Investment Solutions

Quarterly Report – June 30, 2013

July 22, 2013

We believe the investment outlook for energy stocks continues to be favorable with oil maintaining a $90+ price a barrel which is contrary to bearish forecasts made by some analysts earlier in the year. Natural gas is trading in a $3.50-$4.00 per mcf range as demand continues to be bolstered by electric usage and the moderately increasing economy. The dramatic increase in U.S. oil production is an amazing story. Who would have predicted a few years ago, for example, that the state of Texas, if it were a country, would be one of the 15 largest producers in the world

While the firm oil price has been a positive catalyst for most of the energy subsectors including infrastructure, and master limited partnerships; in our opinion, a more favorable picture is beginning to emerge for natural gas. After years of over supply and depressed economics, the commodity’s price has increased ~50% since the lows of April 2012. Expected CO2 regulations are a major catalyst behind a bullish long term case that can be made for rising demand. Additional emission regulations are probable later in the decade, following new mercury standards in 2015, increasing industrial and electric generation usage, and rising LNG exports.

The fundamentals for energy infrastructure are improving. Proposals for new North American LNG/Petrochemical development currently exceeds $150 billion. We believe Chicago Bridge and Iron, Flour, and Cheniere Energy are among the major beneficiaries.

Selected diversified electric utilities such as Calpine and Nextera Energy, and independent power producers are likely to benefit from NRG’s decision to monetize its renewable portfolio by spinning off contracted fossil/renewable electric generation assets into a new publicly traded equity, The new company – NRG Yield was priced to yield 6%. Since it is not an MLP, it can be purchased more easily by institutions. The spinoff left NRG with a 70% residual ownership in the portfolio.

We remain very positive on the outlook for Master Limited Partnerships (MLPs) and expect them to continue to generate average total returns of at least 10% annually. Historically, this highly attractive group has exceeded this expectation and recorded over a 20% return in the first half of 2013. The average current dividend yield approximates 6% and many companies have already announced and/or are expected to increase distributions this year. The yields of other income investments including REITs and utilities are currently not as attractive as MLPs. Overall, investor sentiment, in our judgment, remains very favorable and should be further reinforced as second quarter results and guidance for full year 2013 and 2014 are discussed. On the macro level, higher interest rates are typically a risk for income equities, stocks and bonds, but we believe that this risk is not a serious longer term threat as dividend growth of MLPs have exceeded interest rate increases. Additionally, the Fund has meaningful investments in C-corps such as Williams Companies and Kinder Morgan which are not as exposed to any rise in rates. At this time, MLPs represent about 30% of the Fund.

Again, as stated in our prior communications, we believe the Fund’s “energy chain” approach to investing in the space allows us the flexibility to react to changes. Our ability to change asset allocations in the first half was very key to our successful performance. Given the major “game changing” factors occurring in the space, we believe the time is right for selected energy stock investments. As always, we 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 ( 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.