Quarterly Report – June 30, 2008

July 18, 2008

The Fund’s positive performance benefited from the diversification of its energy related investments which gives us the ability to seek out opportunities that are often missed in more narrowly focused portfolios. For example, a major contributor to our performance in the quarter was holdings of exploration and production (E&P) companies that benefited from rising production and expanding investor interest in shale and unconventional oil and gas drilling plays. A combination of higher commodity prices and new technology advances have resulted in significantly increased volume combined with lower cost structures. For example, U.S. producers are now drilling natural gas fields that were previously uneconomic. Companies are now able to drill horizontal wells into rock formations that were unprofitable to exploit. Horizontal, as contrasted to vertical drilling, is often the only way to tap reserves that otherwise would never be available. Also, new technologies and products have enhanced unconventional opportunities, especially in the Rocky Mountain region, which is having a huge impact on gas supply. Stock holdings in E&P that are major beneficiaries of these developments include Cabot Oil and Gas,

Newfield Exploration, Petrohawk, Southwestern Energy, Williams, and XTO Energy. We are encouraged also that many E&P companies still have net asset values that trade at as much as 50% discounts relative to the New York Mercantile Exchange (NYMEX).

Rising gas, oil, and coal prices drive electric power prices and creditable industry sources, such as the Federal Energy Regulatory Commission (FERC), recently predicted that the “nation may be entering a period of significantly higher power prices that will last for years”. We view this as positive for many of our electric power producers’ positions, including Calpine, Dynegy, NRG, FPL, Exelon, and Constellation Energy.

Our portfolio management approach continues to be based on our belief that energy supply, (excluding coal) are in a tightening trend that will result in firmer commodity prices over the foreseeable future. Therefore, while stock corrections are expected, our “energy chain” model has enabled the “Fund” to offset a decline in one sub-sector with strength in another. This was the situation in the second quarter, where outperformance in certain industry groups more than made up for weakness in others. However, it should also be noted that consensus stock valuations are conservative; i.e. based on only approximately $90/bbl of oil and $8/mmcf of gas versus current spot prices of around $130/bbl of oil and $10.60/mmcf of gas, respectively.

Moving into the third quarter of 2008, we are maintaining our net long bias. We anticipate that analysts will continue to increase their commodity price and earnings forecasts for 2008 and 2009, which should be strong catalysts for many of the industry sub sectors and companies. Also we are confident that near term individual company second quarter earnings reports, and future guidance, should be very positive and, in many instances exceed consensus. Nevertheless, while long term bullish, we remain very diligent in reducing volatility by expanding the use of hedging strategies.

Therefore, in conclusion, we remain positive on the long-term energy outlook and, as value investors, view shorter-term consolidations, more often than not, as opportunities.

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 (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.