Investment Solutions

Quarterly Report – March 31, 2013

April 24, 2013

The major story in 2012, and the first quarter of 2013, has been shale drilling and its potential impact on the U.S. economy. North America now produces more natural gas than any other continent. It is a “game changer” for North America and appears offer the best opportunity for job growth and energy independence. As an example, Pennsylvania’s abundant Marcellus Shale natural gas is providing, as we see it, the foundation for a manufacturing rebirth in the state, which would create tens of thousands of well- paying local jobs while enhancing air quality and lowering energy costs. At the same time, natural gas continues to play an expanding role as a fuel in generating electricity and potentially as a transportation fuel. This home grown resource should allow consumers and businesses, in many cases, to cut fuel prices in half. Cheap energy not only reduces the trade deficit, but also makes U.S. factories competitive globally and reduces dependence on foreign oil.

In recent weeks, there have been major articles on the subject in Barron’s, The Wall Street Journal, NY Times and many publications discussing the potential of energy independence. The long economically depressed Rust Belt is being rejuvenated largely because of the energy boom. Among, the biggest beneficiaries are the chemical and steel producers because they consume huge volumes of natural gas and its derivatives in their processes. In our portfolio, we own equities of companies that should continue to prosper in a gas fueled manufacturing revival, namely: Lyondell Basell Industries, Calpine, Williams Cos., Dow Chemical, Westlake Chemical, to name a few. Also, more recently, in November 2012, the world renowned International Energy Agency (IEA), forecast that America could become the world’s largest oil producer by 2020, outstripping Saudi Arabia and Russia and could be energy self sufficient by 2035. In addition, the U.S. has plans on becoming a leading exporter of liquefied natural gas (LNG) and coal.

As noted in prior letters, we believe that the energy sector will continue to outperform the overall stock market over the longer term. Fortunately, the Fund’s “energy chain” approach to investing in the space provides the necessary flexibility to deal with the changes that also occur over the near and intermediate term. Our increasing asset allocation in the Fund to MLPs, which offer very attractive dividend absolute yields and income growth compared with most interest sensitive investments, significantly aided our performance. Energy related infrastructure likewise enhanced the quarter as did oil service and oil and gas producers. Company consolidations and restructurings were also positive factors. Again, we believe the time is right for selected energy investment and greatly appreciate your support.

Certain statements contained herein may contain "forward-looking statements" within the meaning of the Private Securities and Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Fund to be materially different from any future results, performance or achievements expressed or implied by such forward- looking statements. Such factors include, among others, risks and uncertainties associated with the timing and costs of energy sector production, the demand for and prices of oil/gas products, the timing and amount of capital spending in the nation and world wide, and general economic factors. This report is not a recommendation to either buy or sell any securities mentioned.

 

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About ELCO Management, LLC
Established in 1995 and based in New York, ELCO Management (www.elcomanagement.com) offers investment solutions to high net worth individuals and institutions. ELCO also manages two highly specialized energy funds: the ELCO Energy Fund, L.P. and the ELCO Select Fund L.P.