Global Energy: 2018 Outlook January, 2018 Tim Guinness - - PowerPoint PPT Presentation

Global Energy: 2018 Outlook

January, 2018

Tim Guinness (Co-manager) Will Riley, CA (Co-manager) Jonathan Waghorn (Co-manager) For Registered Investment Professional Use Only

1

Energy sector: outlook

• We believe OPEC has shown clear determination to defend an oil price floor; we expect

a $55-60/bl range

• US onshore oil production will need to grow faster in 2019/2020, in our view, to offset

existing production declines and to satisfy growing demand globally for oil products

• The energy equity sector has adjusted to lower oil prices with profitability and free

cashflow generation improving

• We see it as unlikely that extreme sector valuation levels will be sustained as the

companies continue to recover

Review of 2017: spot oil prices higher; long dated prices lower

Source: Guinness Atkinson Funds, Bloomberg, data as of end Dec 2017

2 Brent and WTI oil futures curves

• Brent and WTI spot oil prices rose in 2017, pulled higher by a tighter market (global oil

demand growth and OPEC discipline holding sway over US onshore supply growth)

• Longer dated prices fell, and the futures curve to shift from contango to backwardation

50 52 54 56 58 60 62 64 66 68

Brent oil price: futures curves

31-Dec-16 31-Dec-17 $/bl 46 48 50 52 54 56 58 60 62

WTI oil price: futures curves

31-Dec-16 31-Dec-17 $/bl

Energy equity performance in 2017

Source: Guinness Atkinson Funds, Bloomberg, data as of end Dec 2017 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.

3 Global energy equity subsectors: median total return in 2017 (%)

• Guinness Atkinson Global Energy Fund produced a return in 2017 of -1.0% (total return)
• Year of divergence between sectors: strong for integrateds/refiners; weak for E&Ps/services
• 60%
• 40%
• 20%

0% 20% 40% 60%

• 4.00
• 2.00

0.00 2.00 4.00

OMV AG VALERO ENERGY CORP ROYAL DUTCH SHELL PLC-A SHS STATOIL ASA CNOOC LTD BP PLC CANADIAN NATURAL RESOURCES SUNCOR ENERGY INC TOTAL SA JA SOLAR/SUNPOWER CONOCOPHILLIPS CHEVRON CORP OCCIDENTAL PETROLEUM CORP ENI SPA MSCI WORLD ENRGY INDEX GUINNESS GLOBAL ENERGY FUND PETROCHINA CO LTD-H GAZPROM PAO -SPON ADR IMPERIAL OIL LTD RESEARCH PORTFOLIO/OTHER DEVON ENERGY CORP HALLIBURTON CO ENBRIDGE INC/EXXON MOBIL SOCO/TULLOW HELIX ENERGY/UNIT CORP SCHLUMBERGER LTD NEWFIELD EXPLORATION CO HESS CORP NOBLE ENERGY INC APACHE CORP QEP RESOURCES/OASIS/CARRIZO

Contribution to return (percent)

Indicative fund contribution, per position

2017 indicative contribution 4

Source: Guinness Atkinson Funds, Bloomberg, data as of end Dec 2017 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.

20 40 60 80 100 120 140 160 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Oil Price ($/bbl) Brent oil price Incentive price for new supply Estimated demand destruction level Cash cost of marginal current supply

Economics: marginal cost of supply has historically defined prices

• The oil price trades between the cash cost of supply and the price at which demand falls
• Marginal cost tends to determine the oil price in the longer term

Economics of crude oil

Source: Bernstein, Guinness Atkinson Funds, Jan 2018

5

Near term oil demand: world oil demand up 1.5m b/day in 2017

Source: IEA Oil Market Report Dec 2017 Forecasts are inherently limited and cannot be relied upon.

• 2017 world oil demand up around 10m b/day on pre-recession peak (2007)
• Non-OECD demand has grown unchecked for over a decade, not unseated by financial crisis
• Estimates for 2018 indicate healthy demand growth of 1.3m b/day – all from non-OECD

Global oil demand (m b/day)

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 OECD demand

IEA IEA

North America 25.7 25.8 24.5 25.8 24.5 23.7 24.1 24.0 23.6 24.2 24.2 24.6 24.7 24.9 25.0 Europe 15.6 15.7 15.7 15.6 15.5 14.7 14.7 14.3 13.8 13.6 13.5 13.8 14.0 14.3 14.3 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 8.1 8.1 8.0 Total OECD 50.1 50.4 48.9 50.1 48.3 46.4 47.0 46.5 45.9 46.1 45.8 46.4 46.9 47.3 47.3 Change in OECD demand 0.3

• 1.5

1.2

• 1.8
• 1.9

0.6

• 0.5
• 0.6

0.2

• 0.3

0.6 0.5 0.4 0.0 NON-OECD demand FSU 3.8 3.9 4.0 4.0 4.2 4.0 4.1 4.4 4.6 4.5 4.6 4.5 4.8 4.8 4.9 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 0.8 China 6.4 6.7 7.2 7.6 7.7 7.9 8.9 9.3 9.9 10.4 10.8 11.6 11.9 12.4 12.8 India 2.6 2.6 2.7 2.9 3.1 3.2 3.3 3.5 3.7 3.7 3.8 4.2 4.6 4.7 5.0 Other Asia 6.4 6.4 6.6 6.9 6.8 7.1 7.5 7.6 7.6 7.9 8.0 8.2 8.4 8.7 8.9 Latin America 4.9 5.0 5.2 5.3 5.6 5.7 6.1 6.2 6.5 6.6 6.8 6.7 6.6 6.6 6.7 Middle East 5.5 5.9 6.1 6.4 6.7 7.1 7.3 7.5 7.9 8.0 8.4 8.4 8.3 8.3 8.5 Africa 2.8 2.9 2.9 3.3 3.3 3.4 3.5 3.5 3.8 3.8 3.9 4.1 4.1 4.2 4.3 Total Non-OECD 33.1 34.1 35.4 37.1 38.1 39.1 41.4 42.7 44.8 45.6 47.3 48.5 49.4 50.6 51.9 Change in non-OECD demand 1.0 1.3 1.7 1.0 1.0 2.3 1.3 2.1 0.8 1.7 1.2 0.9 1.2 1.3 Total Demand 82.5 83.8 85.1 87.2 86.4 85.5 88.4 89.2 90.7 91.7 93.1 95.0 96.3 97.8 99.1 Change in demand 1.3 1.3 2.1

• 0.8
• 0.9

2.9 0.8 1.5 1.0 1.4 1.9 1.3 1.5 1.3

6

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 World oil bill / GDP (%) $100 oil in 2014 = 4.3% of GDP $53 oil in 2017 = 2.4% of GDP $100 $75 $50

Oil price: $53 oil implies spend of 2.4% of world GDP in 2017

Source Bloomberg LP; Guinness Atkinson Funds, data as of Dec 2017 *World oil bill = total global spend on oil consumption / world GDP Forecasts are inherently limited and cannot be relied upon.

• We believe Saudi is targeting a price that gives a “reasonable” world oil bill
• Ten year average world oil bill* is 4.2%, 20yr average is 3.2%, 30yr average is 2.8%
• If oil averages $75 it will mean in 2020 the world oil bill is 3.1% of GDP
• If oil averages $50 it will mean in 2020 the world oil bill is 2.1% of GDP

The world oil ‘bill’ as a percentage of world GDP 7

Oil demand: global demand trends still remain upwards

• Non-OECD oil demand has grown at 3.8%pa since 1965, vs the OECD at 1.5%pa
• Per capita oil demand in China & India remains at a fraction of developed OECD levels

Per capita oil consumption (barrels per head pa)

Source IEA; Guinness Atkinson Funds (Nov 2017)

8

5 10 15 20 25 30 35 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Oil consumption per capita (bls per year) Japan USA South Korea China India

• 500,000

1,000,000 1,500,000 2,000,000 '000s vehicles Russia Indonesia India Brazil China Other USA 50 years: fleet grows by 890 million 20 years: fleet grows by 850 million vehicles

Oil demand: vehicle growth is creating an oil demand shock

9

Source : US DoE (actual), Guinness Atkinson Funds (estimates) as of Nov 2017 Forecasts are inherently limited and cannot be relied upon.

• Long term oil demand will be driven by the non-OECD adopting mass transportation
• The global vehicle population grew by 890m from 1960 to 2010…

… but we think could grow by 1,000m in the next twenty years

World vehicle population (1960-2030e)

Oil demand: vehicle growth is creating an oil demand shock

10

Source : US DoE (actual), Guinness Atkinson Funds (estimates) as of Nov 2017 Forecasts are inherently limited and cannot be relied upon.

• Crude oil is 60% used in transportation and there are limited substitutes currently
• We expect the global fleet of ICE vehicles to expand by around 20% over next 10 years

Electric vehicles vs non-electric vehicles

• 250

500 750 1,000 1,250 1,500 1,750 2,000 Global vehicle population (end of year) Electric vehicle population (end of year) Global vehicle population ex electric vehicles (million vehicles) EVs at around 1% of world vehicle fleet in 2020 (15m vehicles vs 1.5m today) Assumes 1 in 5 cars sold in 2025 is an EV Assumes 1 in 2 cars sold in 2030 is an EV

Oil demand: what about the rest?

11

Source : US DoE (actual), Guinness Atkinson Funds (estimates) as of Nov 2017 Forecasts are inherently limited and cannot be relied upon.

• Passenger vehicles account for less than 30% of oil demand. Other key sources of

demand (heavy transport; petrochemicals) more closely linked to GDP growth

Source of demand % Power 6% Petrochemicals 13% Other industry 11% Cars & light trucks 26% Heavy vehicles 18% Air travel 6% Shipping 6% Rail 1% Other 13% Total 100%

 Global truck fleet rising from 377m in 2015 to 600m in 2030 (+c.60%)  Air revenue passenger kms rising from 9trn in 2015 to 15trn in 2030 (+c.70%)  Seaborne trade rising from 54trn ton miles in 2015 to 90trn ton miles in 2030 (+c.70%)  Ethylene demand rising from 141m tons to 230m tons in 2030 (+c.65%)

Cars & light trucks 26% Other 74%

Structure of global oil demand

Global oil supply: three main components

12

Source : IEA; Guinness Atkinson Funds (Jan 2018)

1) Non-OPEC (ex-US onshore): holding up thanks to legacy projects, but facing decline 2) OPEC (inc natural gas liquids): low cost production, but in countries struggling to breakeven fiscally 3) US onshore: shorter cycle, able to grow at $50/bl

Global oil supply in 2017 (m b/day)

51m b/day 40m b/day 7m 20 40 60 80 100 120 Non-OPEC (ex-US onshore) OPEC (inc NGLs) US onshore m b/day

13

Non-OPEC oil supply: concentrated growth from North America

Source: IEA, Guinness Atkinson Funds (Nov 2017)

• North America delivered nearly all of non-OPEC oil production growth over the last six years
• Despite $100 oil and high capex levels, other non-OPEC countries had flat production

Non-OPEC oil growth: 2017 vs 2012 pa (m b/day)

• 0.20

0.00 0.20 0.40 0.60 0.80 1.00 1.20 Mexico China Syria Yemen Australia Other Europe OECD Other Asia non OECD Egypt Columbia Argentina India Other Latin America Other Europe non OECD Other Pacific OECD Other non OPEC ME Malaysia Other Africa non OPEC Oman Norway UK FSU Processing Gains Russia Global Biofuels Brazil Canada USA Total non-OPEC

Sector holdings are subject to change.

Non-OPEC oil supply (ex-US): upstream capex has fallen sharply

14

Source : Simmons International and Rystad, January 2018

• Global upstream capex has fallen by more than 20%pa in both 2015 and 2016

Year over year change in global upstream capex

100 200 300 400 500 600

• 40%
• 30%
• 20%
• 10%

0% 10% 20% 30% 40% 50% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Upstream international capex (real 2016 USD$bn) Annual percentage change (%)

Non-OPEC oil supply (ex-US): spending

15

Source : Simmons International, April 2017

“The 2017 E&P spend for this part of the global production base, which still makes up around 50 million barrels-per-day of production is expected to be down 50% compared to 2014. At no other time in the past 50 years has our industry experienced cuts of this magnitude and this duration. While the market continues to focus on the headline numbers which suggest that production is holding-up well even in the third successive year of underinvestment, a closer look at the underlying data reveals that the current situation is not sustainable.” Paal Kibsgaard, CEO, Schlumberger (March 2017)

Non-OPEC oil supply (ex-US): production flat to declining

16

Source : Kessler Energy, Guinness Atkinson Funds, Jan 2018 Forecasts are inherently limited and cannot be relied upon.

• Non-OPEC supply (ex-US) project start-ups still strong in 2017/18 then sharp drop in 2019/20

Major non-OPEC (ex-US onshore) project start-up schedule

0.0 20.0 40.0 60.0 80.0 100.0 120.0 1,000 2,000 3,000 4,000 5,000 6,000 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019E 2021E Brent oil price (US$/bl) Oil production capacity receiving final investment approval (kb/d)

Non-OPEC oil supply: US onshore production and rig count

17

Source: EIA (oil production to July 2017); Bloomberg (oil rig count) at end October 2017

• The decline of US onshore oil production in 2015/16 now reversed to growth
• The US oil directed rig count has recovered from low of 330 mid-2016 to 750 in Sept 2017

US onshore oil production vs oil rig count (table shows US onshore total rig count by shale basin)

200 400 600 800 1,000 1,200 1,400 1,600 1,800 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Rig count Oil production (kb/d) Onshore US crude oil production (ex Alaska) Onshore oil-directed drilling rig count

Non-OPEC oil supply: US oil supply response

18

Source: Guinness Atkinson estimates, as of Jan 2018

Potential trajectories for US onshore oil production Brent oil price Production change $30-40/bl Declining 0.3-0.5m b/day $40-50/bl Broadly flat $50-60/bl Increasing around 0.6-1.2m b/day $60-70/bl Increasing around 1.2-1.6m b/day

• We expect marginal investment (from higher oil prices) to be invested in US shale
• The resource is available, payback is quick and technical, fiscal and political risks are low
• Efficiency gains will compete with cost inflation and infrastructure access
• We believe that a trajectory towards $60/bl will be required, to:
• Offset the increasing decline rates of new wells in order to sustain the growth trajectory
• Deliver more growth in 2019/2020 as non-OPEC ex-US sees production declines

OPEC oil: call on OPEC around 0.5m b/day above actual supply

Source: Bloomberg; Guinness Atkinson Funds (Data as of December 2017) * OPEC-12: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi , U.A.E., Venezuela

• OPEC-12 production was 1.2m b/day lower in Nov 2017 than in Nov 2016
• This is despite growth of 0.5m b/day from Nigeria and Libya
• “Call on OPEC” for 2018 is now 32.5m b/day; 0.5m b/day above Nov 2017 production

OPEC-12* production (m b/day) 19

22 24 26 28 30 32 34 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Million barrels per day OPEC-12* production Call on OPEC-12

Call on OPEC-12: 2017 = 32.9m b/day 2018 = 32.5m b/day IEA Nov 2017 production = 32.0m b/day

OPEC oil supply: OPEC staying disciplined with cuts

Source: Bloomberg, December 2017, red dot indicates November 2014 OPEC meeting; green dot indicates Jan 2017 quota change

• OPEC oil production grew by nearly 2.0 m b/day after the Nov 2014 meeting, peaking in Dec 2016
• Ex Nigeria & Libya, OPEC cut in 2017 by 1.2m b/day
• Nigeria & Libya have recovered and are now part of the quota system again

Libya OPEC ex Nigeria/Libya Iran Nigeria Saudi Arabia Venezuela

7,500 8,000 8,500 9,000 9,500 10,000 10,500 11,000 Jun-2010 Jun-2011 Jun-2012 Jun-2013 Jun-2014 Jun-2015 Jun-2016 Jun-2017 '000 bbl/day 1,000 1,200 1,400 1,600 1,800 2,000 2,200 2,400 Dec-2008 Dec-2009 Dec-2010 Dec-2011 Dec-2012 Dec-2013 Dec-2014 Dec-2015 Dec-2016 '000 bbl/day 200 400 600 800 1,000 1,200 1,400 1,600 1,800 Dec-2008 Dec-2009 Dec-2010 Dec-2011 Dec-2012 Dec-2013 Dec-2014 Dec-2015 Dec-2016 '000 bbl/day

2,000 2,200 2,400 2,600 2,800 3,000 3,200 3,400 3,600 3,800 4,000 Jun-2010 Jun-2011 Jun-2012 Jun-2013 Jun-2014 Jun-2015 Jun-2016 Jun-2017 '000 bbl/day

20

OPEC oil supply: fiscal budgets imply high oil price needs

• The actual economic cost of developing most OPEC oil remains very low
• Higher levels of government expenditure necessitate greater oil revenues
• The fiscal breakeven oil price* for Saudi in 2018 is estimated to be $70 per barrel

Source: IMF; Guinness Atkinson Funds

*‘Required oil price’ is defined as the oil price that is needed by each country to balance fiscal budgets

21 OPEC (selected) fiscal breakeven oil prices - 2018 ($/bbl)

20 40 60 80

22

Oil supply/demand: OECD inventories need to normalise

OECD oil inventories (million bbls)

Source: IEA Oil Market Report (November 2017); Guinness Atkinson Funds

• In 2015, OECD inventories moved well above the top of the ten year range…

….the move implied average oversupply of c.0.8m b/day

• In 2016, inventories fell slightly, indicating a tightening in the second half of the year
• In 2017, inventory levels tightening thanks to OPEC cuts, albeit slower than first hoped

2,400 2,600 2,800 3,000 3,200 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec OECD stocks (m barrels)

2005 - 2014 spread 2014 2015 2016 2017

2,200 2,400 2,600 2,800 3,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

OECD stocks (m barrels) 1994 - 1997 spread 1998 1999 23

Inventories - parallel with 1998-99 down cycle

OECD oil inventories 1994-1999 (million bbls)

Source: IEA Oil Market Reports (1994-1999); Guinness Atkinson Funds

• 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

Inventories – the path to a lower inventories in 2018

2018 global oil market balance (assuming OPEC deal is adhered to)

Source: Guinness Atkinson Funds, Jan 2018

• As usual, the picture of oil supply and demand in 2018 will be dynamic
• Our ‘base’ case shows that the oil market is likely to be undersupplied in 2018, by

something around 0.3m b/day

• We assume that the market averaged 2017 in undersupply (c.0.3-0.5m b/day)
• ‘Core’ OPEC cuts and growing global oil demand tighten the market
• US shale, Canada and Brazil loosen the market
• 2.0
• 1.5
• 1.0
• 0.5

0.0 0.5 1.0

Average

• ver/(under)

supply in 2017 OPEC supply Global oil demand growth non-OPEC supply (ex-US

• nshore)

US onshore supply Average

• ver/(under)

supply in 2018 m b/day

loosening tightening

24

Natural gas: summary views

• The gap between US and international gas prices widened in 2017
• US continues to see high levels of new supply, economic at $3/mcf, from the Marcellus
• New US LNG export facilities starting up over next three years, with major wave in 2019

Global natural gas prices (US$/mcf)

Source: Bloomberg, Guinness Atkinson Funds (data as of Dec 2017)

2 4 6 8 10 12 14 16 18 20 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Natural gas price ($/mcf)

Euro Spot US Spot Japan LNG Price

25

10 20 30 40 50 60 70 80 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Expected growth 2018 to 2030 - 9% p.a. Growth 2000 to 2011 - 15% p.a. Growth 2012 to 2017 - 9% p.a.

Global natural gas: non-OECD gas intensity very low, esp China

26

Source: BP Statistical Review of World Energy; Guinness Atkinson Funds, data as of end Dec 2017 Forecasts are inherently limited and cannot be relied upon.

• Gas in China taking share from coal; tripling from 25 Bcf/day in 2017 to 75 Bcf/day in

2030, in our view

• This implies a market share for gas in China of around 16% in 2030 (up from 7% in 2017)

China natural gas demand (bcf/day)

50,000 100,000 150,000 200,000 2012 2013 2014 2015 2016 2017 2018 2019 2020

Super-majors: free cashflow vs CAPEX and dividends

CAPEX Dividends Free cashflow from operations

$m

Energy equities: super-major FCF yield improving

• Super-major oil and gas companies are emerging from a period in which dividend was being paid by

debt to a period where they will have the ability to raise dividends by up to 40% (at $60 Brent) 27

Source: Guinness Atkinson Asset Management (Nov 2017) Forecasts are inherently limited and cannot be relied upon.

Super-majors have the scope to increase dividend by c.40% in 2019/2020 (at $60 Brent / $58 WTI)

• Exxon; Chevron; BP;

Royal Dutch Shell; Total

20,000 40,000 60,000 80,000 100,000 120,000 2012 2013 2014 2015 2016 2017 2018 2019 2020

Other large-caps: free cashflow vs CAPEX and dividends

CAPEX Dividends Free cashflow from operations

$m

Energy equities: other large-cap FCF yield improving even more

• Other large cap oil and gas companies also emerging from a period in which dividend was being paid

by debt to one of expanding FCF – greater scope to expand dividends than majors (at $60 Brent) 28

Source: Guinness Atkinson Asset Management (Nov 2017) Forecasts are inherently limited and cannot be relied upon.

Other large caps have the scope to increase dividend by c.80% in 2019/2020 (at $60 Brent / $58 WTI)

• Statoil; ENI; OMV;

Conocophillips; Occidental; Suncor; CNOOC; Imperial Oil; Canadian Natural Resources

Guinness Atkinson Energy Fund: FCF returns improving well

FCF return of current Guinness Atkinson Global Energy fund portfolio holdings 29

Source: Bloomberg, Company Data and includes analysis of all ‘full position’ holdings (for which 1998-2016 data is available) in the Guinness Atkinson Energy fund as of June 30, 2017. Forecasts are inherently limited and cannot be relied upon.

• 4%
• 2%

0% 2% 4% 6% 8% 10% 12% 14% 16% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E Free cash flow return (%)

• FCF (cashflow from operations less CAPEX) return was essentially zero between 2012 and 2016, but

has now returned to the longer-term average, as companies have adjusted

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E R² = 84% 1.2x 1.4x 1.6x 1.8x 2.0x 2.2x 2.4x 2.6x 2.8x 3.0x

• 2%

0% 2% 4% 6% 8% 10% 12% 14% 16% Price/Book multiple Free Cash Flow Return

Guinness Atkinson Energy Fund: FCF returns improving well

• The long-term relationship between FCF return and P/B implies c.40% upside

FCF return of current Guinness Atkinson Global Energy fund portfolio holdings 30

Source: Bloomberg, Company Data and includes analysis of all ‘full position’ holdings (for which 1998-2016 data is available) in the Guinness Atkinson Energy fund as of June 30, 2017. Forecasts are inherently limited and cannot be relied upon.

Guinness Atkinson Global Energy Fund: at a trough level of ROCE

• The combination of lower oil prices and legacy higher cost structures leave ROCE depressed
• We expect reported ROCE to improve as a result of
• External factors: improvements in oil and natural gas prices
• Internal factors: Cost deflation, efficiency improvements and M&A activity

ROCE of current Guinness Atkinson Global Energy portfolio 31

Source: Bloomberg, Company Data and includes analysis of all ‘full position’ holdings (for which 1998-2016 data is available) in the Guinness Atkinson Energy fund as of June 30, 2017

0% 5% 10% 15% 20% 25% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Return on capital employed (ROCE) 1998-2016 average 12%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E R² = 78% 1.0x 1.2x 1.4x 1.6x 1.8x 2.0x 2.2x 2.4x 2.6x 2.8x 3.0x 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% Price/Book multiple Return on Capital Employed (ROCE)

ROCE vs P/B multiple for Guinness Atkinson Global Energy portfolio

0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00 20.00 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Price/Cash flow multiple US Super Majors Chinese Majors

Energy equities: Importance of looking globally for opportunities

• Not all energy super-majors are valued the same: for example, there has been a major divergence

since 2008 between the P/CF of US vs Chinese major oil & gas companies

• As a result, we have shifted our portfolio towards China and away from US

Source: Bloomberg; Guinness Atkinson Asset Management (Jan 2018)

US & Chinese oil & gas majors: price to cashflow multiple 32

33

Fund positioning: key themes in the fund for 2018

Source: Guinness Atkinson Funds, at end December 2017

Theme Example holdings

1 Expanding free cashflow yields from large-cap oil & gas 29.2% 2 North American shale oil & gas growth 27.4% 3 Growing return on capital from oil & gas majors 17.7% 4 Emerging market natural gas demand growth 10.8% 5 Strong refining margins resulting from global GDP growth 7.2% 6 Deleveraging balance sheets 2.7% 7 Growth in global solar market 1.4% 8 Other (incl cash) 3.5%

Weighting (%)

Top 10 holdings as of 12/31/2017: 1. Suncor Energy 3.66% 2. Conocophillips 3.63% 3. Halliburton Co 3.63% 4.Petrochina Co Ltd 3.62% 5.Devon Energy 3.62% 6. Royal Dutch Shell PLC 3.60% 7. Schlumberger Ltd 3.60% 8. OMV AG 3.58% 9. CNOOC Ltd 3.57% 10. Occidental Petroleum Corp 3.55%

The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase or sell such securities, and the information provided regarding such individual securities is not a sufficient basis upon which to make an investment decision.

Fund and index performance, as of December 31, 2017

34

Expense ratio: 1.53% (gross); 1.45% (net) *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

• Underperformance from energy vs S&P500 in 2017, leaving the sector, in our analysis, a

long way from historical normalized valuation levels

Q4 2017 1 Year 5 Years* 10 Years* Since Inception (June 30, 2004)*

Global Energy Fund 5.85%

• 1.06%
• 1.67%
• 2.10%

6.82% MSCI World Energy Index 6.85% 5.93% 2.21% 0.26% 6.75% S&P 500 6.63% 21.80% 15.77% 8.48% 8.74%

Fund characteristics

35 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

• bjective

Long-term capital appreciation

36

Fund manager biographies

Timothy Guinness

• Executive Chairman and Chief Investment Officer of Guinness Atkinson 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
• btaining an MBA at MIT, worked for 10 years as a corporate financier

Will Riley CA

• Joined Guinness Atkinson 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 Atkinson 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

Contact details

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Corporate Office (California)

Sarah Sollesa sarah.sollesa@gafunds.com 1-818-716-2741 21550 Oxnard Street Suite 850 Woodland Hills California 91367

Investment management team (London)

Tim Guinness tim.guinness@gafunds.com +44 (0) 20 7222 7978 Will Riley will.riley@gafunds.com +44 (0) 20 7222 3451 Jonathan Waghorn jonathan.waghorn@gafunds.com +44 (0) 20 7222 3457 14 Queen Anne’s Gate London SW1H 9AA For your protection, calls to these numbers may be recorded

Guinness Atkinson Asset Management

• Guinness Atkinson Asset Management: founded in 2003, along with UK sister firm

Guinness Asset Management

• Four core areas of expertise: Global Equities, Energy, Asia & Financials
• Guinness Group AUM (at December 31, 2017): $1.6bn
• Staff of 30, including 14 investment professionals
• Company is 100% owned by employees

38

AUM = assets under management

39

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. The Fund’s investment objectives, risks, charges and expenses must be considered carefully before investing. The statutory and summary prospectus contains this and other important information about the investment company, and it may be obtained by calling 800-915-6566

• r visiting gafunds.com. Please read it carefully before investing.

You cannot invest directly in an index. 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