global energy: what do opec cuts mean for the oil market? · 2,400 2,600 2,800 3,000 3,200 jan feb...
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Global Energy: what do OPEC cuts
mean for the oil market?
October, 2016 Tim Guinness (Co-manager) Will Riley, CA (Co-manager) Jonathan Waghorn (Co-manager)
For Registered Investment Professional Use Only
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Guinness Global Energy: summary 1
• OPEC cuts: announcement of first supply cuts since 2008, to put a floor under the oil price. Cuts likely to come from Saudi, Kuwait & UAE
• Oil market remains oversupplied, but in better balance than at start of the year... ….moving to deficit in 2017
• We consider the oil price to be on a journey back to $70/bbl
• US natural gas market: has moved into undersupply
• Energy equities have outperformed in 2016: rebound still leaves the sector a long way from historical normalised valuation levels
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OPEC: first production cut announced since 2008
Source: Bernstein, IEA, Guinness Funds (data as at end of August 2016)
2
• OPEC announced on September 28th 2016 that they had agreed to cut production levels
• OPEC have opted for a new production limit of 32.5-33.0m b/day, a reduction of 0.5-1.0m b/day versus current supply. To be ratified at OPEC’s November meeting
• We expect the lion’s share of the cut to be borne by Saudi, Kuwait & UAE
9,000
10,000
11,000
12,000
13,000
14,000
15,000
16,000
17,000
000s b/day
Over production of 3.8m b/day relative to long run average
Average 1992-2015
Saudi, Kuwait and UAE production (k b/day) OPEC production (m b/day) ('000 b/day) 31-Dec-10 31-Aug-16 Change
Saudi 8,250 10,600 2,350
Iran 3,700 3,640 -60
UAE 2,310 3,070 760
Kuwait 2,300 2,910 610
Neutral zone 540 0 -540
Nigeria 2,220 1,460 -760
Venezuela 2,190 2,140 -50
Angola 1,700 1,760 60
Libya 1,585 280 -1,305
Algeria 1,260 1,110 -150
Qatar 820 650 -170
Ecuador 465 550 85
OPEC-11 27,340 28,170 830
Iraq 2,385 4,350 1,965
OPEC-12 29,725 32,520 2,795
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OPEC: why have they announced a production cut?
Source: Bernstein, IEA, Guinness Atkinson, Oct 2016
3
• OPEC’s statement, accompanying the announcement of cuts, says:
“In the last two years… Oil-exporting countries’ and oil companies’ revenues have
dramatically declined, putting strains on their fiscal position and hindering their economic
growth. The oil industry faced deep cuts in investment and massive layoffs, leading to a
potential risk that oil supply may not meet demand in the future, with a detrimental effect
on security of supply.”
0
30
60
90
120
OPEC (selected) fiscal breakeven oil prices 2016 ($/bbl) • Saudi are running highest
budget deficit within the G20
• Cuts to Saudi ministerial salaries of 20% announced in September
• Payment delays to contractors in Saudi being reported
• Financial pressures even greater in ‘tier 2’ OPEC (e.g. Iraq; Nigeria; Venezuela; Ecuador)
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2,400
2,600
2,800
3,000
3,200
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
OEC
D s
tock
s (m
bar
rels
)
2005 - 2014 spread 2014 2015 2016
4 Oil supply/demand: OECD inventories over top of 10 year range
OECD oil inventories (million bbls)
Source: IEA Oil Market Report (published Sept 2016; data to end of July 2016); Guinness Atkinson
• The net supply/demand effect in 2014 was a loosening of OECD inventories
• In 2015, OECD inventories moved above the top of the ten year range…
….the move implied average oversupply of c.0.7m b/day
• In the six months to the end of July, the oversupply has fallen to 0.2m b/day
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2,200
2,400
2,600
2,800
3,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
OEC
D s
tock
s (m
bar
rels
)
1994 - 1997 spread 1998 1999
5 OPEC: Inventories - parallel with 1998-99 down cycle
OECD oil inventories 1994-1999 (million bbls)
Source: IEA Oil Market Reports (1994-1999); Guinness Atkinson
• In the 1998/99 downcycle, oil inventories peaked at around 300m above average…
…. very similar to magnitude of oversupply in 2015/16
• Oil price recovery and end of 1998 coincided with inventories starting to fall
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Inventories – the path to a tighter market in 2017 6
2016 global oil market balance
2017 global oil market balance (assuming OPEC deal is adhered to)
Q4 2016 wildcards: • Libya
2017 wildcards: • Libya • Nigeria • US onshore
Source: Guinness Atkinson, Sept 2016
-1.0-0.50.00.51.01.52.0
Over/(under)supply at
start of 2016
OPEC supply(ex-Iran)
Iraniansupply
Global oildemand
non-OPECsupply (ex-
US onshore)
US onshoresupply
Over/(under)supply at end
2016
mnb/day
-1.5
-1.0
-0.5
0.0
0.5
1.0
Over/(under)supply at
start of 2017
OPEC supply(ex-Iran)
Iraniansupply
Global oildemand
non-OPECsupply (ex-
US onshore)
US onshoresupply
Over/(under)supply at end
2017
mnb/day
Note: the information shown in the above charts is a Guinness Atkinson forecast
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Near term oil demand: world oil demand up 1.4m b/day in 2016 7
Source: IEA Oil Market Report September 2016
• 2016 world oil demand forecast to be around 8.9m b/day up on pre-recession peak (2007)
• Non-OECD demand has grown unchecked through the oil price spike and financial crisis of 2008/09
• Demand growth in 2015 of 1.8m b/day highest since 2010, spurred on by low price
• Estimates for 2016 and 2017 indicate healthy demand growth of 1.3m and 1.2m b/day
Global oil demand (m b/day)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
OECD demand IEA IEA
North America 25.7 25.8 24.5 25.8 24.5 23.7 24.1 24.0 23.6 24.1 24.1 24.4 24.6 24.7
Europe 15.6 15.7 15.7 15.6 15.5 14.7 14.7 14.3 13.8 13.6 13.5 13.7 13.8 13.8
Pacific 8.8 8.9 8.7 8.7 8.3 8.0 8.2 8.2 8.5 8.3 8.1 8.1 8.0 8.0
Total OECD 50.1 50.4 48.9 50.1 48.3 46.4 47.0 46.5 45.9 46.0 45.7 46.2 46.4 46.5
Change in OECD demand 0.3 -1.5 1.2 -1.8 -1.9 0.6 -0.5 -0.6 0.1 -0.3 0.5 0.2 0.1
NON-OECD demand
FSU 3.8 3.9 4.0 4.0 4.2 4.0 4.1 4.4 4.6 4.7 4.9 4.9 5.0 5.1
Europe 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7
China 6.4 6.7 7.2 7.6 7.7 7.9 8.9 9.3 9.9 10.4 10.7 11.4 11.6 11.9
Other Asia 9.0 9.0 9.3 9.8 9.9 10.3 10.8 11.1 11.3 11.7 12.0 12.5 13.1 13.6
Latin America 4.9 5.0 5.2 5.3 5.6 5.7 6.1 6.2 6.5 6.6 6.8 6.8 6.7 6.7
Middle East 5.5 5.9 6.1 6.4 6.7 7.1 7.3 7.5 7.9 7.9 8.0 8.2 8.3 8.5
Africa 2.8 2.9 2.9 3.3 3.3 3.4 3.5 3.5 3.8 3.9 4.0 4.1 4.2 4.4
Total Non-OECD 33.1 34.1 35.4 37.1 38.1 39.1 41.4 42.7 44.8 45.9 47.2 48.6 49.7 50.9
Change in non-OECD demand 1.0 1.3 1.7 1.0 1.0 2.3 1.3 2.1 1.1 1.3 1.4 1.1 1.2
Total Demand 82.5 83.8 85.1 87.2 86.4 85.5 88.4 89.2 90.7 91.9 92.9 94.7 96.1 97.3
Change in demand 1.3 1.3 2.1 -0.8 -0.9 2.9 0.8 1.5 1.2 1.0 1.8 1.4 1.2
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Near term oil demand: US demand picking up 8
Source: Bloomberg LP; Guinness Atkinson (data as at end of Sept 2016)
• US oil demand fell from c.20m b/day to c.19m b/day, between 2001 and 2012
• Lower domestic oil and gasoline prices now driving positive US oil demand growth
• Retail gasoline is still less than $2.50/gallon, with Brent oil prices at $50/bbl
• We would expect demand growth to stay robust as a result of weak oil prices
US retail gasoline prices (US$/gallon) US oil demand, yoy growth
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
Mar
-11
Mar
-12
Mar
-13
Mar
-14
Mar
-15
Mar
-16
1.5
2.0
2.5
3.0
3.5
4.0
4.5
US
reta
il ga
solin
e p
rice
(U
S$/g
allo
n)
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Aug
-201
1O
ct-2
01
1D
ec-2
01
1Fe
b-2
01
2A
pr-2
012
Jun
-20
12A
ug-2
012
Oct
-20
12
Dec
-20
12
Feb
-20
13
Apr
-20
13Ju
n-2
013
Aug
-201
3O
ct-2
01
3D
ec-2
01
3Fe
b-2
01
4A
pr-2
014
Jun
-20
14A
ug-2
014
Oct
-20
14
Dec
-20
14
Feb
-20
15
Apr
-20
15Ju
n-2
015
Aug
-201
5O
ct-2
01
5D
ec-2
01
5Fe
b-2
01
6A
pr-2
016
Jun
-20
16A
ug-2
016
% g
row
th in
dem
an
d (yoy,
4w
k a
vera
ge)
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9
Source: Bloomberg LP; Credit Suisse; Guinness Atkinson (data as of end Sept 2016)
• China 2015 apparent oil demand up 6.5% vs 2014 (strongest yoy growth since 2011)
• IEA estimates for 2016 and 2017 indicate 0.3m b/day pa growth on average
• China’s Strategic Petroleum Reserve was estimated to be 235mn bls in early 2016
• The rate of build appears to be around 100-200k b/day….
….This represents 30 days of oil import coverage; the target is 90 days by 2020
Near term oil demand: Chinese oil demand still looks fine
China total vehicle sales China oil imports
7.57
0
1
2
3
4
5
6
7
8
9
May-0
8
May-0
9
May-1
0
May-1
1
May-1
2
May-1
3
May-1
4
May-1
5
May-1
6
mn b
bls
/day
Chinese oil imports
12 month MAV
30.25
0
4
8
12
16
20
24
28
32
36
2008
2009
2010
2011
2012
2013
2014
2015
2016
mill
ion
/yea
r
Chinese total vehicle sales
12 month MAV
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Non-OPEC oil supply: US onshore production and rig count 10
Source: EIA (oil production to June 2016); Bloomberg (oil rig count) as 10 September 2016
• US onshore (ex Alaska and GoM) oil supply was 6.86m b/day in Feb 2016
• US onshore oil supply peaked in Apr 2015 at 7.65m b/day
• US onshore oil supply was down 0.6m b/day in 2015 and is heading down further, we think
• The US oil directed rig count has fallen from over 1,600 rigs to 330 rigs at end June 2016
• The rig count in key oil shale basins has fallen by 60%-70%
US onshore oil production vs oil rig count (table shows US onshore total rig count by shale basin
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
3,000
3,500
4,000
4,500
5,000
5,500
6,000
6,500
7,000
7,500
8,000
2009
2010
2011
2012
2013
2014
2015
2016
Rig
coun
t
Oil
prod
ucti
on (
kb/d
)
Onshore US oil production Kessler Energy Credit Suisse
Bernstein (est $40 scenario) BMO oil rig count
Onshore US crude oil production
(ex Alaska)
Onshore oil-directed
drilling rig count
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Non-OPEC oil supply: US oil production in decline 11
Source: Bloomberg; EIA; Guinness Atkinson
• US onshore oil production peaked in April 2015 • Most recent data (June 2016) shows decline of around 0.8m b/day (year-on-year)
• We expect US onshore oil production to continue declining in to the end of 2016
US onshore oil production (kb/day) Actual production and annual change
US onshore oil production (kb/day) Potential future production sensitivity
Assumes an average 30kb/d of oil production decline per month to end December 2016 and June 2017 and an average 25kb/d growth through 2017
-900
-600
-300
0
300
600
900
1,200
1,500
4,500
5,000
5,500
6,000
6,500
7,000
7,500
8,000
Jun
-20
13
Sep
-20
13
Dec
-20
13
Mar
-201
4
Jun
-20
14
Sep
-20
14
Dec
-20
14
Mar
-201
5
Jun
-20
15
Sep
-20
15
Dec
-20
15
Mar
-201
6
Jun
-20
16
Sep
-20
16
US onshore oil production
US onshore oil production (LH axis)
US onshore oil production (year-on-year change, RH axis)
'000s b/day '000s b/daykb/d
US onshore oil
production (ex GoM
and Alaska) (kb/d)
Change
(kb/d)Change (%)
Exit 2012 5,145
Exit 2013 5,962 817 16%
Exit 2014 7,530 1,568 26%
Exit 2015 7,098 (432) -6%
Exit 2016 6,519 (579) -8%
Exit 2017 6,819 300 5%
Average 2012 4,690
Average 2013 5,667 977 21%
Average 2014 6,867 1,200 21%
Average 2015 7,410 543 8%
Average 2016 6,736 (674) -9%
Average 2017 6,623 (113) -2%
Peak, April 2015 7,613
Decline to date (924) -13%
Decline at Dec 2017 (794) -12%
Data as at end July 2016
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Non-OPEC oil supply (ex-US): upstream capex has fallen sharply 12
Source : Simmons International, Sept 2016
• Global upstream capex fell over 20% in 2015 and will see similar falls in 2016
• This is a larger and longer decline than those seen in 2008/2009 and 1998/1999
• The effect is twofold:
1. The ‘decline rate’ on existing production starts to increase
2. The rate of new non-OPEC project start-ups slows
• There is a time delay between oil prices falling and non-OPEC production reacting
Decline rates on current Brazil oil production Year over year change in global upstream capex
-30%
-20%
-10%
0%
10%
20%
30%
40%
0
20
40
60
80
100
120
140
Up
stre
am C
AP
EX (y
ear/
year
ch
ange
%)
Oil
pri
ce (
Bre
nt
$/b
bl)
Global upstream capex Oil price (Brent ($/bbl)
Data to end of 1Q 2016
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Non-OPEC oil supply (ex-US): production flat to declining 13
Source : Tudor Pickering Holt, Guinness Atkinson, Sept 2016
• Non-OPEC supply (ex-US) expected to be flat in 2017/18, then decline in 2019/20
• Biggest sources of net new supply and decline to 2020:
• Brazil (+1.2m b/day)
• Canada (+0.4m b/day)
• UK (+0.2m b/day)
• Russia (-0.6m b/day)
• China (-0.7m b/day)
Top 10 non-OPEC producers (ex-US): forecast production to 2020
-398
-1,297 -1,123 -1,157 -1,100 -1,046
865
1,122 1,112 1,139
750 539
-1,500
-1,000
-500
-
500
1,000
1,500
2015 2016E 2017E 2018E 2019E 2020E
Natural decline New projects Net production growth/decline
K b/day
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0
2
4
6
8
10
12
14
16
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Gas
pri
ce (
$/m
cf)
Gas price
Marginal cost of supply
Estimated demand destruction level
Cash cost of supply
Economics: marginal cost of supply has historically defined prices
• Historically, both crude oil and natural gas commodity prices have traded between the cash cost of supply and the price at which demand is destroyed
• Crude oil is currently trading close to the estimated marginal cash cost of supply, estimated to be the cost of running large scale Canadian oil sands facilities
• Henry Hub natural gas is trading at around the cash cost of current marginal supply
Economics of crude oil Economics of US natural gas
Source: Bernstein, Guinness Atkinson, (data as at end Sept 2016)
14
0
20
40
60
80
100
120
140
160
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Oil
Pri
ce (
$/b
bl)
Brent oil price
Incentive price for new supply
Estimated demand destruction level
Cash cost of marginal current supply
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Natural gas: summary views
• The gap between US and international gas prices has closed significantly • US continues to have high levels of new supply, economic at $3/mcf, from the Marcellus
• Asian gas demand has weakened as Japan has increased nuclear activity and switched to solar
• Asian gas price formulae are linked to oil prices with a 6 month lag
• New US LNG facilities will start operation between 2016 and 2020, the economics of the spot price arbitrage now look significantly less attractive
15
Global natural gas prices (US$/mcf)
Source: Bloomberg, Guinness Atkinson (data as of Sept 2016)
02468
101214161820
Mar
-05
Sep
-05
Mar
-06
Sep
-06
Mar
-07
Sep
-07
Mar
-08
Sep
-08
Mar
-09
Sep
-09
Mar
-10
Sep
-10
Mar
-11
Sep
-11
Mar
-12
Sep
-12
Mar
-13
Sep
-13
Mar
-14
Sep
-14
Mar
-15
Sep
-15
Mar
-16
Sep
-16
Nat
ura
l gas
pri
ce (
$/m
cf)
Euro Spot US Spot Japan LNG Price
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US natural gas: storage is slightly above the 5 year average 16
Source: IEA; Guinness Atkinson, Sept 2016
• A very warm 2015/16 winter pushed inventories to record (seasonal) levels
• The overhang vs 10yr average has reduced from 900bcf (end 1Q 2016) to 210bcf
US natural gas inventories
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1 5 9 13 17 21 25 29 33 37 41 45 49
Wo
rkin
g ga
s in
sto
rage
(B
cf)
Week number (1st Jan = 1)
5 year spread 2007 - 2011
5 year av. 2007 - 2011
2015
2016
Maximum storage capacity 4,000 to 4,300 Bcf
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Guinness Atkinson Energy Fund: sources of potential upside
• Return on Capital Employed (ROCE) is a key driver of valuation for the energy sector
• ROCE has been depressed as a result of cost inflation, capital enlargement and now, oil prices
• The ROCE for the Guinness portfolio is likely to be only 2% in 2016 at $40 Brent oil
• Even with $70/bl oil in 2019, all else being equal, ROCE would be below the long run average of 11%
• The sector is focussing on cost cutting and efficiency gains to help boost ROCE
• We see good potential for ROCE to exceed our expectations and for valuation to benefit
Super Majors* ROCE vs Price/Book multiple ROCE and Upside for GA Energy portfolio
17
20152014
2013
2012
20112010
2009
200820072006
2005
20042003
20022001
2000
1999
1998
199719961995
1994
1993
R² = 78%
1.0x
1.5x
2.0x
2.5x
3.0x
3.5x
5% 10% 15% 20% 25% 30%
Five
ye
ar a
vera
ge p
rice
/tan
gibl
e b
ook
Five year average return on capital employed (lagged by two years)
Source: Bloomberg numbers in brackets indicate forecast Brent oil ($/bl) and Henry Hub ($/mcf) gas prices; upside for GA Energy portfolio upside represent Guinness Atkinson estimates Past performance is no guarantee of future results.
2017 ($55/3)
2018 ($65/3.25)
2019 ($70/3.25)
2020 ($70/3.25)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0% 2% 4% 6% 8% 10% 12%
Up
sid
e in
Gu
inn
ess
En
erg
y p
ort
folio
Return on Capital Employed (ROCE)
Long run averageROCE of
11%
* Super Majors are Exxon, Chevron, BP, RD/Shell and TOTAL
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Guinness Atkinson Energy Fund – source of the potential upside
• We use target EV/EBITDA multiples as one of our tools for assessing valuation
• Each company has a specific target multiple based on historic levels and profitability
• The Guinness Atkinson portfolio has had a 10yr average (2006-15) EV/EBITDA multiples of around 7.8x
• Our average target multiple is a more conservative 6.7x for the Guinness Atkinson Energy portfolio
• If the portfolio traded at 6.7x 2018 EBITDA, there would be around 35% upside
Equity upside at $65 oil in 2018
Historic and forecast * EV/EBITDA multiples
(at $65 oil)
18
Source: Bloomberg; Equity upside represents Guinness Atkinson estimates * Oil and gas price estimates as follows: 2016 ($43/$2.50), 2017 ($55/$3.00), 2018 ($65/$3.25), 2019 ($70/$3.25) Past performance is no guarantee of future results.
* chart represents the average net debt, market capitalization and enterprise value for the Guinness Atkinson Global Energy fund
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
2015 2016 2017 2018 2019 2020 5yr ave 10yr ave
EV
/EB
ITD
A m
ult
iple
Target multiple
used for GA
Global Energy
fund
0
10
20
30
40
50
60
70
80
90
100
Current share prices at 6.7x EV/EBITDAtarget for 2018
Ente
rpri
se v
alue
(U
S$bn
)
Net debt Market cap
35%upside
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Guinness Atkinson Energy Fund – source of the potential upside
Upside/downside at Base Case price estimates Suncor*: example of valuation uplift
19
• On our base case oil price and EV/EBITDA assumptions, we believe the Guinness Atkinson Energy Fund:
• is around fair value at $50-55/bl oil in 2017, based on 6.7x EV/EBITDA
• Offers between 50% and 65% upside at $70/bl oil in 2019/2020
• Our ROCE and EV/EBITDA estimates may prove to be conservative. Using Suncor as an example:
• Based on our 6.5x EV/EBITDA and 4% ROCE estimate for 2017, we have a target of C$46/sh
• If ROCE increased to 10%, then our target could increase to around C$57/sh
• If our EV/EBITDA target multiple increased to 7.5x, then our target could increase to around C$67/sh
Source: Bloomberg, Suncor annual reports; upside/downsides represent Guinness Atkinson estimates Past performance is no guarantee of future results.
-60%
-40%
-20%
0%
20%
40%
60%
80%
2016($43/2.5)
2017($55/3)
2018($65/3.25)
2019($70/3.25)
2020($70/3.25)
% u
psi
de
34
34%
35%
57
26%
67
0
10
20
30
40
50
60
70
80
Current Currenttarget
ROCEuplift to
10%
Potentialnew target
At 10yrave
EV/EBITDA
Potentialtarget
C$
sh
are
pri
ce (
blu
e)
an
d %
up
sid
e f
rom
curr
en
t (g
ree
n)
Suncor (SU CN) Potential New Target based on EBITDA of C$15bn and 10% ROCE. SU has 10yr average ROCE of 11% and EV/EBITDA of 7.5x
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Energy equities: at low levels within global indices
• The S&P500 energy index was 7.3% of the S&P500 index at 30 Sept 2016
• Since 1990, energy has ranged between 5.1% and 16.2% of the S&P500
• The average weight over the last 25 years has been 9.5%
• The weight of energy within the S&P 500 is close to multi-decade lows
20
Weight of energy with the S&P Index (1926-2016)
Source: GMO, S&P, MSCI, Bloomberg, Guinness Atkinson (Data as at end Sept 2016)
S&P Index sector weights (1990-2016)
0
5
10
15
20
25
30
35
40
1990 1995 2000 2005 2010 2015
Wei
ght
(%)
wit
hin
the
S&P5
00 In
dex
IT Financials Healthcare
Consumer Disc Consumer Staples Industrials
Energy Utilities Materials
Telecoms
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Fund and index performance, as of Sept 30, 2016 21
YTD
1
Year
5
Years*
10
Years*
Since Inception
(June 30, 2004)*
Global Energy Fund 16.50% 16.13% -0.20% 1.15% 6.88%
MSCI World Energy Index 18.59% 18.01% 3.18% 2.56% 6.32%
S&P 500 7.82% 15.39% 16.33% 7.22% 7.59%
Gross expense ratio: 1.41% *Periods over 1 year are annualized returns Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling 800-915-6566 and/or visiting www.gafunds.com
Source: Bloomberg
• Energy suffered a second consecutive year of poor returns
• The energy index was down 22% in 2015 as a result of lower oil prices
• This is the second consecutive year of significant negative returns for energy
• Outperformance from energy vs S&P500 in 2016 (to Sept 30)
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22 Fund positioning: key themes in the fund for 2016
Source: Guinness Atkinson, at end Sept 2016
Theme Example holdings
1 Cheap large-cap oil 34.4%
2 Undervalued integrated oil & gas reserves 19.5%
3 Exploration & production spending plans 8.8%
4 US shale oil growth 8.5%
5 Emerging market natural gas demand 7.5%
6 International mid and small cap oil producers 5.9%
7 Rising US natural gas price 3.6%
8 US Gulf Coast refining advantages 2.9%
9 Low cost solar 2.6%
10 Other (incl cash) 5.4%
Weighting (%)
Top 10 holdings in the fund at Sept 30 2016: Apache Corp 4.00%; CNOOC Ltd 3.77%; Halliburton Co 3.62%; Devon Energy Corp 3.60%; Gazprom PJSC 3.58%; Statoil ASA 3.58%; Canadian Natural Resources Ltd 3.57%; Royal Dutch Shell PLC 3.53%; Chevron Corp 3.40%; Newfield Exploration Co 3.40%;
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-0.50 0.00 0.50 1.00
DEVON ENERGY CORP
HELIX ENERGY/UNIT CORP
CARRIZO/QEP RESOURCES
CONOCOPHILLIPS/SOUTHWESTERN
APACHE CORP
RESEARCH PORTFOLIO/OTHER
CANADIAN NATURAL RESOURCES
VALERO ENERGY CORP
GAZPROM PAO -SPON ADR
OMV AG
MSCI WORLD ENRGY INDEX
GUINNESS GLOBAL ENERGY FUND
SUNCOR ENERGY INC
CNOOC LTD
BP PLC
SCHLUMBERGER LTD
TOTAL SA
IMPERIAL OIL LTD
NOBLE ENERGY INC
HALLIBURTON CO
CHEVRON CORP
STATOIL ASA
SOCO/TULLOW/BANKERS
OCCIDENTAL PETROLEUM CORP
NEWFIELD EXPLORATION CO
TRINA SOLAR/JA SOLAR/SUNPOWER
PETROCHINA CO LTD-H
EXXON MOBIL CORP
ENI SPA
ROYAL DUTCH SHELL PLC-A SHS
HESS CORP
Contribution to return (percent)
Indicative fund contribution, per position 23
Source: Guinness Atkinson, Bloomberg, data as of end Sept 2016
Past performance should not be taken as an indicator of future performance. The value of this investment and any income arising from it can fall as well as rise as a result of market and currency fluctuations as well as other factors.
2016 (YTD) indicative contribution 2016 3Q indicative contribution
-3.00 -2.00 -1.00 0.00 1.00 2.00 3.00
CANADIAN NATURAL RESOURCES
CONOCOPHILLIPS/SOUTHWESTERN
HELIX ENERGY/UNIT CORP/SHAWCOR
CARRIZO/QEP RESOURCES
APACHE CORP
SOCO/TULLOW/BANKERS
NEWFIELD EXPLORATION CO
DEVON ENERGY CORP
HALLIBURTON CO
STATOIL ASA
CNOOC LTD
CHEVRON CORP
GAZPROM PAO -SPON ADR
MSCI WORLD ENRGY INDEX
ROYAL DUTCH SHELL PLC-A SHS
GUINNESS GLOBAL ENERGY FUND
BP PLC
SCHLUMBERGER LTD/WOOD GROUP
HESS CORP
EXXON MOBIL CORP
OCCIDENTAL PETROLEUM CORP
TOTAL SA
SUNCOR ENERGY INC
NOBLE ENERGY INC
IMPERIAL OIL LTD
ENI SPA
OMV AG
RESEARCH PORTFOLIO/OTHER
PETROCHINA CO LTD-H
VALERO ENERGY CORP
TRINA SOLAR/JA SOLAR/SUNPOWER
Contribution to return (percent)
Notes: MSCI World Energy Index included for comparison purposes. Charts include companies held in the quarter but, in some instances, no longer held. There is no guarantee similar investments will be made
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Fund characteristics 24
Single sector Companies engaged in the production and distribution of energy (oil, natural gas, coal, alternative energy, nuclear and utilities)
High conviction Equally weighted, concentrated portfolio (30 positions)
Unconstrained No reference to index
Global Diversified globally
Investment type Listed equities (long-only)
Investment objective
Long-term capital appreciation
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25 Fund manager biographies
Timothy Guinness
• Executive Chairman and Chief Investment Officer of Guinness Asset Management
• Portfolio manager of the Investec Global Energy Fund from November 1998 to
February 2008
• Co-founder of Guinness Flight Global Asset Management and, after its acquisition
by Investec, chairman of Investec Asset Management until March 2003
• Graduated from Cambridge University in 1968 with a degree in Engineering. After
obtaining an MBA at MIT, worked for 10 years as a corporate financier
Will Riley CA
• Joined Guinness Asset Management in 2007
• Company valuation expert for PricewaterhouseCoopers 2000-2007
• Qualified as a Chartered Accountant in 2003
• Graduated from Cambridge University with a Masters degree in Geography in 1999
Jonathan Waghorn
• Joined Guinness Asset Management in 2013
• Co-portfolio manager of the Investec Global Energy Fund from February 2008 to May 2012
• Co-head of energy equity research at Goldman Sachs from 2000-2008
• Drilling engineer in Dutch North Sea for Shell
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Contact details 26
Corporate Office (California)
Frank Zukowski [email protected] 1-732-972-2266
Jim Atkinson [email protected] 1-818-716-2739
21550 Oxnard Street Suite 850 Woodland Hills California 91367
Investment management team (London)
Tim Guinness [email protected] +44 (0) 20 7222 7978
Will Riley [email protected] +44 (0) 20 7222 3451
Jonathan Waghorn [email protected] +44 (0) 20 7222 3457
14 Queen Anne’s Gate London SW1H 9AA
For your protection, calls to these numbers may be recorded
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Guinness Atkinson Asset Management
• Guinness Atkinson Asset Management: founded in 2003, along with US sister firm Guinness Atkinson Asset Management Inc.
• Four core areas of expertise: Global Equities, Energy, Asia & Financials
• Guinness Group AUM (at Sept 30, 2016): $1.13bn
• Staff of 19, including 8 investment professionals
• Company is 100% owned by employees
27
AUM = assets under management
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28 Disclosure
Opinions expressed are subject to change, are not guarantee and should not be considered investment advice. The Fund’s holdings, industry sector weightings and geographic weightings may change at any time due to on-going portfolio management. References to specific investments and weightings should not be construed as a recommendation by the Fund or Guinness Atkinson Asset Management, Inc. to buy or sell the securities. Current and future portfolio holdings are subject to risk. References to other mutual funds should not be interpreted as an offer of these securities. Mutual fund investing involves risk and loss of principal is possible. The Fund invests in foreign securities which will involve greater volatility, political, economic and currency risks and differences in accounting methods. The Fund is non-diversified meaning it concentrates its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund. The Fund also invests in smaller companies, which involve additional risks such as limited liquidity and greater volatility. The Fund’s focus on the energy sector to the exclusion of other sectors exposes the Fund to greater market risk and potential monetary losses than if the Fund’s assets were diversified among various sectors. The decline in the prices of energy (oil, gas, electricity) or alternative energy supplies would likely have a negative effect on the funds holdings. While the fund is no-load, management and other expenses still apply. Please refer to the prospectus for further details. This information is authorized for use when preceded or accompanied by a prospectus for the Guinness Atkinson Funds. The prospectus contains more complete information including investment objectives, risks, fees and expenses related to an ongoing investment in the Fund. Please read it carefully before investing.
You cannot invest directly in an index.
Contango refers to a situation where the future spot price is below the current price, and people are willing to pay more for a commodity at some point in the future than the actual expected price of the commodity.
Fund holdings & sector allocations are subject to change and are not recommendations to buy or sell any security. Diversification does not assure a profit nor protect against a loss in a declining market.
For Institutional Use Only. Not for use with the retail public. Distributed by Foreside Fund Services, LLC