Investment Solutions

Quarterly Report – June 30, 2015

July 13, 2015

The second quarter continued to reflect the differences in opinion on oil price direction, which, in turn, has contributed to a very volatile trading environment in the energy space. Our position continues to be that a rebalancing in the oil market should take place over the 2015-2017 period. However, the impact of incremental Iranian oil on world supply, coupled with China’s economic situation, and questions about U.S. and worldwide demand adds to the uncertainty of near term oil price direction; i.e. $55-$60/bbl range (Brent) or $60-$70 over the next 18-24 months. Some industry sources believe $80/bbl is now required to support global deepwater drilling and, if $50-$60/bbl continues into the next year, production will take a bigger hit than assumed by many forecasts.

Overall, we are confident in a stronger oil price environment over the next 18 months, but not without some volatility. Oil supply, despite the historic decline, in the U.S. rig count hasn’t yet negatively impacted production. However, we believe volumes should begin to drop in the second half of the year.

Master Limited Partnerships (MLPs) have also been negatively impacted by the cut in the oil price and an anticipated increase in interest rates. In our judgment, the visibility of long term contracts and geographic assets that cannot be replicated, and a consensus forecast of 5%-7% annual distribution (dividend) growth is creating a buying opportunity in well positioned companies. For examples, our largest position, Energy Transfer, made an unsolicited bid for Williams Cos., another large holding in the portfolio at more than a 30% premium. The latter has long term visible growth opportunities, but was selling at a price that was below its intrinsic value. Since both companies are significant holdings in our portfolios, the Fund should be a meaningful beneficiary if the transaction is successful. We expect additional M&A activity in this growing asset class.

During the second quarter, we continued to be negative on electric utilities because of their high valuations and have actually been shorting individual companies.

In summary, the energy space has been challenging for investors, but we strongly believe there is tremendous value along all the various subsectors in the Fund. We believe that we are well positioned to benefit from an oil price recovery.

Paul Elliot, CFADan Tulis, CFAJames Elliot, CFA

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.