Portfolio Manager’s Monthly Update – April 2018

April 8, 2018

Dear Partners,

Processing of K-1s has taken longer than expected but we hope to get K-1s out to you ASAP. For the time being, we can supply a rough estimate that there should be little in the way of income or realized capital gains or losses for 2017. We do expect that there will be some depreciation deductions. Overall we are estimating zero in the way of taxable income.

Turning to the market and the portfolio, the Fund had a correction last month. The energy sector and general markets had a much bigger one. Markets across the board are now in a correction, mostly over the tough trade talk coming out of the White House. There have been some tariffs imposed on China but they are still minor and it is rumored that there are behind-the-scene talks to reach a non- confrontational settlement. No one wins a trade war, but the Administration has a point that much of the trade with China and others is too one sided and there are likely ways to improve them.

Passing a tax bill, which was very good, is not enough. The economy is in very good shape now after only a year partially because of the tax cuts, but also because of a series of little talked about rollbacks of burdensome government regulations. These regulatory revisions could help create an even stronger economy and jobs market that could last years and years.

Despite the current market correction, the US energy markets are in pretty good condition. Prices are higher. Most companies have greatly reduced costs and are focused and lean. Prices are not high enough yet for some areas to return to active exploration but activity in the Permian continues. The U.S. is starting to export increasing volumes of petroleum products, helping the world keep prices for energy low. This is a boon to all economies. The Permian has the lowest costs of any area in the world outside the Middle East and is doing extremely well in the current environment. Remember that competitive production from the Middle East has very low cost but is governed by country budgets that need revenues not profits.

Prices around $60 for oil are high enough to be extremely lucrative for Permian operators. They are not high enough to bring much competition from other areas such as the Bakken or the Eagle Ford, or from offshore wells. If OPEC producing countries were to try to increase production in the near future, prices would again decline, in our opinion. This is a beneficial scenario for the U.S. and will likely last until rising Permian production can no longer supply the bulk of slowly rising worldwide demand.

We think the Permian Basin and its producers will continue to rise in prominence and importance. With the portfolio tactically committed to the area, we expect our investors will continue to profit.

Best regards,

Dana McGinnis and the team at
Mission Advisors