Investment Solutions

Quarterly Report – September 30, 2014

October 17, 2014

During the first two weeks of October, largely reflecting a number of factors, the price of oil declined very suddenly, approximately 25%, causing significant underperformance of all energy sector investments. However, as in the past, as conditions continue to settle down and the oil price stabilizes, we are confident that the Fund’s “Energy Value Chain” approach will once again positively differentiate it from other energy investment vehicles. As such, we will attempt to put into perspective our confidence in the longer term bullish energy outlook.

As of this writing, energy stocks are trading at a significant discount to energy prices and this could be a great buying opportunity. One of our contacts, Mike Rothman of Cornerstone Analytics, an oil industry veteran for almost 40 years, suggests most energy sub sectors are trading off of sub $75/barrel prices. This is especially true for the exploration and production and energy services sectors.

In terms of the portfolio, our focus has been investing in high quality, high cash flow generating companies. One of our longer dated positions, Dresser Rand, has agreed to be acquired by Siemens, in a deal worth $7.6 billion. While Dresser Rand’s operational performance has not been stellar, their strong cash flow generating business model has always been attractive to the large industrial players. The acquisition will strengthen Siemens presence in the U.S. shale oil and gas industry. Also, National Oilwell Varco (NOV) recently announced a potential 9% outstanding share buyback. Not only is this the first buyback announcement for NOV, but the magnitude shows the projected cash flow visibility of the Company. We would not be surprised to see the Fund’s other energy holdings such as Halliburton, Schlumberger, and Core Labs increase their own buybacks during this time.

A major reason the Fund outperformed the major energy indices; (for example the E&P Index down 13.42% and the Oil Service Index down 9.72%, for the month of September) has been our overweight position in energy infrastructure, especially Master Limited Partnerships (MLPs) which are above average yield instruments. This subsector is backed by asset heavy companies with long term fee-based contracts. Although MLPs are susceptible to pull backs, their “utility-like” contract structures and distribution growth, tend to fare better and recover more quickly in volatile markets. Important to note is that recent successful pricings of two high quality MLP initial public offerings seems to indicate continued investment appeal for companies that offer above average total returns.

While energy stocks pulled back due to increased uncertainty and overall stock market correction, we remain optimistic as we believe we are invested in high quality, best of breed companies in our individual subsectors. These are businesses with industry presence that cannot be replicated and this market pull back has seen many valuations come down to very attractive levels.

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.