Quarterly Report – September 30, 2009
October 14, 2009
Despite the weak economy during the third quarter and first nine months of 2009, the Fund outperformed the overall stock market and most energy indices.
Particularly encouraging was that the Fund’s performance was accomplished notwithstanding a 37% decline in the natural gas price over the past year, reaching an historic low of $2.50 per mcf on September 3, 2009. In our opinion, this probably was the bottom and reflected a combination of dramatic incremental supply from new shale resources even though the number of operating rigs declined 50% during the past year and a significant drop in demand because of the recession.
Looking ahead, Congress is struggling to pass an energy bill in 2009. If not successful, it will be challenging to accomplish it in 2010 due mid-term elections. Therefore, it may not be until 2011 before new legislation has any chance of success. However, natural gas received a boost when Senators Barbara Boxer and John Kerry included incentives for use of gas in power plants for electricity generation in their climate change bill. Their bill promotes natural gas as the fuel that can be utilized to replace or retire power plants that emit a greater amount of greenhouse emissions. Also natural gas fired plants can serve as backup for renewable energy i.e. wind and solar which are less reliable for base load generation.
Overall, our current investment approach continues to reflect our belief that oil should trade in a range of roughly $65-$85 per barrel over the next year while the price of natural gas, which reached a low of $2.50 per mcf in September 2009, should improve to $6 to $7 per mcf over the same period. As the economy rebounds and the impact of the reduction in the number of drilling rigs takes hold, energy usage should improve and supply will begin to tighten into 2010. Therefore, as we noted in our last communication, "although periodic stock corrections can be expected, we plan to take advantage of opportunities when they occur. Our longer term bias remains positive on commodity prices and our energy chain approach which allows us to offset a decline in one subsector with an increase in another". This methodology has aided the Fund's performance this year as we increased asset allocation in a number of groups, particularly the high yielding Master Limited Partnerships (MLPs). This asset class has been one of the stock market's largest outperformers since the first quarter. MLPs currently represent the largest asset allocation percentage in the Fund’s portfolio.
We continue to remain positive on the near and longer-term outlook for energy investment as the economy strengthens. We believe our ability to navigate the different subsectors will continue to enhance the Fund's performance while hedging strategies will provide protection during overall stock market and individual industry sector consolidations.
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.
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.