Investment Solutions

Quarterly Report – September 30, 2013

October 16, 2013

In our judgment, there has rarely been a more attractive time to invest in energy. Earlier concerns about an oil price collapse have somewhat lessened. Despite the significant increase in North American production from shale drilling, heightened global geopolitical risks, particularly in the Middle East and North Africa, have illustrated just how little spare capacity is available worldwide. Our company holdings assume a range of $80-$100 a barrel in oil for the balance of 2013 and 2014. Additionally, improving fundamentals of the oil majors and attractive equity valuations in most individual sectors, give us confidence for improved relative price performance over the next 6-12 months.

A major positive is the oil and gas U.S. production growth; a development that was not predicted only a few years ago. This significant change largely offsets the fragile political climate in important OPEC countries such as Iraq, Libya, and Nigeria, while the chaos in Egypt and Syria adds to the global uncertainty. In summary, given the worldwide decline of production from existing fields, and the slow but recovering global economies, we remain bullish on oil prices over the foreseeable future.

With respect to natural gas, we look for gradual supply/demand improvement as increased electric utility, LNG, and NGL usage continues to support shale drilling opportunities. This is bullish for companies involved in energy infrastructure; namely Master Limited Partnerships (MLPs) and select type companies such as Chicago Bridge & Iron, Cameron International, Dresser Rand, and Cheniere Energy. Also, if commodity prices hold up, capital spending should increase in 2014 and 2015. Overall, we believe that the forward curve for natural gas should be supportive to drive natural gas demand growth. Accordingly, we agree with the industry consensus that a $4.50-$5.00/MMBtu price range would be necessary to drive long term gas production growth. Specifically, global demand for natural gas, particularly LNG, could double according to industry sources, from 240 million tons by 2030. The U.S. is likely to provide a large portion of the increase since the estimated cost could be one-third to one-half of other producing countries such as Australia.

In terms of the Fund’s portfolio, we continue to see an increase in investor friendly developments such as non core asset spinoffs, major restructurings such as Oil States International’s announced sale of its tubular business and various company moves to unlock sum of the part valuations, dividend increases, and meaningful stock buy backs.

While the majority of macro and energy sector news remains positive, we are keenly aware that there are events that could have a negative impact on the overall stock market. Therefore, we have been protecting our gains and, once again, reducing our exposure by selling securities and buying added protection on the overall market and oil and gas price volatility.

In conclusion, we remain very constructive about the Fund’s prospects and believe our energy value chain approach to asset allocation will continue to drive performance and provide portfolio diversification.

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.


« Library »


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.