simm energy hedge fund annual report for fiscal year of 2013

7/28/2019 SIMM Energy Hedge Fund Annual Report for Fiscal Year of 2013

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SIMM Energy Hedge Fund

Annual Report for the Fiscal Year of March 29, 2013

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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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 investorsare urged to review The Funds investment objectives and understand 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.

Disclosure


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Investment Objective_________________________________________________________________________p3

Energy Trends and Events___________________________________________________________________p4-6

Energy Market Outlook_____________________________________________________________________p7-8

Our Focus__________________________________________________________________________________p9

Closed Positions_________________________________________________________________________p10-11

Open Positions_____________________________________________________________________________p12Realized 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

Table of Contents


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Preservation of CapitalGenerate returns to investors that exceed:

The annual historical return of the S&P 500 The performance of the SPDR Energy ETF (XLE)

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 investmentPrime Broker: Interactive BrokersRedemption: Quarterly with 60 days noticeAUM as of Close 3/29/13: $266,121.58

Investment Objective and Compensation Terms


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During our fiscal year, there have been numerous unique events that have controlled the direction and pace

of the energy markets. The volatile macroeconomic environment has been a defining factor, often shifting price

direction.

The Eurozone debt crisis has dominated the news especially in the first halfof the year. Greeces debt issues

were frequent headlines. Late spring and into the summer, there were multiple elections in the country that failed

to decide on leadership creating further instability in the country. Fears over Spains failing economy also came to

fruition as Spanish banks received a 100 billion bailout, 10 year Spanish bond yields rose to a record high, andunemployment in the country reached over 25%. Even Chinas seemingly unstoppable growth has slowed as GDP

growth has dipped below 10% per year; an average that it has maintained over the past three decades. Recent news

has suggested that China may be starting to show some signs of recovery. Their economy grew at a rate of 7.9%

which is up from 7.4% in the third quarter.

Growth in the U.S. has remained slow. The economy showed promising growth in the third quarter with

GDP growth of 3.1% but then disappointed at 0.1% for the fourth quarter. The Federal Reserve has pledged to

keep interest rates near zero, at a rate of 0.25% until at least mid 2015 to help boost business. They also enacted athird round of quantitate easing (QE3) through the open-ended buying of $40 billion in mortgage backed securities

per month with no announced end date. Federal Reserve Chairman Ben Bernanke has suggested that interest rates

will be kept at historical lows until the current unemployment rate of 7.9% is reduced to 6.5%.

Energy Trends and Events


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Another issue dominating headlines to close 2012 was the pending fiscal cliff which would of implemented

tax increases and spending cuts that many feared would send the U.S. into another recession. Shortly before the

midnight, January 1st deadline, lawmakers came to a compromise that averted the potential economic disaster.

More recently, Congress has been deadlocked by the sequester issue which also enacts more budget cuts,

heavily affecting government employees, especially at the Pentagon, where reduced pay, hours and layoffs will go

into effect. Republicans and Democrats failed to come up with a deal, forcing these budget cuts. Many fear that

this will hurt growth with President Barack Obama pledging that the sequester may slow an economic reboundbut will not hinder the recovery over the long-haul

Commodities, especially the crude oil complex, have been affected by the cyclicality in the global markets.

The two most widely used oil benchmarks, West Texas Intermediate Crude (WTI) and Brent Crude were heavily

affected by the aforementioned global macroeconomic events. Hydraulic fracturing has allowed for a rebirth in

U.S. oil production that has boosted supplies to levels not seen in over 20 years. This shaleboom has led the

International Energy Agency (IEA) to forecast the U.S. to be energy independent by 2020. Imports of foreign oil

are near half of their peak of 12 million barrels per day between 2004 and 2007. The heavy supplies of domesticoil have created a bottleneck in Cushing, Oklahoma, which is the delivery point for WTI futures contracts. The

combination of heavy production and difficulties transporting the commodity out of Cushing has put downward

pressure on prices and has contributed to the decrease in the spread between Brent and WTI. The recent expansions

of the Seaway Pipeline shows promise to help alleviate this bottleneck but will not be fully operational until the

end of 2013. Middle East tensions have also had an effect on prices. Iran continued to threaten to close the Strait

of Hormuz, which about 20% of the worlds oil travels through, because of nuclear sanctions.

Energy Trends and Events (Continue)


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After a decline at the beginning of the summer, which corresponded with a drop in oil prices, gasoline prices

surged this summer on supply concerns. Refinery outages throughout the U.S. and Europe kept supplies tight in

New York Harbor where RBOB gasoline futures prices reached a five-month high of $3.342 a gallon and prices in

California briefly shot up over $6 a gallon in some locations. Surging gasoline prices helped increase the crack

spread during the second half of the summer, improving refiner margins, and elevating our refiner holdings.

Hurricane Sandy also had a significant effect on gasoline prices. Damage from the hurricane temporarily shut

down one of the largest refiners in the New York City creating a massive gas shortage. Both New York City andthe State of New Jersey saw gas lines stretching for blocks, some over 12 hours long, forcing both the city and the

state to utilize an odd-even license plate rationing system.

Natural gas has also had an eventful and historic run over the past few months. The same technology that has

created a new oil boom in the U.S. has led to even larger growth in natural gas production. This growth, along with

an extremely warm winter in 2011-2012, has led to record inventory levels and has severely depressed the price,

reaching its lowest level in over a decade of $1.89 in April. The cheap price also led to a significant amount of

coal-to-natural gas switching by power plants this summer as the commodity was a cheaper alternative then coal touse as fuel for power. Record cooling demand, due to the hottest summer in 50 years, helped prices recover some

their losses, recovering from their April low. More recently, this winter has seen temperatures that were colder

than last years but still above average. This has led to lower inventories than but with supplies 14% higher than the

5-year average, prices have stayed well below $4.

Energy Trends and Events (Continue)Energy Trends and Events (Continue)


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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 lowerthan 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 andinvestors 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.

Market Outlook


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An increase in production may increase oil stocks throughout the country and may affect the price of West

Texas Intermediate Crude (WTI), the key benchmark for U.S. based crude oil. Current stocks in Cushing, OK, the

delivery point for WTI, are up 28.42% from a year ago further signaling a major shift in US oil production.

Despite this, we expect the addition of new pipeline capacity in Q3 of 2013 will help alleviate some of the buildup

in stocks, leveling prices instead of them reaching new lows. The improved infrastructure of delivering crude oil to

the Gulf Cost will relieve the inventory in Cushing and may continue to further tighten the Brent-WTI price spread.

These recent developments may also help reduce the United States dependence on imported crude oil from foreign

nations.

Natural gas should see some major price swings over the coming months. We believe that with inventories

10% above the norm and with the transition period from cold weather to warmer upon us, prices will decrease

leading into the summer. The summer months should see another bull run due to the relatively cheap prices of

natural gas. They may not be currently cheaper than coal, discouraging natural gas to coal switching by power

plants, but a forecasted hot summer and relatively cheaper prices then historical norms should push prices higher

due to heavy cooling demand. Over a more long-term period, we expect natural gas prices to rise significantly as

supply will eventually be drawn down due to increased demand. The approval of liquefied natural gas (LNG)exporting by US based companies, such as Cheniere Energy, will be a big proponent of this. This will allow

companies with the capacity to produce LNG to greatly benefit from the abundant amount of cheap natural gas

currently being produced.

Market Outlook (Continued)


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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.

Futures Contracts

Equities

Futures Options Equity OptionsWithin 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.

Energy Hedge Fund Objectives


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Closed Positions


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Closed Positions Continued


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Open Positions


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Net of transaction cost*

Realized Profits & Loses


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Energy Commodity Commodity Type April 2, 2012 March 29, 2013

CL1 Comdty WTI Crude Oil 105.23 97.23CO1 Comdty Brent Crude Oil 125.43 110.02NG1 Comdty Natural Gas 2.15 4.02XB1 Comdty RBOB 338.22 310.54

Commodity Prices


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April 2, 2012March 29, 2013

Dow Jones-UBS WTI Crude Oil Sub Index -10.35%Dow Jones-UBS Brent Crude Oil Sub Index -4.71%Dow Jones-UBS Natural Gas Sub Index 26.35%Dow Jones-UBS Unleaded Gasoline Sub Index 8.81%Dow Jones Credit Suisse Core Hedge Fund Index USD 2.17%

Dow Jones UBS Performance


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Risk Analysis Energy SelectSector SPDR, XLE S&P 500SPX United States OilFund LP, USO SIMM EnergyHedge FundSharpe Ratio 0.77 1.07 -0.45 0.49%Sortino Ratio 0.57 0.81 -1.00 0.81%Standard Deviation 1.10% 0.80% 1.50% 1.21%Mean Return 0.05% 0.05% -0.04% 0.03%Positive Periods in Days 136 (52.71%) 143 (55.43%) 141 (54.65%) 149 (57.75%)

Negative Periods in Days 122 (47.29%) 115 (44.57%) 117 (45.35%) 109 (42.25%)

Energy Hedge Fund Risk Analysis


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Cumulative Returns from 04/02/12 - 3/29/12 XLE SPX USO U83913610.58% 11.41% -11.39% 6.46%

Cumulative Return Comparison

*U839136 = Energy HedgeFund


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Crude oil is down over 9% since last April, putting in its yearly highs one day after the start of our fiscal

year. The main concern right now continues to be an increase in production and supply with weaker demand. US

domestic production for crude oil is now at 7.15 million barrels per day, up from 6.04 million per day this time last

year and currently at highs not seen since 1992. Crude oil supplies in Cushing, OK are at 49.46 million barrels, up

from 41 million barrels this time last year, and just off all-time highs of 51.8 million barrels in January of this year.

We have seen the Brent/WTI spread widen by 40% since last year, which is the difference in price between WTI

crude based in Texas and the global benchmark Brent based in Europe. With the amount of pipelines being built tohelp reduce the glut of supply in Cushing, we expect the spread to narrow, which has happened in the past few

weeks. With the amount of exploration and production that has been happening on US soil, there has been less

reason to import crude oil. The US is now importing 8.8 million barrels of oil per day, lower than 9.7 million from

this time last year, and just off of 5 year lows. US Days supply of crude oil excluding those in the Strategic

Petroleum Reserve (SPR) have also hit 20 year highs, currently sitting at 26.9.

Portfolio AllocationCrude Oil Review


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With all that has been listed in the review, we believe that oil prices will decrease in the future. Although

playing out with what our forecast was in our semi-annual report, we have seen Cushing supplies begin to increase

due to technological innovations and more pipelines being built. We also believe that the Brent/WTI spread will

begin to contract due to global weakness. We think that Brent prices will be headed lower in the future due to the

likelihood of European and Asian economies remaining slow. Prices of WTI crude will remain stable but may pick

up as equities continue to hit all-time highs, seeing as they both still have a relatively high correlation. There is also

the chance for less demand for WTI in the US due to better and cheaper alternatives in the future. We have already

seen exploration and uses for natural gas; also the likelihood for cars to run on fuels not made from oil has been

increasing. We will be closely following the oil markets as we head into the summer driving season, where we will

be tracking demand patterns across the US, seeing if there are possibilities to make money from trading WTI on

weekly inventory data.

Crude Oil Forecast


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We have seen gas prices rise substantially from 2008, with 2012 marking the most costly year for consumers. Unrest

in the Middle East, along with several major hurricanes, caused prices to heighten in 2012, with a national average of $3.60,

up from $3.51 a year prior. A sticker shock helped to limit prices from exceeding a national average of $4.00 a gallon.

However, the west coast was not as fortunate, particularly California, where prices accelerated beyond $5.00 a gallon for a

stretch during the summer. This was due to two problems with refineries in the area. The Chevron refinery in Richmond had

a fire seriously inhibit production, and a power outage at ExxonMobil in Los Angeles hurt the areas distribution as well.

Heightened prices forced consumers to cut back their gasoline consumption resulting in prices backing off the peak price

levels seen in September.

Hurricane Sandy struck in late October, causing the financial markets to close and millions to be effected by massiveflooding. Despite the levels of destruction, national gas prices declined following the natural disaster. Areas affected by the

storm saw gas lines stretch for miles and last hours. In these areas, prices skyrocketed for a relatively short period of time as

supply was constricted in New York City and New Jersey. Part of the reason prices dropped was due to the seasonal effect

which started in October, along with a sharp decline in demand. Also, Californian prices dropped $0.50 as refineries

reopened and started refining the less costly winter blend. Fewer consumers were able to travel given the state of the east

coast, and those with demand were simply unable to obtain gas.

Gas prices declined to their lowest levels in December. This was supported by investors pulling their money out of

oil and other commodities as the Fiscal Cliff loomed with uncertainty. At the start of 2013, analysts were initiallyforecasting average national prices of $4.00 a gallon, but have since retracted these projections. This is due in large part to

prices experiencing seasonal increases earlier than usual. History has shown that gas prices rise throughout the spring and

peak in the late summer due to more drivers on the roads, when compared to the winter. However, since March 29, gas

prices fell 26 out of 30 days, causing analysts to reduce their average price peaks from $3.95 to $3.69 a gallon.

Gasoline ReviewGasoline Review


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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 ofgasoline 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.

Gasoline Forecast


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Current Holdings: Natural Gas May 2013 4.30 Call

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 whichkept 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% year-

over-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.

Natural Gas Review


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Over the next few months, we are expecting to see a drop in prices for natural gas for multiple reasons.

Transitional temperatures should come into play across much of the U.S. causing a drop in price from recent highs.

We expect near term rig counts to continue to remain below last years averages due to an increase in production

per rig. Based on the past boom in drilling, we are expecting to see an increase in the production for current wells

as opposed to new wells being drilled.

We are expecting warm temperatures for the summer of 2013 to create demand for cooling, raising prices.The National Oceanic and Atmospheric Administration (NOAA) has projected that a dry summer for much of the

west and southwest will continue to be plagued by ongoing draught conditions. These conditions are expected to

expand into areas of Texas, Florida, and along much of the eastern seaboard. Above average temperatures will

plague much of the lower 48 states.

Furthermore, we expect consumption to increase due to the expanded use of natural gas. Many automakers

are developing cars fueled by the commodity which would largely increase demand. We are also looking for

pipeline construction to increase shipping capacity across the U.S. by putting more pipeline infrastructure in theeastern and northeastern regions of the U.S. An experimental green corridor spanning across 900 miles of

roadways along major trucking routes in Canada will be supplied with LNG fill stations spaced every 250 miles.

Natural Gas Forecast


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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 announcedthe 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 andMemphis 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.

Equities Review


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HollyFrontier Corp. (HFC) had an annualized return of 76.3%. Q4 EPS missed by $0.32 at $1.92, but

revenues beat by $0.21B at $5.14B. A major reason for lower than expected earnings was the increased costs per

barrel of production from $5.22 a year ago to $6.29 in Q4 which stem from unplanned downtime and turnaround

activity associated with the merger in July 2011. HFC also benefited from increased margins from their

advantageous location allowing them to take advantage of much cheaper domestic crude, generating a record

$3.1B of EBITDA in 2012. They completed turnaround at the Tulsa West refinery, and also completed and started

up a new coker furnace at the El Dorado refinery in Q4. The company paid out dividends totaling 39% of netincome and doubled the regular dividend from $0.10 to $0.20, as well as issuing five special $0.50 dividends

during 2012.

Apache Corp. (APA) struggled to maintain gains with an annualized return of -44.17% in our portfolio. The

company has seen a large drop in price of over 8% since their 2012 10-K earning release which disappointed

investors. Apache reported earnings for the full year of $3.767 billion and adjusted earnings per share of $9.63.

This beat analyst estimates of $9.589 earnings per share but investors were still overall disappointed in their

production outlook. Management announced that production might rise in 2013 by 3%-5% which is lower thananalyst estimates of 6.4%. This has disappointed the market, sending the stock lower despite its relatively attractive

valuation and deep assets. Despite these disappointments, Apache has made some positive moves in 2012. The

company produced $10.2 billion dollars in operating cash flow and increased oil/natural gas production by 6.3%.

Equities Review (Continue)


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This was fueled by production growth within their massive assets in the oil rich Permian and Anadarko Basin. Thecompany also entered a deal with Chevron (CVX) to manage the Kitmat LNG project on the west coast of Canada.

This project will allow Apache to take advantage of the upcoming boom in the liquefied natural gas (LNG) market,

exporting LNG overseas where the commodity is in high demand due to its cheap price.

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 higherreturning 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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permission by the U.S. Dept. of Energy to export about 15M metric tons per annum of domestically producedliquid natural gas to FTA countries. This comes after Cheniere was the only company granted approval to export

by the Federal Energy Regulatory Commission.

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 andSpraberry 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 flatfor 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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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.

Equities Forecast


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Before each trade is implemented, all the possible foreseen risks involved must be presented and discussed

with management. A formal trade proposal must be put in writing as to have a record of the initial justification and

risks associated with the trade. This also allows us to review trades and critique them based on new information

and changes in the market.

Each position is monitored on a daily basis and is adjusted accordingly. Each analyst is assigned a position

to monitor and is to report to upper management on a weekly basis.

Positions limits include:

No equity position can make up more than 20% of the portfolio Futures contracts initial maintenance margin cannot exceed 50% of the total portfolio value

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.

Risk Management Guidelines


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Management Team

Vasile TivadarCo-Portfolio Manager

Jeremy TranzilloCo-Portfolio Manager

Peter EllerCrude Oil Analyst

Neil ScheibleOil & Gas Equity Analyst

Christopher MatthewsOil & Gas Equity Analyst

Mike R. LawheadNatural Gas Analyst

James ReedGasoline Analyst


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Jeremy Tranzillo Energy Hedge Fund: Co-Portfolio Manager, April 2012Present Head of Fixed Income, January 2012May 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 2012Present Energy Hedge Fund: Geopolitical Analyst, January 2012May 2012 Fixed Income Sector Research Associate, January 2012May 2012 Risk Management, Research Analyst, January 2012May 2012 Industrial Sector, Research Analyst, September 2011December 2011 B.B.A. Accounting and Finance, St. Bonaventure University 2013

Peter Eller Neil Scheible

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

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

Biographies


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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

James Reed

Mike R. Lawhead

Energy Hedge Fund, Natural Gas Analyst, January 2013Present Long Fund, Consumer Discretionary, Analyst, August 2012Present B.B.A. Accounting, St. Bonaventure University 2015

Energy Hedge Fund, Gasoline Analyst, January 2013Present Long Fund, Consumer Discretionary, Analyst, August 2012 Present B.B.A. Finance and Marketing, St. Bonaventure University 2014

Biographies


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We would like to thank all of the alumni, professors, fellow students, friends, and family for helping us have

another phenomenal year. Being part of the Energy Hedge Fund has been not only a great learning experience but

something that has positively affected all of our lives. Thanks again for all your help, advice, and encouragement

throughout the year!

Sincerely,

The Energy Hedge Fund Team

Follow us on Twitter @SIMMEnergyFund

Thank You

simm energy hedge fund annual report for fiscal year of 2013

Documents