10-K: United States 12 Month Natural Gas Fund, LP: Annual Report Highlights Investment Strategy and Financial Performance

The United States 12 Month Natural Gas Fund, LP (UNL) annual report details its investment strategy, financial results for 2023, and key risk factors.

Summary

• The United States 12 Month Natural Gas Fund, LP (UNL) is a commodity pool aiming to track the daily changes in natural gas prices at the Henry Hub, Louisiana.
• UNL invests primarily in natural gas futures contracts and, to a lesser extent, in other natural gas-related investments.
• The fund's objective is for its net asset value (NAV) to reflect the daily changes in the average price of 12 consecutive months of natural gas futures contracts.
• For the year ended December 31, 2023, UNL's per share NAV decreased from $17.24 to $8.58, a decline of approximately 50.23%.
• The average price of the Benchmark Futures Contracts decreased by approximately 35.54% over the same period.
• UNL's total expenses for the year were $325,448, but after a voluntary expense waiver from USCF, the total expenses were $157,225.
• The fund's average daily total net assets were $17,468,706 for 2023, compared to $35,502,209 in 2022.
• UNL earned $845,458 in dividend and interest income on Treasuries, cash, and cash equivalents, with an annualized yield of 4.84% based on average daily total net assets.

Sentiment

Score: 4

Explanation: The document presents a mix of positive and negative information. While the fund's tracking performance was within its target range, the significant decrease in NAV and the volatility of the natural gas market contribute to a negative sentiment.

Positives

• UNL's investment strategy is designed to provide investors with a cost-effective way to invest indirectly in natural gas.
• The fund's daily changes in NAV closely tracked the daily changes in the average price of the Benchmark Futures Contracts.
• UNL earned a significant amount of dividend and interest income on its holdings of Treasuries, cash and cash equivalents.
• USCF voluntarily waived certain expenses, reducing the total expenses borne by UNL.

Negatives

• UNL's per share NAV decreased significantly in 2023, reflecting the decline in natural gas prices.
• The fund's performance is subject to the volatility of the natural gas market.
• Contango and backwardation in the futures market can impact UNL's total return.
• Accountability levels and position limits set by exchanges can cause tracking error.

Risks

• UNL's NAV is directly related to the value of natural gas futures contracts, which are subject to price fluctuations.
• The fund's performance may not correlate with the spot price of natural gas due to market forces like contango and backwardation.
• Accountability levels, position limits, and daily price fluctuation limits set by exchanges can cause tracking error.
• Risk mitigation measures imposed by UNL's FCMs can limit investments and cause tracking error.
• An investor's tax liability may exceed the amount of distributions, if any, on its shares.
• UNL is subject to credit risk with respect to counterparties to OTC contracts.
• Infectious disease outbreaks like COVID-19 could negatively affect the valuation and performance of UNL's investments.
• The market price at which investors buy or sell shares may be significantly less or more than NAV.

Future Outlook

UNL intends to continue to pursue its investment objective as described in the document, and USCF believes that the daily changes in percentage terms of UNLs NAV will continue to closely track the daily changes in percentage terms in the average of the prices of the Benchmark Futures Contracts.

Management Comments

• USCF believes that market arbitrage opportunities will cause daily changes in UNLs share price on the NYSE Arca on a percentage basis to closely track daily changes in UNLs per share NAV on a percentage basis.
• USCF further believes that daily changes in the average prices of the Benchmark Futures Contracts have historically closely tracked the daily changes in spot price of natural gas.
• USCF believes that the net effect of these relationships will be that the daily changes in the price of UNLs shares on the NYSE Arca on a percentage basis will closely track the daily changes in the spot price of a MMBtu of natural gas on a percentage basis, plus interest earned on UNLs collateral holdings, less UNLs expenses.

Industry Context

The document highlights the volatility in the natural gas market, influenced by factors such as weather, economic conditions, and geopolitical events, including the Russia-Ukraine war. It also notes the increasing impact of international demand on U.S. natural gas prices.

Comparison to Industry Standards

• The document does not provide specific comparisons to other similar funds or benchmarks.
• However, it does detail UNL's tracking performance against its own benchmark, which is the average daily change in the price of the Benchmark Futures Contracts.
• The report notes that UNL's actual total return for 2023 was (50.23)%, while the expected total return based on the Benchmark Futures Contracts was (52.20)%, indicating an outperformance of 1.97%.

Legal Proceedings

• USCF and USO settled with the SEC and CFTC regarding certain Wells Notices, paying a total of $2,500,000 in civil monetary penalties.
• USCF, USO, and certain individuals are defendants in a consolidated class action lawsuit, In re: United States Oil Fund, LP Securities Litigation, alleging violations of the 1933 Act and the Exchange Act.
• USCF, USO, and certain individuals are also defendants in a derivative action, In re United States Oil Fund, LP Derivative Litigation, alleging breach of fiduciary duties.
• USO and USCF were named as defendants in an action filed by Optimum Strategies Fund I, LP, which was dismissed on March 15, 2023.

Related Party Transactions

• UNL pays USCF a management fee of 0.75% per annum on its average daily total net assets.
• USCF pays the fees of the Marketing Agent and BNY Mellon for their services.
• UNL shares certain expenses with the Related Public Funds on a pro rata basis.

Stakeholder Impact

• Shareholders are exposed to the risks of the natural gas market, including price volatility and tracking error.
• Authorized Participants are the only entities that can directly purchase or redeem shares from UNL.
• The fund's performance is directly linked to the price of natural gas, impacting investors seeking exposure to this commodity.

Next Steps

• UNL intends to continue to pursue its investment objective as described in the document.
• USCF will continue to monitor market conditions and regulatory requirements to manage UNL's investments.

Key Dates

Keywords

natural gas, futures contracts, commodity pool, investment strategy, net asset value, contango, backwardation, NYSE Arca, energy market, financial performance