10-Q: Natural Gas Fund Q2 2025: NAV Rises, Expenses Fall

United States 12 Month Natural Gas Fund, LP reports a 7.51% increase in NAV per share for the first half of 2025, driven by positive market movements and reduced expenses.

Summary

• Net income for the six months ended June 30, 2025, was $1,801,480, a significant improvement from a net loss of $1,100,019 in the prior year period.
• Total assets decreased to $12,302,009 as of June 30, 2025, from $19,045,543 as of December 31, 2024.
• Total liabilities significantly decreased to $77,843 as of June 30, 2025, from $373,422 as of December 31, 2024.
• Partners Capital decreased to $12,224,166 as of June 30, 2025, from $18,672,121 as of December 31, 2024.
• Limited Partner shares outstanding decreased to 1,400,000 as of June 30, 2025, from 2,300,000 as of December 31, 2024.
• Net asset value per share increased to $8.73 as of June 30, 2025, from $8.12 as of December 31, 2024.
• The total return for the six months ended June 30, 2025, was 7.51%, compared to a negative 3.50% in the same period of 2024.
• The fund's NAV per share outperformed its benchmark by 1.40% for the six months ended June 30, 2025.
• Average daily total net assets decreased to $15,199,400 for the six months ended June 30, 2025, from $17,758,901 in 2024.
• Dividend and interest income earned on Treasuries, cash, and cash equivalents decreased to $318,208 for the six months ended June 30, 2025, from $454,964 in 2024.
• Total expenses (after waiver) decreased to $110,658 for the six months ended June 30, 2025, from $116,712 in 2024.
• The General Partner management fee was reduced from 0.75% to 0.60% per annum effective May 1, 2024.
• An expense waiver of $76,210 in 2024 was terminated on April 30, 2024.

Sentiment

Score: 7

Explanation: The fund achieved strong positive net income and total return, outperforming its benchmark, and benefited from a reduced management fee. However, there was a notable decrease in total assets and partners' capital, and the termination of the expense waiver will increase future expense burdens. The overall financial performance for the period is positive, but the shrinking asset base and increased expense burden are factors to monitor.

Positives

• Achieved a net income of $1,801,480 for the six months ended June 30, 2025, a significant turnaround from a net loss of $1,100,019 in the prior year period.
• Generated a positive total return of 7.51% for the six months ended June 30, 2025, reversing a negative 3.50% return in the comparable prior year period.
• Outperformed its benchmark by 1.40% for the six months ended June 30, 2025, demonstrating effective tracking and management.
• The General Partner management fee was reduced from 0.75% to 0.60% per annum, effective May 1, 2024, potentially lowering ongoing costs for the fund.
• Total liabilities significantly decreased from $373,422 to $77,843, indicating improved financial health.
• Professional fees and brokerage commissions decreased, contributing to lower overall expenses.
• Natural gas prices increased by approximately 11.26% over the period, benefiting the fund's holdings.
• Increasing demand for LNG and new export facilities are anticipated to lift natural gas prices.
• Natural gas inventories are comfortably below one-year ago and five-year average levels, which has boosted prices.

Negatives

• Total assets decreased significantly from $19,045,543 to $12,302,009.
• Partners Capital decreased substantially from $18,672,121 to $12,224,166.
• Limited Partner shares outstanding decreased from 2,300,000 to 1,400,000, indicating significant redemptions.
• Cash and cash equivalents decreased from $17,860,450 to $11,757,207.
• Dividend and interest income decreased from $454,964 to $318,208 for the six months ended June 30, 2025.
• The annualized yield based on average daily total net assets decreased from 5.15% to 4.22%.
• The expense waiver, which provided $76,210 in relief in the prior year period, was terminated on April 30, 2024, meaning the fund will bear these expenses going forward.
• The natural gas futures market experienced periods of contango, which can negatively impact total returns over time.

Risks

• Market volatility due to geopolitical conflicts (e.g., Russia-Ukraine war, Middle East conflicts), supply chain disruptions, tariffs, trade barriers, and trade wars could negatively impact commodity prices and investment values.
• Potential for illiquid markets for futures contracts if daily price fluctuation limits are reached, preventing prompt liquidation of positions.
• Exposure to interest rate risk, which may prevent the fund from investing fully at prevailing rates or lead to losses on Treasury investments if interest rates rise.
• Inflation risk, where a high inflation environment could erode the value of the fund's cash and Treasury investments.
• Risk of loss from investing in government money market funds, as they are not insured or guaranteed by the FDIC and their share price can fall below $1.00.
• Credit risk from counterparties in OTC swaps and clearinghouses for futures contracts; insolvency of Futures Commission Merchants (FCMs) or custodians could lead to substantial loss of assets.
• Unlimited market risk if the fund enters into contractual commitments to sell natural gas, as there are no limits on future natural gas prices.
• Tracking error may occur if the fund cannot closely track the Benchmark Futures Contracts due to market conditions, regulatory limits, or investment in Other Natural Gas-Related Investments.
• The fund may terminate under unforeseen circumstances, including market conditions or regulatory requirements, which could lead to the liquidation and potential loss of an investor's investment.
• The impact of changes in U.S. federal income tax laws on the fund and its investors is uncertain and could result in adverse tax consequences.

Future Outlook

The General Partner anticipates that interest rates may continue to stagnate over the near term from historical lows. It is also anticipated that fees and expenses paid by the fund may be lower than interest earned, which could lead to the fund outperforming its benchmark. Increasing demand for LNG and new export facilities are expected to lift natural gas prices. A potential resolution to the Russia-Ukraine war could bring more Russian supply to Europe, easing international price pressure and potentially having a milder effect on U.S. prices.

Management Comments

• Market arbitrage opportunities are expected to cause daily changes in the fund's share price on the NYSE Arca to closely track daily changes in the fund's per share NAV.
• Daily changes in the average prices of the Benchmark Futures Contracts have historically closely tracked the daily changes in the spot price of natural gas.
• The net effect of these relationships is expected to be that daily changes in the fund's share price on the NYSE Arca will closely track daily changes in the spot price of natural gas, plus interest earned on collateral holdings, less expenses.
• It is not practical to manage the portfolio to achieve an investment goal where the nominal price of the fund's per share NAV equals the spot price of natural gas or any particular futures contract.
• Interest rates may continue to stagnate over the near term from historical lows, and fees and expenses paid by the fund may be lower than interest earned, potentially leading to outperformance of its benchmark.

Industry Context

The natural gas market experienced periods of both mild contango and backwardation during the reporting period. Historically, U.S. natural gas prices have been driven by domestic supply and demand, with seasonal patterns influencing production and end-user demand. However, international demand, particularly for LNG exports to Europe, and geopolitical events like the Russia-Ukraine war, are increasingly influencing price volatility and direction. The robust U.S. energy industry's ability to meet demand has constrained prices, but cold winters can lead to heavy draws on inventories, boosting prices. New demand from AI data centers could also contribute to price increases.

Comparison to Industry Standards

• The fund's investment objective is to track the average daily percentage changes of the spot price of natural gas delivered at the Henry Hub, Louisiana, as measured by the daily percentage changes in the average of the prices of 12 NYMEX natural gas futures contracts.
• For the 30-valuation days ended June 30, 2025, the average daily change in the Benchmark Futures Contracts was (0.129)%, while the average daily change in the fund's NAV per share was (0.120)%. This 0.009% difference (0.9 basis points) indicates the fund performed within its +/10% tracking goal.
• Since the commencement of the offering on November 18, 2009, to June 30, 2025, the average daily change in the Benchmark Futures Contracts was (0.025)%, and the fund's NAV per share was (0.024)%. This 0.001% difference (0.1 basis points) also indicates performance within the tracking goal.
• For the six months ended June 30, 2025, the fund's actual total return of 7.51% outperformed the expected total return based on the Benchmark Futures Contracts of 6.11% by 1.40%.
• For the six months ended June 30, 2024, the fund's actual total return of (3.50)% outperformed the expected total return based on the Benchmark Futures Contracts of (5.36)% by 1.86%.
• Correlation analysis over 10 years (June 30, 2015, to June 30, 2025) shows natural gas prices had low correlation with Large Cap US Equities (S&P 500) at 0.101, US Govt Bonds (BEUSG4 Index) at -0.142, and Global Equities (FTSE World Index) at 0.053, suggesting diversification benefits.
• Over the past year (June 30, 2024, to June 30, 2025), natural gas showed a low correlation with Large Cap US Equities (S&P 500) at 0.056, US Govt Bonds (BEUSG4 Index) at 0.099, and Global Equities (FTSE World Index) at -0.067.

Corporate Governance

Legal Proceedings

• Optimum Strategies Action: A class action lawsuit against USO and USCF, dismissed with prejudice on March 15, 2023.
• Settlement of SEC and CFTC Investigations: USCF and USO settled with the SEC and CFTC on November 8, 2021, regarding alleged violations related to disclosures and advertising in 2020, resulting in cease-and-desist orders and $2.5 million in civil monetary penalties.
• In re: United States Oil Fund, LP Securities Litigation: A consolidated putative class action against USCF, USO, and individuals, currently pending in the U.S. District Court for the Southern District of New York.
• Wang Class Action: A putative class action against USO, USCF, and others, voluntarily dismissed on August 4, 2020.
• Mehan Action: A derivative action on behalf of USO against USCF and individuals, stayed pending disposition of motions to dismiss in In re: United States Oil Fund, LP Securities Litigation.
• In re United States Oil Fund, LP Derivative Litigation: Consolidated derivative actions on behalf of USO against USCF and individuals, stayed pending disposition of motions to dismiss in In re: United States Oil Fund, LP Securities Litigation.

Related Party Transactions

• USCF, as the General Partner, receives a management fee from UNL, which was reduced to 0.60% per annum of average daily total net assets effective May 1, 2024.
• USCF pays the fees of the Marketing Agent (ALPS Distributors, Inc.) and The Bank of New York Mellon (BNY Mellon) for custodial, administrative, accounting, and transfer agency services.
• UNL shares the fees and expenses of the independent directors of USCF on a pro rata basis with other Related Public Funds.
• UNL and certain Related Public Funds pay a licensing fee to the NYMEX, equal to 0.015% on all net assets.
• USCF previously paid certain expenses on a discretionary basis where expenses exceeded 0.15% of UNL's NAV, but this voluntary expense waiver was terminated on April 30, 2024.

Stakeholder Impact

• Shareholders: Experienced a positive total return of 7.51% and an increase in NAV per share, but the significant decrease in outstanding shares indicates substantial redemptions.
• Investors: Exposed to various market, credit, interest rate, and inflation risks inherent in commodity investments, with potential for loss if the fund terminates.
• General Partner (USCF): Continues to earn management fees, albeit at a reduced rate, and bears certain marketing and administrative costs.
• Authorized Participants: Continue to facilitate share creations and redemptions, earning transaction fees.

Next Steps

• The fund will continue to manage its portfolio to track the Benchmark Futures Contracts.
• The General Partner anticipates that interest rates may continue to stagnate over the near term from historical lows.
• The General Partner anticipates that fees and expenses paid by the fund may be lower than interest earned, potentially leading to outperformance.
• Monthly account statements will be published for shareholders and furnished to the SEC on Form 8-K.

Key Dates

Recommendation

The fund delivered strong positive returns and net income for the period, outperforming its benchmark, and benefited from a reduced management fee. These are positive indicators. However, the significant decrease in total assets and shares outstanding, coupled with the termination of the expense waiver, introduces uncertainties regarding future asset growth and net expense burden. While the recent performance is encouraging, a 'hold' recommendation is prudent to observe if the fund can sustain outperformance and attract new capital under the new expense structure, especially given the ongoing legal proceedings involving its general partner.

Keywords

Natural Gas, Futures Contracts, Commodity Fund, Energy, Investment, NYSE Arca, UNL, SEC Filing, 10-Q, Financial Report, Market Risk, Contango, Backwardation, Henry Hub