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This report is to be presented to the SIMM Advisory Board on Friday April 12, 2013 and be distributed to interested university members, community members, and other parties of interest.
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Disclosure
This report is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security nor is it intended to provide investment advice. There is no guarantee that the energy fund will have a return on invested capital similar to the returns of the other accounts managed by SIMM. The fact that other accounts managed by SIMM have realized gains in the past is not an indication that the Funds will realize any gains in the future. Prior performance is not indicative of future results. An investment in the Fund is speculative and involves risk of loss of invested capital. There can be no assurance that the performance objectives of the Fund will be achieved. The investment program utilized by The Fund is subject to significant risks including risks from the use of short sales and leverage. Prospective investors are urged to review The Funds investment objectives and unders tand the risk of loss associated, and consult with financial, legal and tax advisors prior to investing in a Fund. Performance results shown are presented on a before fee basis and are broken down into Net Asset Value (NAV) and cost basis return. An individual investors return may vary from these returns based on different management fee and incentive arrangements, and the timing of capital transactions. The statistical data regarding the indices has been obtained from BLOOMBERG PROFESSIONAL SERVICE and the returns are calculated assuming all dividends are reinvested. The indices are not subject to any of the fees or expenses to which the funds are subject. This presentation is being provided to you on a confidential basis and is intended solely for the information of the people to whom it is being presented. This presentation is intended solely to assist you in deciding whether or not to proceed with a further investigation of the SIMM Energy Hedge Fund. Accordingly, this presentation may not be reported in whole or in part, and may not be delivered to any person without prior written consent of the SIMM Energy Hedge Fund.
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Table of Contents
Investment Objective_________________________________________________________________________p3 Energy Trends and Events___________________________________________________________________p4-6 Energy Market Outlook_____________________________________________________________________p7-8 Our Focus__________________________________________________________________________________p9 Closed Positions_________________________________________________________________________p10-11 Open Positions_____________________________________________________________________________p12 Realized Profits & Loses_____________________________________________________________________p13 Commodity Prices _________________________________________________________________________p14 Dow Jones-UBS Performance ________________________________________________________________p15 Fund Risk Analysis_________________________________________________________________________p16 Fund Performance__________________________________________________________________________p17 Review and Forecast (Crude Oil, Gasoline, Natural Gas, Equities)__________________________________p18-28 Risk Management Guidelines_________________________________________________________________p29 Management Team__________________________________________________________________________p30 Biographies_____________________________________________________________________________p31-33
Assuming no leverage, expected annual net returns to investors of 8% - 9% The Fund requires on an annual basis, the following fee structure: Two (2) percent of assets under management (AUM). These are to assist in the day-to-day operations of the fund which include, but are not limited to:
Trading Costs Reorganization Costs Costs of Reporting
Twenty (20) percent of gains (realized) There is no minimum investment Prime Broker: Interactive Brokers Redemption: Quarterly with 60 days notice AUM as of Close 3/29/13: $266,121.58
Market Outlook
The 2013 outlook for the energy markets is positive despite tepid US growth and major issues in the Eurozone. The US economy appears to be slowly recovering as we saw Real Gross Domestic Product (GDP) increase 0.4% in Q4 of 2012. Despite this, projections for US GDP growth are conservative at 1.4%. This slow growth could hurt energy demand but we are still encouraged by the overall improving figures. The Feds decision to keep interest rates low and to continue to stimulate the economy through QE may help stimulate continued growth going forward. Intervention by the Fed has a simulative affect on hard assets such as energy commodities as it devalues the dollar, which artificially inflates the prices of these assets. This could potentially push commodity prices much higher. We believe the shale gas boom in the US will overall keep energy prices lower than their historical norms due to abundant inventory not seen in over 20 years. The Eurozone remains a huge concern for the international economic environment and for energy markets. Eurozone manufacturing continues to decline with the seemingly unstoppable German economy seeing a slip in PMI growth in March. These factors along with the new economic crisis in Cyprus provide grave concerns for overseas economic growth which could hurt energy demand. Overall, despite an interconnected global economy, we believe that many of the US based energy assets we trade will only be partially affected by these developments since the record amount of production of these commodities has made prices too cheap for consumers and investors to pass up. Overall global crude oil consumption is expected to increase by 1.12% to 90.2 million bbl/d with US oil production expecting to increase 12.67% to 7.25 mb/d in 2013. This increase in production is primarily due to the advancement in horizontal drilling and multi-stage hydraulic fracturing, which is expected to reach 33% of total U.S. oil production by 2014.
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The Fund was founded under the principle focus of investing within the energy sector and products. This entails investments being made in various areas throughout the energy markets. We utilize numerous securities in order to capitalize and generate superior returns to investors.
Within the energy sector, The Fund has had a primary focus on making investments in the traditional areas (crude oil, natural gas, and natural gas liquids). We have found investments involving positions in various energy commodities, along with companies throughout the industry. The Fund reacts to changes in the market and adapts to trends by taking both long and short positions. Moving forward, we reserve the right to invest in other products not stated in our current investment focus.
Closed Positions
Name Chesapeake Put Chesapeake Call WTI Crude Oil TSO Equity HFC Equity CHK Equity LNG Equity Brent Crude Oil Brent Crude Oil WTI Crude Oil Put USO ETF Put Natural Gas Natural Gas Natural Gas Brent Crude Oil Brent Crude Oil WTI Crude Oil WTI Crude Oil WTI Crude Oil Call Ticker CHK, 2012, 04/20, 21 Strike CHK, 2012, 04/20, 26 Strike CL, 2012, 12 TSO HFC CHK LNG COIL, 2012, 08 COIL, 2013, 06 CL MAY12 101.5 P USO 19MAY12 38.0 P NG, 2012, 05 NG, 2012, 05 NG, 2012, 06 COIL, 2012, 08 COIL, 2013, 06 CL, 2012, 12 CL, 2012, 07 CL Aug12 98 Call Security Equity Option Equity Option Futures Stock Stock Stock Stock Futures Futures Futures Option Equity Option Futures Futures Futures Futures Futures Futures Futures Futures Option Trade Date 11/30/2011 11/30/2011 11/9/2011 1/9/2012 1/9/2012 1/31/2012 1/31/2012 2/29/2012 2/29/2012 3/21/2012 3/21/2012 4/4/2012 4/4/2012 4/4/2012 4/17/2012 4/17/2012 4/17/2012 4/17/2012 5/8/2012 Settlement Date 4/20/2012 4/20/2012 11/16/2012 N/A N/A N/A N/A 7/16/2012 5/16/2013 4/17/2012 5/19/2012 4/26/2012 4/26/2012 5/29/2012 7/16/2012 5/16/2013 11/16/2012 6/20/2012 N/A Close Date 4/12/2012 4/20/2012 4/17/2012 Open Open 10/3/2012 Open 4/17/2012 4/17/2012 4/17/2012 4/18/2012 4/25/2012 4/4/2012 5/17/2012 7/5/2012 6/20/2012 7/10/2012 5/8/2012 7/9/2012 Position long short long long long short long long short short long long long short short long short long long 2 -2 1 318 227 0 674 2 -1 -8 30 3 3 -3 -2 2 -2 2 2 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Average Cost (1.60) 2.29 (94.07) (22.64) (26.50) 19.64 (12.90) (119.85) 113.07 0.90 (0.72) (2.14) (2.13) 2.26 117.56 (112.43) (104.66) 103.84 4.38 $ $ Total Cost (320.04) 457.95 $ $ $ Closing Price 0.67 104.66
Total Cl $ $ $
$ (17,512.08) $ (239,704.80) $ 113,067.60 $ $ 7,181.44 (2,151.73) $ $ $ $ $ $ $ $ $ $ $ $ 117.57 112.41 0.71 2.08 2.14 2.53 102.01 93.80 $ $ $ $ $ $ $ $ $ $ $
10 86.98
96.98 0.03
Total Cl $ $ $
$ (17,512.08) $ (239,704.80) $ 113,067.60 $ $ 7,181.44 (2,151.73) $ $ $ $ $ $ $ $ $ $ $ $ 117.57 112.41 0.71 2.08 2.14 2.53 102.01 93.80 $ $ $ $ $ $ $ $ $ $ $
11 86.98
96.98 0.03
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Energy Commodity CL1 Comdty CO1 Comdty NG1 Comdty XB1 Comdty
Commodity Type WTI Crude Oil Brent Crude Oil Natural Gas RBOB
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Dow Jones-UBS WTI Crude Oil Sub Index Dow Jones-UBS Brent Crude Oil Sub Index Dow Jones-UBS Natural Gas Sub Index Dow Jones-UBS Unleaded Gasoline Sub Index Dow Jones Credit Suisse Core Hedge Fund Index USD
April 2, 2012 March 29, 2013 -10.35% -4.71% 26.35% 8.81% 2.17% 15
Risk Analysis
Sharpe Ratio Sortino Ratio Standard Deviation Mean Return Positive Periods in Days Negative Periods in Days
XLE 10.58%
SPX 11.41%
USO -11.39%
U839136 6.46%
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Gasoline Forecast
One major concern for fuel prices looking ahead in 2013 are the costs refiners are faced with complying with a federal law to improve gasoline emissions. Carmakers recommend the amount of ethanol used in fuel not exceed 10% of gasoline however increased EPA quotas for next year have caused the price of ethanol credits to exceed $1. This is a substantial increase from what it was last year at just a few cents. These costs will eventually be passed on to the consumer, increasing pump prices. Not only does this hurt consumers pockets, but it also means more trips to the pump. Ethanol is 33% less pure than gasoline, and can decrease gas mileage by 3.3%. Despite the negative attention with soaring gas prices, there are some upside factors looking ahead that could keep gas prices from breaking that $4.00 national average. The EIA projects the average retail price of gasoline to average $3.56 per gallon, until December 2013. Middle-East stability will help to keep prices from edging upwards. The more turmoil in the region leads to supply chain interruptions, and thus higher prices. A positive note that will help hedge political unrest is news released from the EIA. The EIA stated monthly U.S. crude oil production is on pace to exceed crude oil imports for the first time since early 1995. Greater production will lead to lower refining costs and less reliance on the international oil supply. Also, when fuel prices start to near that $4.00 mark, consumers begin to find ways to cut back. This decrease in demand will likely keep prices from excelling beyond price levels of 2012.
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Depressed pricing due to low demand for heating or cooling fuels across the country called for an influx in inventory. In April, prices dipped below $2 due to a historically warm winter which caused inventories to reach record highs. Due to increasing temperatures through July, prices reached $2.95 (MMBtu) as cooling demand increased. Many power plants converted from coal to natural gas over the summer to produce electricity used to power A/C units. This spurred prices to rise over $1 to around $3.30. Prices then began to drop through August and September as we went through transitional climates which kept prices near the $2.85 (MMBtu) mark. Prices in October ended at $3.32 (MMBtu). Due to the energy shortages caused by Hurricane Sandy, we saw demand increase nearly 10% over the last week of October in comparison to the previous week. Inventories reached end of season records of 3,923 Bcf which were an increase of 3% yearover-year. As 2012 ended, weather remained relatively warm in conjunction with high inventory numbers which brought Natural Gas to a December price of $3.34 (MMBtu). January and February ended with similar numbers at $3.33 (MMBtu) each month due to a warm beginning to 2013. As a cruel blast of winter rolled through the country in the beginning of March, prices began to increase as demand for heating fuels grew. High consumption due to unseasonably cold weather has diminished inventories to 1,983 Bcf which was down 70 Bcf from the week before. For the week ending March 20th, prices rose to $3.96 (MMBtu) the highest level in over a year. Winter temperatures were more normal in comparison to the winter of 2012, but overall prices remain low due to the shale gas boom.
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Equities Review
Current Holdings: Tesoro Corp. (TSO), Valero Energy Corp. (VLO), HollyFrontier Corp. (HFC), Apache Corp. (APA), Occidental Petroleum Corp. (OXY), Cheniere Energy Inc. (LNG), Pioneer Natural Resources (PXD), Exxon Mobil Corp. (XOM), and Energy Select Sector SPDR (XLE). Our largest gainer was Tesoro Corp. (TSO), which had an annualized return of 111.69%. Earnings per share in Q4 missed by $0.07 at $1.34, but revenues beat by $1.21B at $8.27B. TSO was able to continue to benefit from large crack spreads and discounted crude by maintaining a high refining utilization rate of 89%. In addition to the over 225 retail stores added, which allowed a 20% year-over-year increase in retail fuel sales, TSO also announced the completion of three of five major refining projects, the acquisition of BPs Carson refinery in California and of Chevrons Northwest Product System which is expected to add over $0.5B in recurring EBITDA. The company also announced that the final two major refining projects, an expansion to a diesel desulfurization unit at the Mandan refinery, and the Salt Lake City conversion project, are scheduled to be online during Q2 2013. The next leading equity in our portfolio is Valero Energy Corp. (VLO), which posted an annualized return of 106.74%. EPS in Q4 beat by $0.59 at $1.82, and revenues beat by $3.69B at $34.7B. Valero greatly benefited from increased refining margins and lower operating costs. The company replaced imported crude at its Golf Coast and Memphis refineries with cheaper domestic crude. VLO also announced that it plans to complete the separation of its retail business by Q2 2013 and will distribute 80% of shares to shareholders, liquidate the other 20%, and bring in $1.1B in cash. Other highlights are the completion of a pipeline from the Quebec refinery to Montreal, and the completion of a hydrocracker at the St. Arthur facility. In Q4, Valero paid out $97M in dividends and purchased 4.2M shares, and also increased its quarterly dividend 14% to $0.20 per share.
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Occidental Petroleum (OXY) has also struggled in our portfolio with an annualized return of -38.54%. Despite this, the company reported 2012 earnings of $5.734 billion and adjusted earnings per share of $7.09 beating analyst estimates of $6.94. The company has overall pleased investors with its focus on cost-cutting and production growth. Starting in October, Occidental began a plan to reduce expenses by focusing on higher returning assets, simplifying well design, and drilling in fewer geological plays. Company management has claimed they are already well ahead of schedule on their timeline to reach their goal of a minimum of $300 million in savings in operating costs. The shale-gas boom in the US has also greatly benefited Occidental. In 2012 they had exceptional production growth from their US assets of 11%. The company also benefits from being an independent oil producer since they can drill and produce crude without partnering with other firms allowing for lower costs and greater profits from their wells. This helped them achieve an extremely impressive reserve replacement ratio, a key industry metric measuring the amount of proved reserves to production, of 140%. This means Occidental is replacing all their current reserves and growing production at an additional 40%. Cheniere Energy, Inc. (LNG) posted an annualized return of 75.87%. Q4 EPS missed by $0.07 with a $0.19 per share loss, and revenues missed by $4M coming in at $67.4M. These losses are mainly attributed to major development projects including the Sabine Pass Liquefaction Project and the Corpus Christi Liquefaction Project, as well as lower of cost or market adjustments to existing inventory and lower export activity. Cheniere was given
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Pioneer Natural Resources (PXD) had an annualized return of 17.06%. Q4 EPS missed by $0.05 coming in at $0.83, but revenues beat by $35.12M at $818.7M. PXD averaged 156,000 barrels of oil equivalent per day which was up 29% year over year and was at the top of their target range. Most of this growth came from the Spraberry vertical, horizontal Wolfcamp Shale program, Eagle Ford, and the Barnett Shale Combo drilling programs. The company announced they are initiating a $1B horizontal drilling appraisal program at their northern Wolfcamp and Spraberry land for 2013 and 2014, and also announced that they are looking to complete a $1.74B transaction with Sinochem expecting to close Q2 2013. For 2013, Pioneer is projecting production growth of 12% to 18% depending on the price of WTI which they believe will range from $85 to $100. ExxonMobil (XOM) has struggled to maintain significant gains with a 3.63% annualized return in our portfolio. Earnings in 2012 were $44.9 billion while earnings per share for 2012 were $9.70. ExxonMobil has continued to drive income growth through its downstream (refining) businesses, growing 196% for the year. The company also is continuing to struggle to improve their exploration and production business whose growth was flat for the year. To improve production the company purchased two companies, Denbury Resources and Celtic Exploration, giving them promising assets in both the US and Canada. ExxonMobil also continues to diversify their holdings by holding more natural gas assets. Their purchase of Celtic will help them improve natural gas production which was surprisingly down 2.4% in 2012.
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Equities Forecast
The uncertainty in the global macroeconomic environment gives us an unclear picture of price direction for our commodities, which greatly affects our holdings. For the crude oil complex, this uncertainty makes it difficult to determine where the price of oil is heading and could make it difficult for refiners to retain such high margins. If oil prices increase and the spread between WTI and Brent crude continues to narrow, our refiners will lose out on potential profits that come from this spread being as wide as it currently is. In the earlier part of the year, the price of domestic crude dropped in comparison to Brent crude. This widening spread gave a big boost to refiners with access to cheaper domestic crude. Also affecting refiners margins will be increased government regulations such as requiring a greater amount of increasingly expensive ethanol in their road fuels. Additionally, the U.S. government recently announced that it is requiring refiners to reduce the amount of sulfur in fuels from 30 ppm to 10ppm by 2017. This is going to add a large extra expense to refiners which will suck up profits from beneficial margins. With the expectation of oil prices to rebound and the tougher government regulations, it might be harder for refiners to see the same record profits they saw in 2012. In the area of liquid natural gas, we expect the agreements with the U.S. Dept. of Energy and the Federal Energy Regulatory Commission to give Cheniere a great competitive advantage. Adding to the agreements the expectation that the price of natural gas will rebound from recent lows, 2013 looks promising for natural gas producers.
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Despite our ability to lever our portfolio through Interactive Brokers (4.5x), management at this time does not view the risk to return ratio optimal to increase debt. Management advises that all speculative positions consider a corresponding hedge position.
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Management Team
Jeremy Tranzillo
Co-Portfolio Manager
Peter Eller
Crude Oil Analyst
Neil Scheible
Oil & Gas Equity Analyst
Christopher Matthews
Oil & Gas Equity Analyst
Mike R. Lawhead
Natural Gas Analyst
James Reed
Gasoline Analyst
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Biographies Biographies
Jeremy Tranzillo
Energy Hedge Fund: Co-Portfolio Manager, April 2012 Present Head of Fixed Income, January 2012 May 2012 M.B.A. St. Bonaventure University, May 2013 B.A. Psychology, SUNY Geneseo, December 2006
Vasile Tivadar
Energy Hedge Fund: Co-Portfolio Manager, April 2012 Present Energy Hedge Fund: Geopolitical Analyst, January 2012 May 2012 Fixed Income Sector Research Associate, January 2012 May 2012 Risk Management, Research Analyst, January 2012 May 2012 Industrial Sector, Research Analyst, September 2011 December 2011 B.B.A. Accounting and Finance, St. Bonaventure University 2013
Peter Eller
Energy Hedge Fund: Oil Analyst, August 2012 - Present Long Fund: Utilities Sector, Associate, January 2013 - Present Long Fund, General Analyst, January 2012 - May 2012 B.B.A. Finance, St. Bonaventure University May 2014
Neil Scheible
Energy Hedge Fund, Oil & Gas Equity Analyst, August 2012 - Present MicroFinance, Fund Member, September 2012 - Present B.B.A. Management Finance, St. Bonaventure University, 2012 B.B.A. Finance, St. Bonaventure University 2013
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Biographies Biographies
Christopher Matthews
Energy Hedge Fund, Natural Gas Analyst, August 2012 - Present MicroFinance, Fund Member, January 2013 - Present B.B.A. Finance, St. Bonaventure University 2013
Mike R. Lawhead
Energy Hedge Fund, Natural Gas Analyst, January 2013 Present Long Fund, Consumer Discretionary, Analyst, August 2012 Present B.B.A. Accounting, St. Bonaventure University 2015
James Reed
Energy Hedge Fund, Gasoline Analyst, January 2013 Present Long Fund, Consumer Discretionary, Analyst, August 2012 Present B.B.A. Finance and Marketing, St. Bonaventure University 2014
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