Portfolio Manager’s Monthly Update – March 2018

March 14, 2018

Dear Investors,

The Fund value retreated (-.58%) last month after a fine performance in January. The Alerian MLP Index we have long used for performance comparison declined (-9.69%) in February. The Fund is now up +18% net of fees for the year vs.
(-6.5%) for the index. Our long exposure for most of the month was ~110% and our short position, oil price hedges, running about 10%.

Our key position in Texas Pacific Land Trust was stable but did experience some volatility. Their earnings report for the year was outstanding even though they reported a backlog of drilled but uncompleted wells “DUCs” on their lands. Those DUCs are a source of concern for a number of analysts and for some investors with the thinking being that a large number of future completions will flood the oil market and depress prices. Some of those concerns may be justified because many of the DUCs in the Permian will be completed in the next two years and we do expect them to put some pressure on prices in the short term. Many of the DUCs outside the Permian, however, may not be completed anytime soon, as those in the Marcellus face a shortage of infrastructure and a glut of natural gas from existing wells. Many of the DUCs in other fields in the U.S. will need to see sustained prices above $65-70 before spending money for completions. Not so in the Permian where costs are very low especially compared to production volumes.

Any production bump from DUC completions likely will be short lived because though drilling will proceed in the Permian, worldwide spending to replace natural depletion of existing production is woefully inadequate to meet still rising demand for fossil fuels. We do expect some pressure on prices later this year, but by 2020 there is no other way to meet rising energy demand than to drill for oil and gas. If demand continues growing even the much higher production that we expect form the Permian (much higher than industry estimates) will not be enough to keep oil and gas prices from moving to much higher levels.

The continued rise in the demand for fossil fuels is simply a fact, yet most public reports (outside the energy industry) speak of nothing but alternative energy or the future of electric cars. While the use of alternative energy is rising, and may well even be the future for the world, it is hard to see that occurring when we are not really dealing with the here and now. Almost all publically listed alternative energy companies have gone broke and all of the ones that have survived are subsidized by government. Whether those subsidies come from the U.S. or from China makes no difference when we speak in terms of global energy needs or emissions that dirty our air, it is still a subsidy. Future energy must be cheap enough so that people can afford it and subsidies are not the answer.

It is time that all governments and people start discussing our future energy needs in those terms. The U.S. Congress is beginning to reduce subsidies to the wind and solar industries and both of those groups are in retreat. What makes sense now for a national energy policy is to encourage the use of natural gas and to push for the faster conversion of coal plants to natural gas. Both fuels are abundant but gas emissions are half that of coal. There is no reason to punish coal, just allow economics and strict emissions standards to do the work. We can no longer afford to allow emotional arguments with no factual basis to impede progress.

The U.S. is becoming an energy powerhouse. We should take full advantage of our well- earned energy leadership and profit while helping the rest of the world reduce energy costs. In the meantime, for the Fund, we will continue to do what we have been doing for years, provide positive returns for our investors. In doing so we try to follow the advice of Will Rogers as he said, “Only buy stocks that go up, if they don’t go up don’t buy them.”

Our best wishes,

Dana McGinnis
and the Mission Advisors team