Portfolio Manager’s Monthly Update – February 2018

February 14, 2018

Dear Investors,

We suggested last month that we believed that 2018 would be a strong year for equity markets including those in the energy sector and in our energy portfolio. In January, we were certainly not disappointed as equity markets raced ahead and the portfolio gained 18.7% net of fees. Most of these gains reflected optimism about the general strength of the economy and a massive tax cut delivered from Congress in December. The main beneficiaries of the cuts will be corporations who will see their tax rates decline from 39% to 21% and go a long way to putting US corporations on an equal tax footing with competition around the world (from a tax perspective). We believe the lower tax rates given to most mid-income Americans will add strength to the economy for years to come.

There are potential risks to the rosy economic expectations that we saw in January, those being fears of higher inflation and higher rates as a consequence of larger deficits. Those fears took over in February and knocked the market back down to realistic levels. Fortunately, our portfolio is still up nicely for the year. The gains may have come too quickly, but so did the reversal. We believe the case for higher markets is on firm economic footing and if this proves correct, the market should be reasserting itself soon.

The energy markets, including positions in our portfolio began correcting this month as well, but for the obvious reason that oil prices finally started to fall. The macro background for oil is centered on the production volumes from OPEC and from the Permian Basin of West Texas and New Mexico. In the world of oil, these are crucial areas.=

Oil prices have risen for several months because of OPEC cutbacks, inventory drawdowns, and worldwide increases in demand. The world began to notice recently that oil production from the Permian Basin has risen much more quickly that markets thought possible. We think that this positive surprise will continue from the Permian and that production from the region will be far stronger than estimated now.

As oil production from the US passes ten million barrels a day, the industry is now thinking that US production can be as much as 11 million barrels/day by 2019. We think it could be that high or higher by 2019 and then much higher by 2021-23, all as a result of Permian production. If that does happen, oil prices will come under pressure.

However, even as Permian volumes put pressure on oil prices, Permian volumes will just continue to rise and the Permian producers will capture more and more market share at the expense of producers in the rest of the world.

For exposure to the Permian, we continue to like Texas Pacific Land Trust, Viper Energy Partners, and other select energy companies focused on the Permian.

Our best wishes,

Dana McGinnis and the team at
Mission Advisors