BP Capital TwinLine® Funds Quarterly Review – 1Q 2017
MACRO OVERVIEW
BACKGROUND
The American Energy and Industrial Renaissance (AEIR)
continues to unfold. We are chronicling the changing
characteristics and key developments of the renaissance as
we progress in our quarterly updates.
Using a combination of horizontal drilling and hydr aulic
fracture stimulation, the United States has dramatically
grown its production of oil and natural gas (NG). Since 2005
and 2009 respectively, US NG and oil production growth
rates have far exceeded those of the rest of the world, and
as a result, the prices of both commodities have fallen
relative to global peers.
While energy suppliers have been clear beneficiaries of the
more rapid development of shale resources within the US,
a less-understood outcome is how lower feedstock prices
have extended this advantage to industries such as the
American refining and industrial complexes. Certain
industries (the chemical and metals industries being
prominent examples) have improved profitability due to
cheaper input costs. According to consulting firm IHS,
billions of dollars of capital will be required to “re -plumb”
America’s energy infrastructure over the next ten years.
This is necessary to connect consumers of energy with
suppliers, and presents a growing investment opportunity.
The BP Capital team has long been recognized as a thought
leader regarding the AEIR, and the BP Capital TwinLine
Funds are designed to capture these secular investment
opportunities.
We are often asked by investors to describe what we
believe to be our competitive advantages. We respo nd by
outlining our three edges:
Informational
Alpha
Energy Value
Chain
Deep Energy
Experience
These edges inform our entire investment process. We
begin with a particular view on commodity prices by
aggregating and analyzing public and proprietary supply
and demand data globally. This supply and demand
backdrop is articulated below, followed by a deep dive into
the fund’s performance.
1 | Quarterly Commentary
The energy sector entered 2017 riding high from a
couple of very notable events in 4Q 2016. First,
positive investor sentiment toward tax reform and
broad deregulation following the November election
served as a strong tailwind across most segments of
capital markets. Additionally, specific to energy, the
OPEC decision that same month to cut oil production
by 1.2 million barrels per day provided a further
boost to recovering crude prices, which at
$53.72/barrel (West Texas Intermediate, WTI) ended
2016 at approximately double the price from the
trough earlier in the year. Higher prices and
renewed positive expectations have been most
evident in the Baker Hughes domestic oil rig count.
That figure, led by a dramatic increase in Permian
Basin activity, rose from a low of 316 in May 2016 to
525 at the end of 2016, and at the end of 1Q 2017,
stood at 662.
Positive sentiment toward oil prices to start the year
could be seen by a surge in net long positions by
commodity traders, with the ratio of net longs-tonet shorts rising in February to levels not seen since
2014. This optimism was largely based on
expectations that OPEC will accomplish its objective
of lowering global crude inventories, which at the
end of 2016 had swelled to approximately 300
million barrels over normal levels. We believe
inventories had begun the process of drawing down
a few months before the November OPEC decision.
In any case, further significant inventory draws are
needed to clean-up the stock surplus.
While
inventory figures reported throughout 1Q 2017
indicated draws in both Europe and Asia, crude
supplies in the US increased for much of the period.
In our view, this largely reflects the lagging influence
of imports that were shipped from the Middle East
prior to the effective January 1 date of the OPEC cut.
Also, while US crude inventories have remained
stubbornly high, it is worth noting that refined oil
products such as gasoline and distillate have seen
significant draws domestically. Regardless, the
persistently-high US crude inventory figures that were
4Q 2016
reported again in March finally broke the patience of oil markets, sinking the previously -resilient price below the
$50/barrel threshold for much of March, before recovering to $50.60/barrel at the end the quarter. This latest
drop in prices appeared to take the wind out of the sails of many previously bullish oil traders, as evidenced by the
largest weekly drop in net long positions in over a decade, and has resulted in what we view now as a much less
crowded oil trade.
With a less than apparent consensus, price forecasters have circled May 25th on their calendars, the date OPEC
will announce whether to extend its cuts. Some investors have viewed this date with trepidation, seeing it as a
binary event to significantly higher or lower oil prices. Still, we would point to record levels of compliance by OPEC
members (especially Saudi Arabia) as evidence of OPEC’s broad commitment to the cuts. Moreover, recent
comments by OPEC leaders strongly suggest an extension as more time is needed for US crude inv entories to draw.
Therefore, given this backdrop, we are currently biased to the upside for prices as the year progresses. We would
also note this view is supported by our expectations of continued healthy global demand and a likely seasonal
uplift driven by spring refinery restarts.
Looking beyond 2017, there appears to be two main camps of oil price prognosticators. The more bullish group
projects a $60+ crude price, driven by further OPEC price support (a planned 2H 2018 IPO of Saudi Aramco will
likely serve as a motivator), solid global demand, and the initial supply impact of numerous large non -OPEC, nonUS projects that were cancelled or deferred as a result of the severe price decline in recent years. The second
group sees a more range-bound crude price, as supply is boosted by growing US shale production and potential
intentions of OPEC to regain any lost global market share. This view still appears to assume a healthy global demand
outlook, the opposite of which would likely be a key factor to pr ices being sustained at substantially lower levels.
BP CAPITAL TWINLINE ENERGY FUND REVIEW
We see valid points to both of these oil price outlooks for outer years. Nevertheless, we stress our focus of
investing in those companies that can thrive in a range -bound or stagnant pricing environment and where our
disciplined valuation work suggests a mispricing in the marketplace. Good examples are our investments in several
Permian Basin Exploration & Production (E&P) companies that have shown the ability to grow reserves and lower
costs through efforts in the field, such as longer laterals and new drilling/fracking technologies, in addition to
corporate actions. Specifically, we would highlight compa nies like Diamondback Energy (FANG), which has
remained in the portfolio since the fund’s inception at 12/31/2013 and as of 3/31/2017, has risen 96% in that time
period, while crude has fallen 49%.
In addition to the E&Ps, we are invested in a number o f oilfield service companies that should see a dramatic uplift
in profits from significantly better pricing as well as overall increased demand for their services and products (e.g.,
sand and fracking horsepower). Finally, we are optimistic on the outlook for many midstream companies, which
will be major beneficiaries of increased volumes being sourced from basins like the Permian, as well as the Mid Con and Marcellus/Utica.
At the end of 1Q 2017, there was only one natural gas company in the portfolio (Ra nge Resources), as we currently
have lower conviction on a bullish outlook for natural gas. (Our investment in Range is largely due to the company’s
advantageous positioning in Northern Louisiana and its attractive valuation even assuming conservative gas prices
in our view.) Natural gas bulls cite expectations for a dramatic boost in demand over the next few years from
higher LNG exports, greater shipments to Mexico, and new ethylene crackers in the Gulf Coast. However,
countering this stronger demand should be a large increase in gas production from associated gas at new oil wells,
particularly in the Permian Basin, that will expand an already well -supplied US natural gas market.
2 | Quarterly Commentary
1Q 2017
PORTFOLIO ATTRIBUTION REVIEW
During the quarter ending March 31, 2017, the BP Capital TwinLine Energy Fund (TLEF) Institutional Shares fell
1.84%. During the same period, the S&P 500 Index rose by 5.53%, but the more relevant S&P North American
Natural Resources and the S&P 500 Energy Indices dropped by 4.76% and 7.30%, res pectively. Since its inception
on 12/31/2013, the TLEF has risen by 0.47% on an annualized basis, significantly outperforming the S&P North
American Natural Resources Index, and S&P 500 Energy Index returns of -6.9% and -7.04%, respectively, during
that period. The S&P 500 Index rose by 7.85% annualized during the same period.
Cheniere Energy was the top relative performer in the portfolio in 1Q 2017, as the company’s new LNG trains at
Sabine Pass were brought further online and as spot LNG prices experienc ed additional recovery. The end user
segment provided the next three best relative performing positions, as well as the portfolio’s worst performer. On
the positive side, Goodyear Tire was positively impacted by a retreat in natural rubber prices, a majo r raw material,
as well as announced tire price increases during the period. Other strong performers in the end user segment were
Westlake Chemical, which has benefited from a surge in caustic soda prices and further investor enthusiasm
regarding its 2016 Axiall acquisition, and Huntsman Chemical, where rising titanium dioxide (Ti02) prices and its
near-term plans to spin-off its pigments division have been the major catalysts. Finally, several midstream MLPs
added meaningfully to the fund’s relative performance. Those included positive contributions from Williams
Partners LP, Tesoro Logistics LP, Sunoco Logistics Partners LP, and Western Gas Partners LP.
The largest detractor of relative performance in the quarter was Horizon Global. Counter to the stock b eing the
second strongest contributor to relative performance in the fourth quarter of 2016, Horizon’s stock price was
pulled down by a large stock offering this January. The stock took another leg down in March with management’s
significantly lower-than-expected 2017 earnings guidance, which primarily related to the expected contribution
from its Westfalia acquisition of last year. Fortunately, we had substantially lowered our exposure to the stock
prior to the latest disappointment, avoiding an even lar ger relative detraction.
1Q Top Five Contributors
Company Name
Ticker
Cheniere Energy Inc.
Goodyear Tire & Rubber Co.
Westlake Chemical Corp.
Huntsman Corp.
Williams Partners LP
LNG
GT
WLK
HUN
WPZ
1Q Top Five Detractors
Relative
contribution (bps)
81
76
76
61
48
Company Name
Ticker
Horizon Global Corp.
Range Resources
Pioneer Natural Resources Co.
HZN
RRC
PXD
Relative
contribution (bps)
-124
-25
-25
Patterson-UTI Energy Inc.
PTEN
-20
National Oilwell Varco Inc.
NVO
-13
Past performance does not predict future results.
Note: Relative contribution is in relation to the S&P North American Natural Resources Index.
bps stands for basis points. 1 bps = 1/100 of a percentage point.
* Returns for periods greater than 1 year are annualized; Inception (12/31/13)
3 | Quarterly Commentary
1Q 2017
Returns quoted represent past performance, which does not guarantee future results. Current returns may be lower or higher. Returns
shown for more than 1-Year are annualized. Performance current to the most recent month-end may be obtained by calling 1-855-40BPCAP (1-855-402-7227). Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or
less than their original cost. Total annual operating expenses for Class I are 1.60%. Returns for Classes A and C are different due to
different charges and expenses.
Energy Fund Sector Weightings
As of 03/31/2017
Subject to change and to risk
4 | Quarterly Commentary
1Q 2017
MLP MARKET OUTLOOK
MLPS’ PERFORM INLINE WITH YIELD-ORIENTED INVESTMENTS AS INTEREST RATE LANDSCAPE CONTINUES TO
SHIFTS
At the end of Q1 2017, midstream master limited partnership (“MLP”) valuations (as represented by the Alerian
MLP Index, or “AMZ”) continued to remain around 40% below their Aug ust 29, 2014 peak, despite a quarter of
positive performance to start the year. AMZ total returns in Q1 (+3.95%) disguised another quarter with
considerable volatility and continued, positive shift in midstream sector sentiment especially related to new
leadership in Washington D.C. The US presidential election continued to impact markets with the AMZ and S&P
both up 1% and 4%, respectively, since Donald Trump’s inauguration on January 20th. Midstream investors
continued to support the prospect of a “pro-energy” administration and a candidate who had made explicit
promises to reduce federal government interference in pipeline construction. Executing on the promise, several
major pipelines were granted final approval in the very first innings of the Trump Pre sidency. Several midstream
pipeline projects, such as the Dakota Access Pipeline, Atlantic Sunrise Pipeline, Rover Pipeline and most notably
the Keystone XL Pipeline, received approvals to proceed with key elements of each respective project releasing
another wave of infrastructure investment.
In the first quarter of 2017, the BP Capital TwinLine MLP Fund (BPMIX) Institutional Shares delivered 3.07% total
returns (vs. 3.95% for the AMZ; 6.07% for the S&P 500) outpacing real estate investment trusts (“REITs” ) (as
measured by the Dow Jones Equity REIT Total Return Index) that returned 2.54% but underperforming utilities (as
measured by the Philadelphia Stock Exchange Utility index) that returned 5.9%.
US OIL PRODUCTION GREEN SHOOTS SPROUT EVEN MORE IN Q1 ON BA CK OF CONTINUED RIG COUNT INCREASES
AND GENERALLY CONSTRUCTIVE COMMODITY PRICING
Where have we come from? While the first half of 2016 saw meaningful declines in US production, that trend
inflected in the second half of last year reversing in Q4. From May 2016 through March 31, 2017, the Baker Hughes’
total land rig count has increased 106%, from roughly 400 to 824, which is up 18% from 700 just two months prior
in January 2017. The former rig count increases have occurred despite an oil price which has re mained range bound
since early 2015. We believe this continued rig count increase portends meaningful production volume increases
as we move into the middle and back half of 2017. As of 1Q17 end, US DOE crude oil production reached
9.15MMBbl/d up 9% from the July 2016 low of 8.4MMBbl/d just months ago.
Exhibit A: Oil production backdrop improves on increasing rig count Note: Vertical axis represents thousands of
barrels per day of crude oil production in the US. Source: Bloomberg, sourced from US Dept of Energy.
5 | Quarterly Commentary
1Q 2017
Recall during Q4, OPEC finalized the decision to reduce oil production. OPEC agreed upon a reduction in production
volumes with an aim of reducing the global oversupply of oil inventories. This decision was unique in OPEC history
in that it publicly allocated cut levels across participating OPEC countries, offering reassurances to skittish markets.
While the oil market recovery seen boosting Q4 2016’s average West Texas Intermediate (“WTI”) crude price to
$53.72 the Q1 2017 supply responses helped bring pricing down with Q1 17 averaging $50.60, down $3 QoQ. The
level of spot oil price of WTI was $50.99 as of this writing April 4, 2017) remains well below the 2014 average of
$92.93/bbl. Despite the modest recovery, rig count recovery has co ntinued, and per rig production, as measured
by the US Department of Energy (DOE), has continued to increase.
We continue to believe that late 2017 production could be significantly higher than late 2016 production, setting
up for a subsequent recovery in pipeline utilizations. Further, we believe several midstream management teams
continue to work towards simplifying their legal and operating structures and preparing for incremental investment
opportunities in the 2017 recovery onward.
It did not take long for new long-haul pipelines to be announced by the midstream sector in response to the
dramatic uptick in rig counts and expected, new production volumes. Just out of the Permian basin in West Texas
alone there have been no less than five major pipelines announced for crude oil and associated, natural gas
transportation from the basin to demand centers.
Lastly, the theme of partnership simplifications has continued into 2017. Many companies with GPs (general
partners) elected to simplify structures with their controlled LPs (limited partnerships.) Midstream companies
WMB/WPZ, MPLX/MPC, OKE/OKS, DCP/DPM all announced transactions during 1Q. Even PAA/PAGP, RRMS/SEMG,
NGLS/TRGP, CMLP/CEQP, KMP/KMI have all completed similar transactions in years past as well .
BP CAPITAL TWINLINE MLP FUND REVIEW
PORTFOLIO OUTLOOK
As we entered 2017 we expected at least two Federal Reserve rate hikes. In March 2017, the Federal Reserve
increased its benchmark interest rate a quarter point based on confidence that the economy is poised for more
stable growth.
The move took the overnight funds rate from 0.75 percent to 1 percent and sets the Fed on a likely path for more
hikes. News of the rate hike pushed government bond yields lower while major averages in the stock market
moved higher. Heading into 2017 we saw at least two interest rate hikes and based on the March decision that
view holds more confidence.
We continue to believe the last OPEC accord improves the outlook for many volumetric MLP business models but
look to the May OPEC meeting for next guidance on OPEC supply adjustments.
While we acknowledge the improving outlook, we remain focused on safeguarding our portfolio from high debt
levels and stretched payout ratios across the MLP space.
We continue to seek attractively-valued companies with strong balance sheets and resilient cash flows which are
not overly reliant on high commodity prices to maintain their payout.
1Q ATTRIBUTION
Positive performance for the BP Capital TwinLine MLP Fund portfolio (+3.0%) trailed the AMZ (+3.9%) yet was
boosted by company allocations in the refining and logistics subsector with assets mostly tied into domestic
refineries and generally enhanced visibility on logistics pipeline throughput volumes. PBF Logistics (PBFX),
Western Refining Logistics (WNRL) and Delek Logistics Partners LP (DKL) were the top three performers for Q1
with all three refining logistics companies up more than 18%. Midcoast Energy Partner (MEP) and Sunoco LP
(SUN) rounded out the top five Q1 performers.
6 | Quarterly Commentary
1Q 2017
Meanwhile, the laggards in the midstream space were comprised of a variety of subsector operations from
shipping to refining and logistics. Teekay LNG Partners (TGP; shipping), Antero Midstream Partners (AM;
gathering and processing), Holly Energy Partners (HEP; r efining and logistics), NGL Energy Partners (various; NGL)
and Martin Midstream Partners (terminaling; MMLP) led the way down with TGP down 22.4% as the top laggard
for 1Q.
Biggest contributors to performance included DKL which benefited from a solid finan cial position and attractive
distribution growth rate for 2017 as announced on 4Q earnings, PBFX which continues to identify attractive
growth projects, WNRL benefiting from logistics expansion in the Permian and Williston Basins and finally NBLX
and TRGP both benefiting from supportive commodity pricing and producer activity outlook.
Detractors to BPMIX included EEP who guided to further weakening of its natural gas gathering and processing
business due to lower realized commodity prices and volume flows in 2017. OKS who announced an agreement to
be purchased by parent ONEOK, Inc. (OKE.) Willams Cos Inc (WMB) who suffered from some uncertainty around
their Geismar facility divestiture. And finally, Antero Midstream Partners LP (AM) and NGL Energy Partners (NGL)
underperformed due to potential for underperformance in their well -head facing operations.
1Q Top Five Detractors
1Q Top Five Contributors
Company Name
Ticker
Delek Logistics Partners
PBF Logistics LP
Western Refining Logistics LP
Noble Midstream Partners LP
Targa Resources Corp
DKL
PBFX
WNRL
NBLX
TRGP
Relative
contribution (bps)
69
52
32
25
25
Company Name
Enbridge Energy Partners LP
EEP
Relative
contribution (bps)
108
ONEOK Partners LP
OKS
37
The Williams Cos Inc.
Ticker
WMB
24
Antero Midstream Partners LP
AM
16
NGL Energy Partners LP
NGL
13
Past performance does not predict future results.
bps stands for basis points. 1 bps = 1/100 of a percentage point.
Note: Relative contribution is in relation to the AMZ Index.
* Returns for periods greater than 1 year are annualized; Inception (12/31/13)
Returns quoted represent past performance, which does not guarantee future results. Current returns may be lower or higher. Returns
shown for more than 1-Year are annualized. Performance current to the most recent month-end may be obtained by calling 1-855-40BPCAP (1-855-402-7227). Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or
less than their original cost. The Fund’s total annual gross operating expenses for Class I is 1.96%. However, the Advisor has
contractually agreed to waive its fees and/or pay for operating expenses to limit net annual operating expenses to 1.49% through at
least 3/31/18. Otherwise, Fund’s returns displayed would have been lower. Returns for Classes A and C are different due to different
charges and expenses.
7 | Quarterly Commentary
1Q 2017
MLP Fund Sub-Sector Weightings
As of 03/31/2017
Subject to change and to risk
8 | Quarterly Commentary
1Q 2017
INVESTMENT CONSIDERATIONS
As with any mutual fund, it is possible to lose money by investing in the BP Capital TwinLine® Funds. An
investment in either Fund is subject to other risks that are more fully described in the prospectus, including but
not limited to risks in Master Limited Partnerships (“MLPs”) include, cash flow, fund structure risk and MLP tax
risk plus regulatory risks. The prices of MLP units may fluctuate abruptly and trading volume may be low, making
it difficult for the Funds to sell its units at a favorable price. Most MLPs do not pay U.S. federal income tax at the
partnership level, but an adverse change in tax laws could result in MLPs being treated as corporations for federal
income tax purposes, which could reduce or eliminate distributions paid by MLPs to the Funds.
An investment in the BP Capital TwinLine® MLP Fund is, also, subject to risks, include b ut are not limited to nondiversification, energy-related sector, small-cap and mid-cap stocks, initial public offerings, high-yield “junk”
bonds, and derivatives. The Fund is treated as a regular corporation, or “C” corporation, for U.S. federal income
tax purposes. Accordingly, unlike traditional open-end mutual funds, the Fund is subject to U.S. federal income
tax on its taxable income at the graduated rates applicable to corporations (currently a maximum rate of 35%) as
well as state and local income taxes. The Fund will not benefit from current favorable federal income tax rates on
long-term capital gains, and Fund income and losses will not be passed on to shareholders. The BP Capital
TwinLine® MLP Fund may, also, invest in MLPs that are taxed as “C” corporations.
An investment in the BP Capital TwinLine® Energy Fund is, also, subject to risks, include but are not limited to
non-diversified, energy-related sector, small-cap and mid-cap stocks, initial public offerings, high-yield “junk”
bonds. The Fund expects that a significant portion of its distributions to shareholders will be characterized as a
“return of capital” because of its MLP investments. If the Fund’s MLP investments exceed 25% of its assets, the
Fund may not qualify for treatment as a regulated investment company (“RIC”) under the Internal Revenue Code
(“Code”). The Fund would be taxed as an ordinary corporation, which could substantially reduce the Fund’s net
assets and its distributions to shareholders.
Investors should consider the investment objective, risks, charges, and expenses of the BP Capital Twin Line
Funds carefully before investing. A prospectus with this and other information about the Funds may be obtained
by calling 1-855-40-BPCAP (1-855-402-7227). Read the prospectus carefully before investing.
Shares of the Funds are distributed by Foreside Fund Services, LLC, not affiliated with BP Capital.
BENCHMARK DESCRIPTIONS
Indexes are unmanaged and have no fees or expenses. An investment cannot be made directly in an index.
The S&P 500 Index (S&P 500) is an index of 500 stocks used industry wide as a macro level indicator of the overall
U.S. equity market.
The S&P 500 Energy Index comprises those companies included in the S&P 500 that are classified as members of
the GICS® energy sector.
The S&P North America Natural Resources Index represents U.S. traded securities that are classified under the
GICS® energy and materials sector excluding the chemicals industry and steel sub -industry.
The Alerian MLP Index is a composite of the 5 0 most prominent energy Master Limited Partnerships (MLPs) that
provides investors with a benchmark for the MLP asset class. The index, which is calculated using a float -adjusted,
capitalization-weighted methodology, is disseminated real-time on a price-return basis (AMX) and on a total-return
basis (AMZX).
Lipper Energy MLP Funds– Average of the funds that invest primarily in Master Limited Partnerships (MLPs)
engaged in the transportation, storage and processing of minerals and natural resources.
Price-to-book ratio is used to compare a stock's market value to its book value. Book value is the total assets of a
company minus total liability.
9 | Quarterly Commentary
1Q 2017