Ninepoint Energy Opportunities Trust

Transcription

1 Ninepoint Energy Opportunities Trust INTERIM MANAGEMENT REPORT OF FUND PERFORMANCE JUNE The interim management report of fund performance is an analysis and explanation that is designed to complement and supplement an investment fund s financial statements. This report contains financial highlights but does not contain the complete interim financial statements of the investment fund. You can get a copy of the interim financial statements at your request, and at no cost, by calling , by visiting our website at or SEDAR at or by writing to us at: Ninepoint Partners LP, Royal Bank Plaza, South Tower, 200 Bay Street, Suite 2700, P.O. Box 27, Toronto, Ontario M5J 2J1. Securityholders may also contact us using one of these methods to request a copy of the investment fund s proxy voting policies and procedures, proxy voting disclosure record or quarterly portfolio disclosure.

2 Management Discussion of Fund Performance Investment Objective and Strategies The objective of the Ninepoint Energy Opportunities Trust (the Fund ) is to achieve long-term capital growth. The Fund invests primarily in equity and equity related securities of companies that are involved directly or indirectly in the exploration, development, production and distribution of oil, gas, coal or uranium and other related activities in the energy and resource sector. The Fund may follow a more concentrated investment approach and from time to time overweight certain sub-sectors within the energy and resource sector, when deemed appropriate by the Portfolio Adviser. This may result in the Fund s portfolio weighting being substantially different from the weightings of the S&P/TSX Capped Energy Total Return Index. As part of its investment strategy, the Fund may: engage in short selling up to 20% of the Fund s total net asset value as a result of special relief it obtained from Canadian securities regulators; and invest in and overweight cash and fixed income securities based on the market outlook for the energy sector. Risks The risks of investing in the Fund are described in the Fund s simplified prospectus. This Fund is suitable only for investors seeking long-term capital growth with a high tolerance for risk and volatility. Investors should be comfortable with high investment risks and have a long-term investment horizon. There were no significant changes to the investment objective and strategies that affected the Fund s overall level of risk during the reporting period. Results of Operations and Recent Developments The Trust returned 7.6% in the first half of 2018, compared to 8.2% for its benchmark, the S&P/TSX Capped Energy Total Return Index. Energy markets in the period were highly sensitive to signals of demand and of additions and reductions in supply. Due to a strong underlying global economy, oil demand grew at a very healthy pace, and is expected to grow by 1.5 to 1.7 million barrels per day in 2018 following very strong growth in Supply as expressed in oil inventories has been in shortage, with a contra-seasonal draw in the first quarter indicating a deficit. This deficit is due in part to a lack of spending by exploration and production companies, which have prioritized debt repayment and return of capital to their shareholders. The lack of supply also stems from the successful production curtailment deal by the Organisation of the Petroleum Exporting Countries ( OPEC ), announced in Although OPEC signaled the return to 1 million barrels per day effective June 2018, the Manager still views the oil market as undersupplied given continued erosion of production in Venezuela and imminent export reductions from Iran. The Manager believes that global oil inventories could reach their lowest level in history by the end of 2019, resulting in a significant price spike. Early in the period, the Fund was positioned with a bias towards the services sub-sector, which was expected to benefit from increased spending as rising oil prices significantly improved cash flow for producers. This initial positioning in U.S. pressure pumpers detracted from the Fund s performance, though U.S. producers held in the Fund contributed. Over the period, the Manager s outlook for oil became incrementally more positive, while the Manager s outlook for U.S. spending became more pessimistic based on pipeline constraints in the Permian Basin in southwestern U.S. and the resulting widening in the Midland oil price differential. Consequently, the Manager reduced the Fund s weighting in services (and U.S. pressure pumpers) and reallocated capital back to Canada. This reallocation to Canadian heavy oil companies contributed significantly to the Fund s performance. Heavy oil stocks rallied strongly due to the increase in the oil price as well as evidence of fund flows coming back into Canada as Permian Basin producers became less attractive. The largest contributors to the Fund s performance were MEG Energy Corp., Athabasca Oil Corp. and WPX Energy Inc. MEG Energy and Athabasca Oil are heavy oil producers whose earnings are highly sensitive to a rising oil price. Both stocks benefited from increased clarity around improved pipeline access and an imminent increase in rail capacity that is expected to narrow the price differential for Western Canadian Select ( WCS ) oil. WPX Energy is a light oil producer in the Permian Basin and U.S. side of the Bakken oil and gas formation that secured fixed takeaway capacity out of the Permian Basin and is hence largely unaffected by 2019 takeaway constraints.

3 The largest detractors from the Fund s performance were Source Energy Services Ltd., C&J Energy Services Inc. and Patterson-UTI Energy Inc. All are services stocks that failed to rally along with the price of oil due to concerns about the overbuilding of capacity and the consequent erosion of margins and pricing. Source Energy Services also failed to meet the Manager s original expectations for production, pricing and margins due to rail capacity issues in the first quarter, and the stock was subsequently eliminated from the Fund. The largest change to the Fund in the period was the reallocation from U.S. exposure to increased Canadian exposure. The Manager believes an oil price spike above US$100 per barrel is highly likely, and Canada has a large number of businesses with higher fixed costs that would disproportionally benefit from higher oil prices. At the same time, sentiment towards Canadian oil producers remains negative. The Manager believes the Fund could benefit from any positive development with respect to increased pipeline takeaway capacity that would lower the expected WCS differential. The Fund s net asset value increased by 4.9% during the period, from $28.2 million as at December 31, 2017, to $29.6 million as at June 30, This change was predominately due to realized gains on investments of $1.4 million. The management expense ratio increased compared to the prior period. Ninepoint Partners LP is the manager and portfolio advisor of the Fund. Prior to August 1, 2017, Sprott Asset Management LP was the manager and portfolio advisor of the Fund. Ninepoint Partners LP assumed the portfolio management of the Canadian diversified asset business of Sprott Asset Management LP on August 1, Related Party Transactions MANAGEMENT FEES The Fund will pay to the Manager an annual management fee equal to 2.00% per annum of the NAV of the Fund. The management fee is calculated and accrued daily based on daily net asset value of that series of the Fund, and is paid monthly. For the six-month period ended June 30, 2018, the Fund incurred management fees of $304,932 (including taxes). OPERATING EXPENSES The Fund pays its own operating expenses, which include, but are not limited to, audit, legal, custodial, trustee, filing and administrative expenses as well as unitholder reporting costs. The Manager pays certain of these expenses on behalf of the Fund and then is reimbursed by the Fund. OTHER RELATED PARTY TRANSACTIONS The Fund relied on the approval, positive recommendation or standing instruction from the Fund s Independent Review Committee with respect to any related party transactions.

4 Financial Highlights The following tables show selected key financial information about the Fund and are intended to help you understand the Fund s financial performance for the six-month period ended June 30, 2018 and each of the previous twelve-month periods ended December 31 shown, unless otherwise noted. The Fund s Net Assets per Unit 1 Jun 30, 2018 $ Dec 31, 2017 $ Dec 31, $ Initial offering price Agents fee and issue expenses (0.20) Net assets, beginning of period Increase (decrease) from operations: Total revenue Total expenses (0.23) (0.32) (0.04) Realized losses 0.17 (3.51) (0.02) Unrealized gains (losses) Total increase (decrease) from operations (3.59) Distributions: From income (excluding dividends) From dividends From capital gains Return of capital Total annual distributions Net assets, end of period This information is derived from the Fund s interim and annual and audited annual financial statements. 2 The increase/decrease from operations is based on the weighted average number of units outstanding over the financial period. Net assets and distributions are based on the actual number of units outstanding at the relevant time. This table is not intended to be a reconciliation of beginning to ending net assets per unit. 3 Information provided is for the period from December 20, 2016 (launch date) to December 31, 2016.

5 Ratios and Supplemental Data Jun 30, 2018 Dec 31, 2017 Dec 31, 2016 Total net asset value (000s) 1 $29,635 $28,249 $44,099 Number of units outstanding 1 4,448,935 4,562,278 4,500,028 Management expense ratio % 2.55% 4.77% Trading expense ratio % 2.28% 10.48% Portfolio turnover rate % % 34.72% Net asset value per unit 1 $6.66 $6.19 $ The information is provided as at June 30, 2018 and December 31 of the years prior to Management expense ratio ( MER ) is based on total expenses (including incentive fees, if any; excluding commissions and other portfolio transaction costs) for the stated period and is expressed as an annualized percentage of the daily average net asset value during the period. The MER, on a non-annualized basis, was 0.13% for the period December 19, 2016 to December 31, The trading expense ratio ( TER ) represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. The TER includes dividend expense and securities borrowing expense paid by the Fund in connection with securities sold short. 4 The Fund s portfolio turnover rate indicates how actively the Fund s portfolio adviser trades its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Fund buying and selling all of the securities in its portfolio once in the course of the year. The higher the Fund s portfolio turnover rate in a year, the greater the trading costs payable by the Fund in the year, and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rate and the performance of the Fund.

6 Return (%) Past Performance The indicated rates of return are the historical total returns including changes in unit values and assume reinvestment of all distributions in additional units of the relevant Series of the Fund. These returns do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that may reduce returns. Please note that past performance is not indicative of future performance. All rates of returns are calculated based on the Net Asset Value of the particular Series of the Fund. Year-by-Year Returns The following chart indicates the performance of the Fund for the six-month period ended June 30, 2018 and each of the previous twelvemonth periods ended December 31 shown, unless otherwise noted. The chart shows, in percentage terms, how much an investment made on the first day of each period would have grown or decreased by the last day of each period * * Return from December 20, 2016 (launch date) to December 31, 2016 (not annualized).

7 Summary of Investment Portfolio As at June 30, 2018 Portfolio Allocation % of Net Asset Value All Positions Issuer % of Net Asset Value Long Positions MEG Energy Corp Oil and Gas Exploration and Production 87.4 Athabasca Oil Corp Integrated Oil and Gas 10.1 Cenovus Energy Inc Oil and Gas Equipment and Services 2.0 Raging River Exploration Inc. 9.6 Total Long Positions 99.5 Parsley Energy Inc. 6.7 Bank Indebtedness (1.1) Extraction Oil & Gas Inc. 6.5 Other Net Assets 1.6 Canadian Natural Resources Ltd. 6.4 Total Net Asset Value TORC Oil & Gas Ltd. 6.2 WPX Energy Inc. 6.0 Encana Corp. 5.8 Seven Generations Energy Ltd. 4.9 Whitecap Resources Inc. 4.5 Enerplus Corp. 4.2 Devon Energy Corp. 3.9 Trican Well Service Ltd. 2.0 Bank Indebtedness (1.1) All long positions as a percentage of net asset value 98.4 The Fund held no short positions as at June 30, This summary of investment portfolio may change due to the ongoing portfolio transactions of the Fund. Quarterly updates of the Fund s investment portfolio are available on the Internet at

8 Corporate Information Corporate Address Ninepoint Partners LP Royal Bank Plaza, South Tower 200 Bay Street, Suite 2700, P.O. Box 27 Toronto, Ontario M5J 2J1 T TOLL-FREE F E invest@ninepoint.com For additional information visit our website: Call our mutual fund information line for daily closing prices: or Auditors KPMG LLP Bay Adelaide Centre 333 Bay Street Suite 4600 Toronto, Ontario M5H 2S5 Legal Counsel McCarthy Tetrault LLP TD Bank Tower 66 Wellington Street West Suite 5300, P.O. Box 48 Toronto ON M5K 1E6 M 03 E