Just been looking through the quarterly report from Guinness Asset Management looking at recent returns from their Global Money Managers fund – which invests in other fund managers.

The interesting chart below stands out – looking at the stocks in their portfolio, the median average dividend yield is a whopping 4.6% compared to a yield of 2.5% for the MSCI World.

Interesting note last week from Jean-Louis LE MEE, a fund manager at commodities specialist WestBeck.

Bottom line – we in the West have taken the meteoric growth of the US unconventional sector for granted. As has President Trump. Tougher times are coming – US shale oil is cracking.

Here are the guys from Westbeck …

“We believe that view is likely to become mainstream over the balance of this year as the hockey stick in US production (that the likes of GS or Rystad are still forecasting) fails to materialize. We have seen forecasts for US production 2019 exit rate between 12.5mbd and 13.5mbd with consensus close to the high end of that huge band. With 5 more months to go and US production in July close to 12.1mbd (essentially flat since Dec 18) we believe exit rate is likely to be much closer to the lower bound of the forecast rang

“Rig data and fracking data show the activity slowdown in Q2. Comments by the pressure pumping community and the largest land drillers confirm activity will slow down further in Q3. By the end of Q3, land rig count is likely to be 20-25% down vs the recent peak. While budget exhaustion points to a fairly catastrophic Q4 for activity.”

“Compounding this activity slowdown are signs that new well productivity is turning negative. Several shale CEOs have repeatedly warned this was coming. A recent study by Wood Mackenzie shows negative well productivity growth is now upon us in key layers of the Permian. The same study also shows more mature wells are experiencing much steeper decline rates than consensus assumptions. Because of the huge US production growth experienced in 2018 (Year 1 decline rates typically reach -65% to -70%), base decline rates in 2019 are much higher than they were a year ago.”

Westbeck aren’t the only market observers growing increasingly bearish. Tudor Pickering Holt and Co, a US energy bank claim to have also seen a significant deceleration in US oil and gas production. Their take?

“The data imply Permian oil production growth has dropped from +735 thousand b/d YoY in June 2019 to what will most likely be just a tick above +600 thousand b/d YoY here in August 2019.  Overall production growth across the seven key basins appears likely to be about +950 thousand b/d YoY this month, down markedly from +1.25 million b/d as recently as six weeks ago and well below the +1.1 to +1.3 million b/d YoY pace that anchors many 2020 forecasts.

“US oil and gas production growth, combined, was +9.1% YoY in June 2019, down from +15.5% YoY in August 2018, according to Federal Reserve survey data. The August 2018 growth rate marks the all-time high in a time series that goes back to January 1973. As the chart at left below shows, when US oil and gas extraction decelerates off the highest peaks (1979, 2006, 2014), that growth rate tends to pick up downside momentum”

So, why does this matter? A number of observations jump to mind. The first is that this is happening just as a significant bunch of bonds is due to mature. It’s also coincided with a multi-year drought of non-shale Capex projects – long-cycle projects. If that is the case one would expect a decline in non-OPEC production, which could, in turn, gobble up OPEC spare capacity.

Welbeck’s key investment idea is thus to move away from US unconventionals and look…North to Canada. They reckon that domestic Canada offers “incredible value”. They have built a basket of 10 stocks trading at or below PDP value, translating in 20-40% FCF at current oil prices. Many of these names are likely to go up 2x to 5x if our oil price scenario plays out.