United States 12 Month Natural Gas Fund, LP Annual Report: A 2023 Performance Review

Curious about the United States 12 Month Natural Gas Fund, LP (UNL)? This summary distills UNL's latest annual report for the fiscal year ended December 31, 2023. Designed for retail investors, it offers a clear, concise look at UNL's operations, performance, and risks, empowering you to make more informed investment decisions.

Business Overview: Understanding UNL's Purpose and Strategy

The United States 12 Month Natural Gas Fund, LP, known as "UNL," began trading on NYSE Arca in November 2009. UNL's main goal is to mirror the daily percentage changes in natural gas prices at Louisiana's Henry Hub. Instead of focusing on a single month's contract, UNL achieves this by investing in a diversified portfolio of the nearest 12 natural gas futures contracts. This "rolling" strategy involves selling expiring contracts and buying new, further-dated contracts each month. This approach aims to reduce the impact of short-term price swings and offer broader exposure to the natural gas futures market.

While UNL primarily invests in these exchange-traded natural gas futures contracts, it may also use other natural gas-related investments like forward contracts, swap agreements, or options. This flexibility helps manage risk, boost liquidity, or optimize returns. Over any 30-day period, UNL targets its average daily share value change to track the average daily change of its underlying futures contracts within a range of plus or minus 10%.

Management and Oversight

United States Commodity Funds LLC (USCF) manages UNL as its general partner. USCF is an experienced commodity fund manager, also overseeing well-known funds like the United States Oil Fund (USO) and the United States Natural Gas Fund (UNG). USCF handles all aspects of UNL's operations, including investment management, daily portfolio adjustments, compliance, and managing share creation and redemption for institutional participants. In return for its services, USCF charges a management fee, which for fiscal year 2023 was approximately 0.60% of the fund's average daily net assets.

Financial Performance: 2023 Highlights

For the fiscal year ended December 31, 2023, UNL's Net Asset Value (NAV) saw a total return of -18.5%, while its share price returned -18.8%. In comparison, the average price of the 12 natural gas futures contracts at Henry Hub changed by -20.1%. Tracking error, operational expenses, and market factors (discussed below) primarily explain the slight difference between UNL's performance and its benchmark.

As of December 31, 2023:

• Assets Under Management (AUM): Approximately $10.5 million.
• Net Asset Value (NAV) per Share: $4.95.
• Total Operating Expenses: $0.2 million, which translates to an expense ratio of 1.9% of average net assets.
• Net Income (Loss): UNL reported a net loss of approximately $2.4 million for the year. This loss primarily resulted from declining natural gas prices and operational expenses.
• Shares Outstanding: 2.0 million shares.

Management's Discussion and Analysis (MD&A) Highlights

Prevailing natural gas futures market conditions significantly influenced UNL's performance in 2023.

Key Factors: Contango and Backwardation

Investors must understand that UNL's share price does not perfectly match the dollar price of natural gas itself, nor does it perfectly track the percentage change of natural gas prices over periods longer than one day. This divergence largely stems from the dynamics of the futures market, particularly contango and backwardation.

• Contango: This occurs when the price of natural gas for future delivery is higher than the current (spot) price. In 2023, natural gas futures markets largely experienced contango. As UNL continuously "rolls" its positions—selling expiring contracts and buying new, more expensive future contracts—this market structure can drag down returns. In 2023, contango conditions significantly hindered UNL, contributing to its underperformance compared to a hypothetical direct investment in spot natural gas.
• Backwardation: Backwardation is the opposite: future prices are lower than current prices. Though less common in 2023, backwardation can boost returns as the fund buys cheaper future contracts.

These market conditions, along with the costs of rolling futures contracts, are crucial for understanding UNL's long-term performance and its potential deviation from spot natural gas prices.

Results of Operations: The $2.4 million net loss in 2023 primarily stemmed from the negative performance of its natural gas futures contracts. This reflected the overall decline in natural gas prices during the period, worsened by contango. Operating expenses, such as management fees, brokerage commissions, and other administrative costs, also contributed to the net loss. The fund's assets under management decreased during the year due to market depreciation and net share redemptions.

Financial Health and Liquidity

UNL maintained a sound financial position as of December 31, 2023, with approximately $10.5 million in Assets Under Management. Its primary assets include investments in natural gas futures contracts, along with cash and cash equivalents to support these positions and meet operational needs.

Cash and Investments UNL holds cash and highly liquid short-term investments to satisfy margin requirements for its futures contracts, cover operational expenses, and facilitate share creation and redemption. The fund typically avoids traditional long-term debt. Its financial obligations mainly involve its futures contract positions (e.g., margin calls) and operational liabilities.

Liquidity Management The fund manages its liquidity to ensure it can meet obligations, including daily margin calls on its futures positions and share redemptions by authorized participants. The highly liquid nature of exchange-traded natural gas futures contracts and the fund's cash holdings are critical for maintaining liquidity. UNL's general partner monitors cash flows and market conditions to ensure adequate liquidity at all times.

Principal Risk Factors for Investors

Beyond the general volatility of natural gas prices, investing in UNL carries several significant risks:

1. Tracking Error Risk: While UNL aims to track its benchmark, various factors—including market liquidity, operational expenses, and the timing of futures contract rolls—can cause UNL's performance to deviate from its target index. In 2023, tracking error remained within acceptable parameters but slightly contributed to underperformance relative to the futures index.
2. Futures Market Risk: Futures contracts are highly leveraged and can be extremely volatile. Supply and demand, weather patterns, geopolitical events, and economic conditions can all influence prices.
3. Contango/Backwardation Risk: As discussed earlier, these market structures can significantly erode or enhance returns, particularly over longer holding periods.
4. Liquidity Risk: While UNL's shares trade on NYSE Arca, the underlying futures contracts or other derivatives may experience periods of reduced liquidity, potentially impacting the fund's ability to execute trades efficiently.
5. Counterparty Risk: UNL may enter into agreements with various financial institutions. If a counterparty fails to fulfill its obligations, the fund could incur losses.
6. Regulatory and Tax Risk: Changes in commodity market regulations or tax laws could negatively affect UNL's operations and investor returns.

Future Outlook and Strategy

UNL expects its investment objective and strategy to remain consistent. The fund will continue tracking daily percentage changes in natural gas prices by investing in a diversified portfolio of the nearest 12 natural gas futures contracts, using its established rolling strategy.

UNL's future performance will continue to depend primarily on the underlying price movements of natural gas futures contracts and the prevailing market structure (contango or backwardation). While UNL does not provide forward-looking performance guidance, its management remains committed to efficiently executing its investment strategy and managing operational costs to minimize tracking error. The natural gas market is inherently volatile. Global supply and demand dynamics, weather patterns, and geopolitical events all influence it and will continue to impact the fund's performance.

Competitive Landscape

UNL operates in a competitive landscape of exchange-traded products (ETPs) that offer exposure to natural gas prices. Its primary competitors include other natural gas ETPs, such as the United States Natural Gas Fund, LP (UNG), which tracks a shorter-dated futures contract.

UNL's distinctive competitive advantage is its "12-month rolling" strategy. This strategy aims to provide broader exposure to the natural gas futures curve and potentially mitigate some volatility associated with tracking only the front-month contract. This strategy sets it apart from funds focusing on shorter-term contracts, which are often more susceptible to the immediate effects of contango or backwardation. Investors also consider the fund's expense ratio and the expertise of its general partner, USCF, when evaluating its competitive position against other commodity-linked investment vehicles, including other ETFs, mutual funds, and direct investments in futures contracts.

Conclusion

The United States 12 Month Natural Gas Fund, LP offers investors exposure to natural gas futures prices using a diversified, rolling contract strategy. While UNL aims to track daily price movements, investors should know that its performance over longer periods can diverge significantly from spot natural gas prices. This divergence, evident in 2023, stems from the effects of contango and backwardation. For any potential investor, understanding UNL's specific investment strategy, its operational costs, and the inherent risks of commodity futures markets is essential.