Item 1. Condensed Financial Statements.
Index to Condensed Financial Statements
United States 12 Month Natural Gas Fund, LP
Condensed Statements of Financial Condition
At June 30, 2020 (Unaudited) and December 31,
2019
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Assets
|
|
|
|
|
|
|
Cash and cash equivalents (at cost $4,043,457
and $2,990,732, respectively) (Notes 2 and 5)
|
|
$
|
4,043,457
|
|
|
$
|
2,990,732
|
|
Equity in trading accounts:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (at
cost $636,143 and $803,973, respectively)
|
|
|
636,143
|
|
|
|
803,973
|
|
Unrealized gain (loss) on open
commodity futures contracts
|
|
|
(157,130
|
)
|
|
|
(435,678
|
)
|
Receivable from General Partner (Note 3)
|
|
|
33,705
|
|
|
|
74,302
|
|
Dividends receivable
|
|
|
300
|
|
|
|
658
|
|
Interest receivable
|
|
|
–
|
|
|
|
247
|
|
Prepaid license fees
|
|
|
1,088
|
|
|
|
–
|
|
Prepaid insurance*
|
|
|
294
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
4,557,857
|
|
|
$
|
3,434,354
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Partners' Capital
|
|
|
|
|
|
|
|
|
General Partner management fees payable (Note 3)
|
|
$
|
2,722
|
|
|
$
|
2,759
|
|
Professional fees payable
|
|
|
27,559
|
|
|
|
57,027
|
|
Brokerage commissions payable
|
|
|
391
|
|
|
|
571
|
|
Directors’ fees payable*
|
|
|
3
|
|
|
|
103
|
|
Total
Liabilities
|
|
|
30,675
|
|
|
|
60,460
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Notes 3,
4 & 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners' Capital
|
|
|
|
|
|
|
|
|
General Partners
|
|
|
–
|
|
|
|
–
|
|
Limited
Partners
|
|
|
4,527,182
|
|
|
|
3,373,894
|
|
Total
Partners' Capital
|
|
|
4,527,182
|
|
|
|
3,373,894
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Partners' Capital
|
|
$
|
4,557,857
|
|
|
$
|
3,434,354
|
|
|
|
|
|
|
|
|
|
|
Limited
Partners' shares outstanding
|
|
|
600,000
|
|
|
|
400,000
|
|
Net asset value per share
|
|
$
|
7.55
|
|
|
$
|
8.43
|
|
Market value per share
|
|
$
|
7.58
|
|
|
$
|
8.39
|
|
* Certain prior year amounts have been reclassified for
consistency with the current presentation.
See accompanying notes to condensed financial statements.
United States 12 Month Natural Gas Fund, LP
Condensed Schedule of Investments (Unaudited)
At June 30, 2020
|
|
Notional
Amount
|
|
|
Number
of
Contracts
|
|
|
Fair
Value/Unrealized
Gain (Loss) on
Open
Commodity
Contracts
|
|
|
%
of
Partners'
Capital
|
|
Open Commodity Futures Contracts - Long
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NYMEX Natural Gas Futures NG August 2020
contracts, expiring July 2020
|
|
$
|
339,577
|
|
|
|
15
|
|
|
$
|
(76,927
|
)
|
|
|
(1.70
|
)
|
NYMEX Natural Gas Futures NG September 2020 contracts,
expiring August 2020
|
|
|
348,242
|
|
|
|
16
|
|
|
|
(62,002
|
)
|
|
|
(1.37
|
)
|
NYMEX Natural Gas Futures NG October 2020 contracts,
expiring September 2020
|
|
|
367,164
|
|
|
|
16
|
|
|
|
(65,244
|
)
|
|
|
(1.44
|
)
|
NYMEX Natural Gas Futures NG November 2020 contracts,
expiring October 2020
|
|
|
360,555
|
|
|
|
15
|
|
|
|
(18,255
|
)
|
|
|
(0.40
|
)
|
NYMEX Natural Gas Futures NG December 2020 contracts,
expiring November 2020
|
|
|
439,264
|
|
|
|
16
|
|
|
|
256
|
|
|
|
0.01
|
|
NYMEX Natural Gas Futures NG January 2021 contracts,
expiring December 2020
|
|
|
443,128
|
|
|
|
16
|
|
|
|
18,152
|
|
|
|
0.40
|
|
NYMEX Natural Gas Futures NG February 2021 contracts,
expiring January 2021
|
|
|
441,943
|
|
|
|
16
|
|
|
|
13,577
|
|
|
|
0.30
|
|
NYMEX Natural Gas Futures NG March 2021 contracts,
expiring February 2021
|
|
|
387,807
|
|
|
|
15
|
|
|
|
23,043
|
|
|
|
0.51
|
|
NYMEX Natural Gas Futures NG April 2021 contracts,
expiring March 2021
|
|
|
369,455
|
|
|
|
16
|
|
|
|
26,385
|
|
|
|
0.58
|
|
NYMEX Natural Gas Futures NG May 2021 contracts,
expiring April 2021
|
|
|
396,120
|
|
|
|
16
|
|
|
|
(5,240
|
)
|
|
|
(0.12
|
)
|
NYMEX Natural Gas Futures NG June 2021 contracts,
expiring May 2021
|
|
|
403,340
|
|
|
|
16
|
|
|
|
(6,220
|
)
|
|
|
(0.14
|
)
|
NYMEX Natural Gas Futures NG July 2021
contracts, expiring June 2021
|
|
|
383,855
|
|
|
|
15
|
|
|
|
(4,655
|
)
|
|
|
(0.10
|
)
|
Total
Open Futures Contracts*
|
|
$
|
4,680,450
|
|
|
|
188
|
|
|
$
|
(157,130
|
)
|
|
|
(3.47
|
)
|
|
|
Principal
Amount
|
|
|
Market
Value
|
|
|
%
of
Partners'
Capital
|
|
Cash Equivalents
|
|
|
|
|
|
|
|
|
|
United States Treasury Obligations
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bills:
|
|
|
|
|
|
|
|
|
|
1.54%, 7/02/2020
|
|
$
|
100,000
|
|
|
$
|
99,996
|
|
|
|
2.21
|
|
1.52%, 7/09/2020
|
|
|
100,000
|
|
|
|
99,967
|
|
|
|
2.21
|
|
1.55%, 7/16/2020
|
|
|
100,000
|
|
|
|
99,936
|
|
|
|
2.21
|
|
1.53%, 7/23/2020
|
|
|
100,000
|
|
|
|
99,907
|
|
|
|
2.21
|
|
1.54%, 7/30/2020
|
|
|
100,000
|
|
|
|
99,878
|
|
|
|
2.21
|
|
1.54%, 8/06/2020
|
|
|
100,000
|
|
|
|
99,848
|
|
|
|
2.21
|
|
1.52%, 8/13/2020
|
|
|
100,000
|
|
|
|
99,820
|
|
|
|
2.20
|
|
1.53%, 8/20/2020
|
|
|
100,000
|
|
|
|
99,790
|
|
|
|
2.20
|
|
1.43%, 8/27/2020
|
|
|
100,000
|
|
|
|
99,777
|
|
|
|
2.20
|
|
Total
United States Treasury Obligations
|
|
|
|
|
|
|
898,919
|
|
|
|
19.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Money Market Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
Goldman Sachs Financial Square Funds - Government Fund
- Class FS, 0.15%#
|
|
|
2,650,110
|
|
|
|
2,650,110
|
|
|
|
58.54
|
|
RBC U.S. Government Money Market
Fund - Institutional Share Class, 0.10%#
|
|
|
790,237
|
|
|
|
790,236
|
|
|
|
17.45
|
|
Total
United States Money Market Funds
|
|
|
|
|
|
|
3,440,346
|
|
|
|
75.99
|
|
Total
Cash Equivalents
|
|
|
|
|
|
$
|
4,339,265
|
|
|
|
95.85
|
|
#
|
Reflects
the 7-day yield at June 30, 2020.
|
*
|
Collateral
amounted to $636,143 on open commodity futures contracts.
|
See accompanying notes to condensed financial statements.
United States 12 Month Natural Gas Fund, LP
Condensed Statements of Operations (Unaudited)
For the three and six months ended June 30, 2020
and 2019
|
|
Three
months ended
June 30, 2020
|
|
|
Three
months ended
June 30, 2019
|
|
|
Six
months ended
June 30, 2020
|
|
|
Six
months ended
June 30, 2019
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on trading of commodity futures contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain (loss)
on closed commodity futures contracts
|
|
$
|
(331,877
|
)
|
|
$
|
(41,649
|
)
|
|
$
|
(693,179
|
)
|
|
$
|
(50,236
|
)
|
Change in unrealized gain (loss)
on open commodity futures contracts
|
|
|
245,056
|
|
|
|
(598,531
|
)
|
|
|
278,548
|
|
|
|
(493,923
|
)
|
Dividend income
|
|
|
626
|
|
|
|
2,896
|
|
|
|
1,584
|
|
|
|
6,798
|
|
Interest
income*
|
|
|
5,781
|
|
|
|
22,529
|
|
|
|
16,874
|
|
|
|
46,165
|
|
ETF transaction fees
|
|
|
700
|
|
|
|
–
|
|
|
|
700
|
|
|
|
350
|
|
Total
Income (Loss)
|
|
$
|
(79,714
|
)
|
|
$
|
(614,755
|
)
|
|
$
|
(395,473
|
)
|
|
$
|
(490,846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Partner management fees (Note 3)
|
|
$
|
6,598
|
|
|
$
|
8,330
|
|
|
$
|
12,392
|
|
|
$
|
17,426
|
|
Professional fees
|
|
|
18,773
|
|
|
|
22,157
|
|
|
|
35,472
|
|
|
|
44,072
|
|
Brokerage commissions
|
|
|
390
|
|
|
|
264
|
|
|
|
521
|
|
|
|
636
|
|
Directors' fees and insurance
|
|
|
151
|
|
|
|
215
|
|
|
|
387
|
|
|
|
543
|
|
License fees
|
|
|
132
|
|
|
|
167
|
|
|
|
248
|
|
|
|
349
|
|
Total
Expenses
|
|
|
26,044
|
|
|
|
31,133
|
|
|
|
49,020
|
|
|
|
63,026
|
|
Expense waiver
|
|
|
(17,683
|
)
|
|
|
(21,137
|
)
|
|
|
(33,705
|
)
|
|
|
(42,114
|
)
|
Net
Expenses
|
|
$
|
8,361
|
|
|
$
|
9,996
|
|
|
$
|
15,315
|
|
|
$
|
20,912
|
|
Net Income (Loss)
|
|
$
|
(88,075
|
)
|
|
$
|
(624,751
|
)
|
|
$
|
(410,788
|
)
|
|
$
|
(511,758
|
)
|
Net Income (Loss) per limited
partner share
|
|
$
|
(0.08
|
)
|
|
$
|
(1.39
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
(1.15
|
)
|
Net Income (Loss) per weighted average limited
partner share
|
|
$
|
(0.20
|
)
|
|
$
|
(1.39
|
)
|
|
$
|
(0.97
|
)
|
|
$
|
(1.12
|
)
|
Weighted average limited partner shares outstanding
|
|
|
447,253
|
|
|
|
450,000
|
|
|
|
423,626
|
|
|
|
454,972
|
|
*
|
Interest
income does not exceed paid in kind of 5%.
|
See accompanying notes to condensed financial statements.
United States 12 Month Natural Gas Fund, LP
Condensed Statement in Changes in Partners’ Capital
(Unaudited)
For the three and six months ended June 30, 2020
and 2019
|
|
Limited
Partners*
|
|
|
|
|
|
|
|
Three
months ended
June 30, 2020
|
|
|
Three
months ended
June 30, 2019
|
|
|
Six
months ended
June 30, 2020
|
|
|
Six
months ended
June 30, 2019
|
|
Balances at beginning of period
|
|
$
|
3,051,181
|
|
|
$
|
4,723,046
|
|
|
$
|
3,373,894
|
|
|
$
|
5,642,871
|
|
Addition of 200,000, –, 200,000 and – partnership
shares, respectively
|
|
|
1,564,076
|
|
|
|
–
|
|
|
|
1,564,076
|
|
|
|
–
|
|
Redemption of (–),(–), (–) and (100,000)
partnership shares, respectively
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(1,032,818
|
)
|
Net income (loss)
|
|
|
(88,075
|
)
|
|
|
(624,751
|
)
|
|
|
(410,788
|
)
|
|
|
(511,758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at end of period
|
|
$
|
4,527,182
|
|
|
$
|
4,098,295
|
|
|
$
|
4,527,182
|
|
|
$
|
4,098,295
|
|
*
|
General
Partners' shares outstanding and capital for the periods presented were zero.
|
See accompanying notes to condensed financial statements.
United States 12 Month Natural Gas Fund, LP
Condensed Statements of Cash Flows (Unaudited)
For the six months ended June 30, 2020 and 2019
|
|
Six
months ended
June 30, 2020
|
|
|
Six
months ended
June 30, 2019
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(410,788
|
)
|
|
$
|
(511,758
|
)
|
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Change in unrealized (gain) loss
on open commodity futures contracts
|
|
|
(278,548
|
)
|
|
|
493,923
|
|
(Increase) decrease in receivable
from General Partner
|
|
|
74,302
|
|
|
|
17,842
|
|
(Increase) decrease in dividends
receivable
|
|
|
358
|
|
|
|
1,641
|
|
(Increase) decrease in interest
receivable
|
|
|
247
|
|
|
|
114
|
|
(Increase) decrease in prepaid
license fees
|
|
|
(1,088
|
)
|
|
|
–
|
|
(Increase) decrease in prepaid insurance*
|
|
|
(174
|
)
|
|
|
(270
|
)
|
(Increase) decrease in prepaid
reimbursement
|
|
|
(33,705
|
)
|
|
|
–
|
|
(Increase) decrease in other assets
|
|
|
–
|
|
|
|
216
|
|
Increase (decrease) in payable
due to Broker
|
|
|
–
|
|
|
|
(81,581
|
)
|
Increase (decrease) in General
Partner management fees payable
|
|
|
(37
|
)
|
|
|
(787
|
)
|
Increase (decrease) in professional
fees payable
|
|
|
(29,468
|
)
|
|
|
(22,005
|
)
|
Increase (decrease) in brokerage
commissions payable
|
|
|
(180
|
)
|
|
|
–
|
|
Increase
(decrease) in directors' fees payable*
|
|
|
(100
|
)
|
|
|
(641
|
)
|
Net cash
provided by (used in) operating activities
|
|
|
(679,181
|
)
|
|
|
(103,306
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Addition of partnership shares
|
|
|
1,564,076
|
|
|
|
–
|
|
Redemption of partnership shares
|
|
|
–
|
|
|
|
(1,032,818
|
)
|
Net cash
provided by (used in) financing activities
|
|
|
1,564,076
|
|
|
|
(1,032,818
|
)
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
884,895
|
|
|
|
(1,136,124
|
)
|
|
|
|
|
|
|
|
|
|
Total Cash, Cash Equivalents
and Equity in Trading Accounts, beginning of period
|
|
|
3,794,705
|
|
|
|
5,763,922
|
|
Total Cash, Cash Equivalents
and Equity in Trading Accounts, end of period
|
|
$
|
4,679,600
|
|
|
$
|
4,627,798
|
|
|
|
|
|
|
|
|
|
|
Components of Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,043,457
|
|
|
$
|
3,529,670
|
|
Equity in Trading Accounts:
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents
|
|
|
636,143
|
|
|
|
1,098,128
|
|
Total Cash, Cash Equivalents
and Equity in Trading Accounts
|
|
$
|
4,679,600
|
|
|
$
|
4,627,798
|
|
* Certain prior year amounts have been reclassified for
consistency with the current presentation.
See accompanying notes to condensed financial statements.
United States 12 Month Natural Gas Fund, LP
Notes to Condensed Financial Statements
For the six months ended June 30, 2020 (Unaudited)
NOTE 1 - ORGANIZATION AND BUSINESS
The United States 12 Month Natural Gas Fund, LP (“UNL”)
was organized as a limited partnership under the laws of the state of Delaware on June 27, 2007. UNL is a commodity pool
that issues limited partnership shares (“shares”) that may be purchased and sold on the NYSE Arca, Inc. (the
“NYSE Arca”). UNL will continue in perpetuity, unless terminated sooner upon the occurrence of one or more events
as described in its Third Amended and Restated Agreement of Limited Partnership dated as of December 15, 2017 (the “LP
Agreement”). The investment objective of UNL is for the daily changes in percentage terms of its shares’ per share
net asset value (“NAV”) to reflect the daily changes in percentage terms of the spot price of natural gas delivered
at the Henry Hub, Louisiana, as measured by the daily changes in the average of the prices of 12 futures contracts for natural
gas traded on the New York Mercantile Exchange (the “NYMEX”), consisting of the near month contract to expire and
the contracts for the following 11 months for a total of 12 consecutive months’ contracts, except when the near month contract
is within two weeks of expiration, in which case it will be measured by the futures contract that is the next month contract to
expire and the contracts for the following 11 consecutive months (the “Benchmark Futures Contracts”), plus interest
earned on UNL’s collateral holdings, less UNL’s expenses. When calculating the daily movement of the average price
of the 12 contracts, each contract month is equally weighted. UNL seeks to achieve its investment objective by investing so that
the average daily percentage change in UNL’s NAV for any period of 30 successive valuation days will be within plus/minus
ten percent (10%) of the average daily percentage change in the price of the Benchmark Futures Contracts over the same period.
UNL’s investment objective is not for its NAV
or market price of shares to equal, in dollar terms, the spot price of natural gas or any particular futures contract based on
natural gas, nor is UNL’s investment objective for the percentage change in its NAV to reflect the percentage change
of the price of any particular futures contract as measured over a time period greater than one day.
United States Commodity Funds LLC (“USCF”), the
general partner of UNL, believes that it is not practical to manage the portfolio to achieve such an investment goal when investing
in Futures Contracts (as defined below) and Other Natural Gas-Related Investments (as defined below). UNL accomplishes its objective
through investments in futures contracts for natural gas, crude oil, diesel-heating oil, gasoline and other petroleum-based fuels
that are traded on the NYMEX, ICE Futures or other U.S. and foreign exchanges (collectively, “Futures Contracts”)
and other natural gas-related investments such as cash-settled options on Futures Contracts, forward contracts for natural gas,
cleared swap contracts and over-the-counter (“OTC”) transactions that are based on the price of natural gas, crude
oil and other petroleum-based fuels, Futures Contracts and indices based on the foregoing (collectively, “Other Natural
Gas-Related Investments”). As of June 30, 2020, UNL held 188 Futures Contracts for natural gas traded on the NYMEX
and did not hold any Futures Contracts traded on ICE Futures US.
UNL commenced investment operations on November 18, 2009
and has a fiscal year ending on December 31. USCF is responsible for the management of UNL. USCF is a member of the National
Futures Association (the “NFA”) and became registered as a commodity pool operator with the Commodity Futures Trading
Commission (the “CFTC”) effective December 1, 2005 and a swaps firm on August 8, 2013.
USCF is also the general partner of the United States Oil Fund,
LP (“USO”), the United States Natural Gas Fund, LP (“UNG”), the United States 12 Month Oil Fund, LP (“USL”)
and the United States Gasoline Fund, LP (“UGA”), which listed their limited partnership shares on the American Stock
Exchange (the “AMEX”) under the ticker symbols “USO” on April 10, 2006, “UNG” on April 18,
2007, “USL” on December 6, 2007 and “UGA” on February 26, 2008, respectively. As a result of
the acquisition of the AMEX by NYSE Euronext, each of USO’s, UNG’s, USL’s and UGA’s shares commenced trading
on the NYSE Arca on November 25, 2008. USCF is also the general partner of the United States Brent Oil Fund, LP (“BNO”),
which listed its limited partnership shares on the NYSE Arca under the ticker symbol “BNO” on June 2, 2010. USCF
previously served as the general partner for the United States Short Oil Fund, LP (“DNO”) and the United States Diesel-Heating
Oil Fund, LP (“UHN”), both of which were liquidated in 2018.
USCF is also the sponsor of the United States Commodity Index
Fund (“USCI”), the United States Copper Index Fund (“CPER”) and the USCF Crescent Crypto Index Fund (“XBET”),
each a series of the United States Commodity Index Funds Trust (“USCIFT”). USCF previously served as the sponsor for
the United States Agricultural Index Fund (“USAG”) a series of USCIFT which was liquidated in 2018. A registration
statement that had been previously filed for XBET was withdrawn on June 25, 2020. USCI and CPER listed their shares on the
NYSE Arca under the ticker symbols “USCI” on August 10, 2010 and “CPER” on November 15, 2011,
respectively.
In addition, USCF was the sponsor of the USCF Funds Trust,
a Delaware statutory trust, and each of its series, the United States 3x Oil Fund (“USOU”) and the United States 3x
Short Oil Fund (“USOD”), which listed their shares on the NYSE Arca on July 20, 2017 under the ticker symbols
“USOU” and “USOD”, respectively. Each of USOU and USOD liquidated all of its assets and distributed cash
pro rata to all remaining shareholders in December 2019.
USO, UNG, UGA, UNL, USL, BNO, USCI and CPER are referred to
collectively herein as the “Related Public Funds.”
UNL issues shares to certain authorized purchasers (“Authorized
Participants”) by offering baskets consisting of 50,000 shares (“Creation Baskets”) through ALPS Distributors, Inc.,
as the marketing agent (the “Marketing Agent”). The purchase price for a Creation Basket is based upon the NAV of
a share calculated shortly after the close of the core trading session on the NYSE Arca on the day the order to create the basket
is properly received.
Authorized Participants pay UNL a $350 transaction fee for
each order placed to create one or more Creation Baskets or to redeem one or more baskets (“Redemption Baskets”),
consisting of 50,000 shares. Shares may be purchased or sold on a nationally recognized securities exchange in smaller increments
than a Creation Basket or Redemption Basket. Shares purchased or sold on a nationally recognized securities exchange are not purchased
or sold at the per share NAV of UNL but rather at market prices quoted on such exchange.
In November 2009, UNL initially registered 30,000,000
shares on Form S-1 with the U.S. Securities and Exchange Commission (the “SEC”). On November 18, 2009, UNL
listed its shares on the NYSE Arca under the ticker symbol “UNL”. On that day, UNL established its initial per share
NAV by setting the price at $50.00 and issued 200,000 shares in exchange for $10,000,000. UNL also commenced investment operations
on November 18, 2009, by purchasing Futures Contracts traded on the NYMEX based on natural gas. As of June 30, 2020,
UNL had registered a total of 30,000,000 shares.
The accompanying unaudited condensed financial statements have
been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the SEC and, therefore, do not include all information
and footnote disclosure required under generally accepted accounting principles in the United States of America (“U.S. GAAP”).
The financial information included herein is unaudited; however, such financial information reflects all adjustments, consisting
only of normal recurring adjustments, which are, in the opinion of USCF, necessary for the fair presentation of the condensed
financial statements for the interim period.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed financial statements have been prepared in conformity
with U.S. GAAP as detailed in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification. UNL
is an investment company and follows the accounting and reporting guidance in FASB Topic 946.
Revenue Recognition
Commodity futures contracts, forward contracts, physical commodities
and related options are recorded on the trade date. All such transactions are recorded on the identified cost basis and marked
to market daily. Unrealized gains or losses on open contracts are reflected in the condensed statements of financial condition
and represent the difference between the original contract amount and the market value (as determined by exchange settlement prices
for futures contracts and related options and cash dealer prices at a predetermined time for forward contracts, physical commodities,
and their related options) as of the last business day of the year or as of the last date of the condensed financial statements.
Changes in the unrealized gains or losses between periods are reflected in the condensed statements of operations. UNL earns
income on funds held at the custodian or futures commission merchants (“FCMs”) at prevailing market rates earned
on such investments.
Brokerage Commissions
Brokerage commissions on all open commodity futures contracts
are accrued on a full-turn basis.
Income Taxes
UNL is not subject to federal income taxes; each partner
reports his/her allocable share of income, gain, loss deductions or credits on his/her own income tax return.
In accordance with U.S. GAAP, UNL is required to
determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority,
including resolution of any tax related appeals or litigation processes, based on the technical merits of the position. UNL
files an income tax return in the U.S. federal jurisdiction and may file income tax returns in various U.S. states. UNL is
not subject to income tax return examinations by major taxing authorities for years before 2016. The tax benefit recognized is
measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
De-recognition of a tax benefit previously recognized results in UNL recording a tax liability that reduces net assets. However,
UNL’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including,
but not limited to, on-going analysis of and changes to tax laws, regulations and interpretations thereof. UNL recognizes
interest accrued related to unrecognized tax benefits and penalties related to unrecognized tax benefits in income tax fees payable,
if assessed. No interest expense or penalties have been recognized as of and for the period ended June 30, 2020.
Creations and Redemptions
Authorized Participants may purchase Creation Baskets or redeem
Redemption Baskets only in blocks of 50,000 shares at a price equal to the NAV of the shares calculated shortly after the
close of the core trading session on the NYSE Arca on the day the order is placed.
UNL receives or pays the proceeds from shares sold or
redeemed within two business days after the trade date of the purchase or redemption. The amounts due from Authorized Participants
are reflected in UNL’s condensed statements of financial condition as receivable for shares sold and amounts payable to
Authorized Participants upon redemption are reflected as payable for shares redeemed.
Authorized Participants pay UNL a $350 transaction fee
for each order placed to create one or more Creation Baskets or to redeem one or more Redemption Baskets.
Partnership Capital and Allocation of Partnership Income
and Losses
Profit or loss shall be allocated among the partners of UNL
in proportion to the number of shares each partner holds as of the close of each month. USCF may revise, alter or otherwise modify
this method of allocation as described in the LP Agreement.
Calculation of Per Share NAV
UNL’s per share NAV is calculated on each NYSE Arca trading
day by taking the current market value of its total assets, subtracting any liabilities and dividing that amount by the total
number of shares outstanding. UNL uses the closing price for the contracts on the relevant exchange on that day to determine
the value of contracts held on such exchange.
Net Income (Loss) Per Share
Net income (loss) per share is the difference between the per
share NAV at the beginning of each period and at the end of each period. The weighted average number of shares outstanding was
computed for purposes of disclosing net income (loss) per weighted average share. The weighted average shares are equal to the
number of shares outstanding at the end of the period, adjusted proportionately for shares added and redeemed based on the amount
of time the shares were outstanding during such period. There were no shares held by USCF at June 30, 2020.
Offering Costs
Offering costs incurred in connection with the registration
of additional shares after the initial registration of shares are borne by UNL. These costs include registration fees paid to regulatory
agencies and all legal, accounting, printing and other expenses associated with such offerings. These costs are accounted for as
a deferred charge and thereafter amortized to expense over twelve months on a straight-line basis or a shorter period if warranted.
Cash Equivalents
Cash equivalents include money market funds and overnight deposits
or time deposits with original maturity dates of six months or less.
Reclassification
Certain amounts in the accompanying condensed financial statements
were reclassified to conform to the current presentation.
Use of Estimates
The preparation of condensed financial statements in conformity
with U.S. GAAP requires USCF to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the condensed financial statements, and the reported amounts of the revenue
and expenses during the reporting period. Actual results may differ from those estimates and assumptions.
NOTE 3 - FEES PAID BY THE FUND AND RELATED PARTY TRANSACTIONS
USCF Management Fee
Under the LP Agreement, USCF is responsible for investing the
assets of UNL in accordance with the objectives and policies of UNL. In addition, USCF has arranged for one or more third
parties to provide administrative, custody, accounting, transfer agency and other necessary services to UNL. For these services, UNL
is contractually obligated to pay USCF a fee, which is paid monthly, equal to 0.75% per annum of average daily total net assets.
Ongoing Registration Fees and Other Offering Expenses
UNL pays all costs and expenses associated with the ongoing
registration of its shares subsequent to the initial offering. These costs include registration or other fees paid to regulatory
agencies in connection with the offer and sale of shares, and all legal, accounting, printing and other expenses associated with
such offer and sale. For the six months ended June 30, 2020 and 2019, UNL did not incur registration fees and other offering
expenses.
Independent Directors’ and Officers’ Expenses
UNL is responsible for paying its portion of the directors’
and officers’ liability insurance for UNL and the Related Public Funds and the fees and expenses of the independent
directors who also serve as audit committee members of UNL and the Related Public Funds. UNL shares the fees and expenses
on a pro rata basis with each Related Public Fund, as described above, based on the relative assets of each Related Public Fund
computed on a daily basis. These fees and expenses for the year ending December 31, 2020 are estimated to be a total
of $2,000 for UNL and, in the aggregate for UNL and the Related Public Funds, $574,000.
Licensing Fees
As discussed in Note 4 below, UNL entered into a licensing
agreement with the NYMEX on December 4, 2007 as amended on October 20, 2011. Pursuant to the agreement, UNL
and the Related Public Funds, other than BNO, USCI and CPER, pay a licensing fee that is equal to 0.015% on all net assets. During
the six months ended June 30, 2020 and 2019, UNL incurred $248 and $349, respectively under this arrangement.
Investor Tax Reporting Cost
The fees and expenses associated with UNL’s audit expenses
and tax accounting and reporting requirements are paid by UNL. These costs are estimated to be $65,000 for the year ending
December 31, 2020. Tax reporting costs fluctuate between years due to the number of shareholders during any given year.
Other Expenses and Fees and Expense Waivers
In addition to the fees described above, UNL pays all brokerage
fees and other expenses in connection with the operation of UNL, excluding costs and expenses paid by USCF as outlined in Note
4 – Contracts and Agreements below. USCF paid certain expenses on a discretionary basis typically borne by UNL, where expenses
exceed 0.15% (15 basis points) of UNL’s NAV, on an annualized basis. USCF has no obligation to continue such payments into
subsequent periods. For the six months ended June 30, 2020, USCF waived $33,705 of UNL’s expenses. This voluntary expense
waiver is in addition to those amounts USCF is contractually obligated to pay as described in Note 4 – Contracts and
Agreements.
NOTE 4 - CONTRACTS AND AGREEMENTS
Marketing Agent Agreement
UNL is party to a marketing agent agreement, dated as of October 30,
2009, as amended from time to time, with the Marketing Agent and USCF, whereby the Marketing Agent provides certain marketing
services for UNL as outlined in the agreement. The fee of the Marketing Agent, which is borne by USCF, is equal to 0.06% on UNL's
assets up to $3 billion and 0.04% on UNL's assets in excess of $3 billion. In no event may the aggregate compensation paid to
the Marketing Agent and any affiliate of USCF for distribution-related services exceed 10% of the gross proceeds of UNL's offering.
The above fee does not include website construction and development,
which are also borne by USCF.
Custody, Transfer Agency and Fund Administration
and Accounting Services Agreements
USCF engaged The Bank of New York Mellon, a New York corporation
authorized to do a banking business (“BNY Mellon”), to provide UNL and each of the Related Public Funds
with certain custodial, administrative and accounting, and transfer agency services, pursuant to the following agreements with
BNY Mellon dated as of March 20, 2020 (together, the “BNY Mellon Agreements”), which were effective as of April 1,
2020: (i) a Custody Agreement; (ii) a Fund Administration and Accounting Agreement; and (iii) a Transfer Agency
and Service Agreement. USCF pays the fees of BNY Mellon for its services under the BNY Mellon Agreements and such fees are determined
by the parties from time to time.
Brown Brothers Harriman and Co. ("BBH&Co.") previously
served as the Administrator, Custodian, Transfer Agent and Fund Accounting Agent for UNL and the Related Public Funds prior
to BNY Mellon commencing such services on April 1, 2020. Certain fund accounting and fund administration services rendered
by BBH&Co. to UNL and the Related Public Funds terminated on May 31, 2020 to allow for the transition to BNY Mellon.
Brokerage and Futures Commission Merchant Agreements
UNL entered into a brokerage agreement with RBC Capital Markets
LLC (“RBC”) to serve as UNL's FCM effective October 10, 2013. In addition, UNL entered into a Commodity
Futures Customer Agreement dated as of May 28, 2020 with RCG Division of Marex Spectron ("RCG") and a Customer
Agreement with ED & F Man Capital Markets Inc. ("MCM") on June 5, 2020, pursuant to which RCG and MCM
each act as an FCM for UNL. The agreements with UNL's FCMs require the FCMs to provide services to UNL in connection with
the purchase and sale of Natural Gas Futures Contracts and Other Natural Gas-Related Investments that may be purchased and
sold by or through the applicable FCM for UNL’s account. In accordance with the FCM agreements, UNL pays each
FCM commissions of approximately $7 to $8 per round-turn trade, including applicable exchange, clearing and NFA fees for Natural
Gas Futures Contracts and options on Natural Gas Futures Contracts. Such fees include those incurred when purchasing Natural
Gas Futures Contracts and options on Natural Gas Futures Contracts when UNL issues shares as a result of a Creation
Basket, as well as fees incurred when selling Natural Gas Futures Contracts and options on Natural Gas Futures Contracts
when UNL redeems shares as a result of a Redemption Basket. Such fees are also incurred when Natural Gas Futures Contracts
and options on Natural Gas Futures Contracts are purchased or redeemed for the purpose of rebalancing the portfolio. UNL
also incurs commissions to brokers for the purchase and sale of Natural Gas Futures Contracts, Other Natural Gas-Related
Investments or short-term obligations of the United States of two years or less (“Treasuries”).
|
|
Six
months ended
June 30, 2020
|
|
|
Six
months ended
June 30, 2019
|
|
Total commissions accrued to brokers
|
|
$
|
521
|
|
|
$
|
636
|
|
Total commissions as annualized percentage of
average total net assets
|
|
|
0.03
|
%
|
|
|
0.03
|
%
|
Commissions accrued as a result of rebalancing
|
|
$
|
358
|
|
|
$
|
538
|
|
Percentage of commissions accrued as a result of rebalancing
|
|
|
68.71
|
%
|
|
|
84.59
|
%
|
Commissions accrued as a result of creation and redemption
activity
|
|
$
|
163
|
|
|
$
|
98
|
|
Percentage of commissions accrued as a result of creation
and redemption activity
|
|
|
31.29
|
%
|
|
|
15.41
|
%
|
The decrease in total commissions accrued to brokers for the
six months ended June 30, 2020, compared to the six months ended June 30, 2019, was due primarily to a lower
number of natural gas futures contracts being held and traded.
NYMEX Licensing Agreement
UNL and the NYMEX entered into a licensing agreement on
December 4, 2007 as amended on October 20, 2011, whereby UNL was granted a non-exclusive license
to use certain of the NYMEX’s settlement prices and service marks. Under the licensing agreement, UNL and the Related
Public Funds, other than BNO, USCI and CPER, pay the NYMEX an asset-based fee for the license, the terms of which are described
in Note 3. UNL expressly disclaims any association with the NYMEX or endorsement of UNL by the NYMEX and acknowledges
that “NYMEX” and “New York Mercantile Exchange” are registered trademarks of the NYMEX.
NOTE 5 - FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET RISKS
AND CONTINGENCIES
UNL may engage in the trading of futures contracts, options
on futures contracts, cleared swaps and OTC swaps (collectively, “derivatives”). UNL is exposed to both market
risk, which is the risk arising from changes in the market value of the contracts, and credit risk, which is the risk of failure
by another party to perform according to the terms of a contract.
UNL may enter into futures contracts, options on futures
contracts, cleared swaps, and OTC swaps to gain exposure to changes in the value of an underlying commodity. A futures contract
obligates the seller to deliver (and the purchaser to accept) the future delivery of a specified quantity and type of a commodity
at a specified time and place. Some futures contracts may call for physical delivery of the asset, while others are settled in
cash. The contractual obligations of a buyer or seller may generally be satisfied by taking or making physical delivery of the
underlying commodity or by making an offsetting sale or purchase of an identical futures contract on the same or linked exchange
before the designated date of delivery. Cleared swaps are agreements that are eligible to be cleared by a clearinghouse, e.g., ICE
Clear Europe, and provide the efficiencies and benefits that centralized clearing on an exchange offers to traders of futures
contracts, including credit risk intermediation and the ability to offset positions initiated with different counterparties. OTC
swaps are entered into between two parties in private contracts. In an OTC swap, each party bears credit risk to the other party,
i.e., the risk that the other party may not be able to perform its obligations under the OTC swap.
The purchase and sale of futures contracts, options on futures
contracts and cleared swaps require margin deposits with an FCM. Additional deposits may be necessary for any loss on contract
value. The Commodity Exchange Act requires an FCM to segregate all customer transactions and assets from the FCM’s proprietary
activities. To reduce the credit risk that arises in connection with OTC swaps, UNL will generally enter into an agreement
with each counterparty based on the Master Agreement published by the International Swaps and Derivatives Association, Inc.,
which provides for the netting of its overall exposure to its counterparty. The Master Agreement is negotiated as between the
parties and would address, among other things, the exchange of margin between the parties.
Futures contracts, options on futures contracts and cleared
swaps involve, to varying degrees, elements of market risk (specifically commodity price risk) and exposure to loss in excess
of the amount of variation margin. The face or contract amounts reflect the extent of the total exposure UNL has in
the particular classes of instruments. Additional risks associated with the use of futures contracts are an imperfect correlation
between movements in the price of the futures contracts and the market value of the underlying securities and the possibility
of an illiquid market for a futures contract. Buying and selling options on futures contracts exposes investors to the risks of
purchasing or selling futures contracts. As to OTC swaps, valuing OTC derivatives is less certain than valuing actively traded
financial instruments such as exchange-traded futures contracts and securities or cleared swaps, because the price and terms on
which such OTC derivatives are entered into or can be terminated are individually negotiated, and those prices and terms may not
reflect the best price or terms available from other sources. In addition, while market makers and dealers generally quote indicative
prices or terms for entering into or terminating OTC contracts, they typically are not contractually obligated to do so, particularly
if they are not a party to the transaction. As a result, it may be difficult to obtain an independent value for an outstanding
OTC derivatives transaction.
A novel strain of coronavirus (COVID-19) outbreak was declared a pandemic by the World Health Organization on March 11, 2020. The situation
is evolving with various cities and countries around the world responding in different ways to address the outbreak. There are direct
and indirect economic effects developing for various industries and individual companies throughout the world. Management will continue
to monitor the impact COVID-19 has on the Fund and reflect the consequences as appropriate in the Fund's accounting and financial reporting.
The recent pandemic spread of the novel coronavirus and related geopolitical events could lead to increased market volatility, disruption
to U.S. and world economies and markets and may have significant adverse effects on the Fund and its investments.
All of the futures contracts held by UNL through June 30,
2020 were exchange-traded. The risks associated with exchange-traded contracts are generally perceived to be less than those associated
with OTC swaps since, in OTC swaps, a party must rely solely on the credit of its respective individual counterparties. However,
in the future, if UNL were to enter into non-exchange traded contracts, it would be subject to the credit risk associated
with counterparty non-performance. The credit risk from counterparty non-performance associated with such instruments is the net
unrealized gain, if any, on the transaction. UNL has credit risk under its futures contracts since the sole counterparty
to all domestic and foreign futures contracts is the clearinghouse for the exchange on which the relevant contracts are traded.
In addition, UNL bears the risk of financial failure by the clearing broker.
UNL’s cash and other property, such as Treasuries, deposited
with its FCMs are considered commingled with all other customer funds, subject to such FCM’s segregation requirements.
In the event of an FCM’s insolvency, recovery may be limited to a pro rata share of segregated funds available. It is possible
that the recovered amount could be less than the total of cash and other property deposited. The insolvency of an FCM could result
in the complete loss of UNL’s assets posted with that FCM; however, the majority of UNL’s assets are held in investments
in Treasuries, cash and/or cash equivalents with UNL’s custodian and would not be impacted by the insolvency of an FCM.
The failure or insolvency of UNL’s custodian, however, could result in a substantial loss of UNL’s assets.
USCF invests a portion of UNL’s cash in money market
funds that seek to maintain a stable per share NAV. UNL is exposed to any risk of loss associated with an investment in such
money market funds. As of June 30, 2020 and December 31, 2019, UNL held investments in money market funds
in the amounts of $3,440,346 and $500,000, respectively. UNL also holds cash deposits with its custodian. Pursuant
to a written agreement with BNY Mellon, uninvested overnight cash balances are swept to offshore branches of U.S. regulated and
domiciled banks located in Grand Cayman, Cayman Islands; which are subject to U.S. regulation and regulatory oversight.
As of June 30, 2020 and December 31, 2019, UNL held cash deposits and investments in Treasuries in the amounts
of $1,239,254 and, $3,294,705 respectively, with the custodian and FCMs. Some or all of these amounts may
be subject to loss should UNL’s custodian and/or FCMs cease operations.
For derivatives, risks arise from changes in the market value
of the contracts. Theoretically, UNL is exposed to market risk equal to the value of futures contracts purchased and unlimited
liability on such contracts sold short or that the value of the futures contract could fall below zero. As both a buyer and a
seller of options, UNL pays or receives a premium at the outset and then bears the risk of unfavorable changes in the price
of the contract underlying the option.
UNL’s policy is to continuously monitor its exposure
to market and counterparty risk through the use of a variety of financial, position and credit exposure reporting controls and
procedures. In addition, UNL has a policy of requiring review of the credit standing of each broker or counterparty with
which it conducts business.
The financial instruments held by UNL are reported in
its condensed statements of financial condition at market or fair value, or at carrying amounts that approximate fair value, because
of their highly liquid nature and short-term maturity.
NOTE 6 - FINANCIAL HIGHLIGHTS
The following table presents per share
performance data and other supplemental financial data for the three and six months ended June 30, 2020 and 2019
for the shareholders. This information has been derived from information presented in the condensed financial statements.
|
|
Three
months ended
June 30, 2020
|
|
|
Three
months ended
June 30, 2019
|
|
|
Six
months ended
June 30, 2020
|
|
|
Six
months ended
June 30, 2019
|
|
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
Per Share Operating Performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
7.63
|
|
|
$
|
10.50
|
|
|
$
|
8.43
|
|
|
$
|
10.26
|
|
Total income (loss)
|
|
|
(0.06
|
)
|
|
|
(1.32
|
)
|
|
|
(0.84
|
)
|
|
|
(1.10
|
)
|
Total expenses
|
|
|
(0.02
|
)
|
|
|
(0.07
|
)
|
|
|
(0.04
|
)
|
|
|
(0.05
|
)
|
Net increase
(decrease) in net asset value
|
|
|
(0.08
|
)
|
|
|
(1.39
|
)
|
|
|
(0.88
|
)
|
|
|
(1.15
|
)
|
Net asset value, end of period
|
|
$
|
7.55
|
|
|
$
|
9.11
|
|
|
$
|
7.55
|
|
|
$
|
9.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return
|
|
|
(1.05
|
)%
|
|
|
(13.24
|
)%
|
|
|
(10.44
|
)%
|
|
|
(11.21
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss)
|
|
|
(2.25
|
)%
|
|
|
(13.80
|
)%
|
|
|
(11.90
|
)%
|
|
|
(10.48
|
)%
|
Management
fees*
|
|
|
0.75
|
%
|
|
|
0.75
|
%
|
|
|
0.75
|
%
|
|
|
0.75
|
%
|
Total
expenses excluding management fees*
|
|
|
2.21
|
%
|
|
|
2.05
|
%
|
|
|
2.22
|
%
|
|
|
1.96
|
%
|
Expense
waived*
|
|
|
(2.01
|
)%
|
|
|
(0.45
|
)%
|
|
|
(2.04
|
)%
|
|
|
(1.81
|
)%
|
Net
expense excluding management fees*
|
|
|
0.20
|
%
|
|
|
0.58
|
%
|
|
|
0.18
|
%
|
|
|
0.15
|
%
|
Net income (loss)
|
|
|
(2.49
|
)%
|
|
|
(14.02
|
)%
|
|
|
12.36
|
%
|
|
|
(10.92
|
)%
|
Total returns are calculated based on
the change in value during the period. An individual shareholder’s total return and ratio may vary from the above total
returns and ratios based on the timing of contributions to and withdrawals from UNL.
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
UNL values its investments in accordance with Accounting
Standards Codification 820 – Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair
value measurement. The changes to past practice resulting from the application of ASC 820 relate to the definition of fair value,
the methods used to measure fair value, and the expanded disclosures about fair value measurement. ASC 820 establishes a fair
value hierarchy that distinguishes between: (1) market participant assumptions developed based on market data obtained from
sources independent of UNL (observable inputs) and (2) UNL’s own assumptions about market participant assumptions
developed based on the best information available under the circumstances (unobservable inputs). The three levels defined by the
ASC 820 hierarchy are as follows:
Level I – Quoted prices (unadjusted) in active markets
for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level II – Inputs other than quoted prices included within
Level I that are observable for the asset or liability, either directly or indirectly. Level II assets include the following:
quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities
in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs that
are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).
Level III – Unobservable pricing input at the measurement
date for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs
are not available.
In some instances, the inputs used to measure fair value might
fall within different levels of the fair value hierarchy. The level in the fair value hierarchy within which the fair value measurement
in its entirety falls shall be determined based on the lowest input level that is significant to the fair value measurement in
its entirety.
The following table summarizes the valuation of UNL's
securities at June 30, 2020 using the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
June 30, 2020
|
|
Total
|
|
|
Level
I
|
|
|
Level
II
|
|
|
Level
III
|
|
Short-Term Investments
|
|
$
|
4,339,265
|
|
|
$
|
4,339,265
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Exchange-Traded Futures Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Contracts
|
|
|
(157,130
|
)
|
|
|
(157,130
|
)
|
|
|
–
|
|
|
|
–
|
|
The following table summarizes the valuation of UNL's
securities at December 31, 2019 using the fair value hierarchy:
At
December 31, 2019
|
|
Total
|
|
|
Level
I
|
|
|
Level
II
|
|
|
Level
III
|
|
Short-Term Investments
|
|
$
|
3,289,117
|
|
|
$
|
3,289,117
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Exchange-Traded Futures Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Contracts
|
|
|
(435,678
|
)
|
|
|
(435,678
|
)
|
|
|
–
|
|
|
|
–
|
|
Effective January 1, 2009, UNL adopted the provisions
of Accounting Standards Codification 815 — Derivatives and Hedging, which require presentation of qualitative disclosures
about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts and gains and losses
on derivatives.
Fair Value of Derivative Instruments
|
|
|
|
|
|
|
|
|
Derivatives
not Accounted for as Hedging Instruments
|
|
Condensed
Statements of
Financial
Condition
Location
|
|
Fair
Value at
June 30, 2020
|
|
|
Fair
Value at
December 31, 2019
|
|
Futures - Commodity
Contracts
|
|
Assets
|
|
$
|
(157,130
|
)
|
|
$
|
(435,678
|
)
|
The Effect of Derivative Instruments on the Condensed
Statements of Operations
|
|
|
|
|
|
For
the six months ended
June 30, 2020
|
|
|
For
the six months ended
June 30, 2019
|
|
Derivatives
not Accounted for as
Hedging Instruments
|
|
Location
of Gain (Loss) on
Derivatives Recognized in
Income
|
|
Realized
gain
(Loss) on
Derivatives
Recognized in
Income
|
|
|
Change
in
Unrealized Gain
(Loss) on
Derivatives
Recognized in
Income
|
|
|
Realized
Gain
(Loss) in
Derivatives
Recognized in
Income
|
|
|
Change
in
Unrealized Gain
(Loss) on
Derivatives
Recognized in
Income
|
|
Futures - Commodity Contracts
|
|
Realized gain (loss) on closed positions
|
|
$
|
(693,179
|
)
|
|
|
|
|
|
$
|
(50,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on open positions
|
|
|
|
|
|
$
|
278,548
|
|
|
|
|
|
|
$
|
(493,923
|
)
|
|
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
In August 2018, the FASB issued Accounting Standards Update
(“ASU”) No. 2018-13, which changes certain fair value measurement disclosure requirements. The new ASU, in addition
to other modifications and additions, removes the requirement to disclose the amount and reasons for transfers between Level 1
and Level 2 of the fair value hierarchy, and the Funds’ policy for the timing of transfers between levels. The amendments
are effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within
those fiscal years. The Fund has evaluated the implications of certain provisions of the ASU and has determined that there will
be no material impacts to the financial statements.
NOTE 9 - SUBSEQUENT EVENTS
UNL has performed an evaluation of subsequent events through
the date the condensed financial statements were issued. This evaluation did not result in any subsequent events that necessitated
disclosures and/or adjustments other than the following:
USCF was named as a defendant in a putative stockholder class
action on July 10, 2020 by Momo Wang, individually and on behalf of others similarly situated, against defendants United States
Oil Fund, LP (“USO”), USCF, John P. Love, Stuart P. Crumbaugh, Nicholas D. Gerber, Andrew F. Ngim, Robert L. Nguyen,
Peter M. Robinson, Gordon L. Ellis, Malcolm R. Fobes III, ABN Amro, BNP Paribas Securities Corp., Citadel Securities LLC, Citigroup
Global Market Inc., Credit Suisse Securities USA LLC, Deutsche Bank Securities Inc., Goldman Sachs & Company, JP Morgan Securities
Inc., Merrill Lynch Professional Clearing Corp., Morgan Stanley & Company Inc., Nomura Securities International Inc., RBC Capital
Markets LLC, SG Americas Securities LLC, UBS Securities LLC, and Virtu Financial BD LLC.
The putative class action complaint alleged that beginning in
March 2020, in connection with USO's registration and issuance of additional USO shares, defendants failed to disclose to investors
certain extraordinary market conditions and the attendant risks that caused the demand for oil to fall precipitously, including
the COVID-19 global pandemic and the Saudi Arabia-Russia oil price war. The plaintiff alleged that defendants possessed inside
knowledge about the consequences of these converging adverse events on USO and did not sufficiently acknowledge them until late
April and May 2020, after USO suffered losses and was allegedly forced to abandon its investment strategy. The putative stockholder
class action was pending in the U.S. District Court for the Northern District of California as Case No. 3:20-cv-4596 but was voluntarily
dismissed effective August 4, 2020.
USCF was named as a defendant in a purported stockholder class
action on July 31, 2020 by Moshe Ephrati, individually and on behalf of others similarly situated, against defendants USCF, USO,
John P. Love and Stuart P. Crumbaugh. The stockholder class action is pending in the U.S. District Court for the Southern District
of New York as Civil Action No. 1:20-cv-06010.
The putative class action complaint alleges that beginning in
March 2020, in connection with USO's registration and issuance of additional USO shares, defendants failed to disclose to investors
certain extraordinary market conditions and the attendant risks that caused the demand for oil to fall precipitously, including
the COVID-19 global pandemic and the Saudi Arabia-Russia oil price war. Plaintiff alleges that defendants possessed inside knowledge
about the consequences of these converging adverse events on USO and did not sufficiently acknowledge them until late April and
May 2020, after USO suffered losses and was allegedly forced to abandon its investment strategy. The complaint seeks to certify
a class and award the class compensatory damages at an amount to be determined at trial. Since this stockholder class action makes
the same substantive claims made against the same defendants in the stockholder class action commenced by Robert Lucas on June
19, 2020, which is summarized above in “Part II. Other Information - Item 1. Legal Proceedings,” and is also pending
in the U.S. District Court for the Southern District of New York as Civil Action No. 1:20-cv-04740, it is expected that these two
stockholder class actions will be consolidated. The defendants intend to vigorously contest the claims and move for their dismissal.
USCF may have additional actions filed against it based on
similar allegations as those that were made in the putative class actions that have been reported.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with
the condensed financial statements and the notes thereto of the United States 12 Month Natural Gas Fund, LP (“UNL”)
included elsewhere in this quarterly report on Form 10-Q:
Forward-Looking Information
This quarterly report on Form 10-Q, including this “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding
the plans and objectives of management for future operations. This information may involve known and unknown risks, uncertainties
and other factors that may cause UNL’s actual results, performance or achievements to be materially different from future
results, performance or achievements expressed or implied by any forward- looking statements. UNL believes these factors include,
but are not limited to, the following: changes in inflation in the United States; movements in U.S. and foreign currencies; significant
market volatility in the crude oil markets and futures markets attributable to the COVID-19 pandemic, disputes among oil-producing
countries over the potential limits on the production of crude oil, a corresponding collapse in demand for crude oil and a lack
of on-land storage for crude oil.; uncertainties associated with the impact from the coronavirus (COVID-19) pandemic, including:
its impact on the global and U.S. capital markets and the global and U.S. economy, the length and duration of the COVID-19 outbreak
in the United States as well as worldwide and the magnitude of the economic impact of that outbreak, the effect of the COVID-19
pandemic on USO’s business prospects, including its ability to achieve its objectives, and the effect of the disruptions
caused by the COVID-19 pandemic on our ability to continue to effectively manage our business. Forward-looking statements, which
involve assumptions and describe UNL’s future plans, strategies and expectations, are generally identifiable by use of the
words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,”
“believe,” “intend” or “project,” the negative of these words, other variations on these words
or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and UNL cannot assure
investors that the projections included in these forward-looking statements will come to pass. UNL’s actual results could
differ materially from those expressed or implied by the forward-looking statements as a result of various factors.
UNL has based the forward-looking statements included in this
quarterly report on Form 10-Q on information available to it on the date of this quarterly report on Form 10-Q, and
UNL assumes no obligation to update any such forward-looking statements. Although UNL undertakes no obligation to revise or update
any forward-looking statements, whether as a result of new information, future events or otherwise, investors are advised to consult
any additional disclosures that UNL may make directly to them or through reports that UNL files in the future with the U.S. Securities
and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q
and current reports on Form 8-K.
Introduction
UNL, a Delaware limited partnership, is a commodity pool that
issues shares that may be purchased and sold on the NYSE Arca, Inc. (the “NYSE Arca”). The investment objective
of UNL is for the daily changes in percentage terms of its shares’ per share net asset value (“NAV”) to reflect
the daily changes in percentage terms of the spot price of natural gas delivered at the Henry Hub, Louisiana, as measured by the
daily changes in the average of the prices of 12 futures contracts for natural gas traded on the New York Mercantile Exchange
(the “NYMEX”), consisting of the near month contract to expire and the contracts for the following 11 months for a
total of 12 consecutive months’ contracts, except when the near month contract is within two weeks of expiration, in which
case it will be measured by the futures contract that is the next month contract to expire and the contracts for the following
11 consecutive months (the “Benchmark Futures Contracts”), plus interest earned on UNL’s collateral holdings,
less UNL’s expenses. “Near month contract” means the next contract traded on the NYMEX due to expire. “Next
month contract” means the first contract traded on the NYMEX due to expire after the near month contract. When calculating
the daily movement of the average price of the 12 contracts, each contract month is equally weighted. UNL seeks to achieve its
investment objective by investing so that the average daily percentage change in UNL’s NAV for any period of 30 successive
valuation days will be within plus/minus ten percent (10%) of the average daily percentage change in the price of the Benchmark
Futures Contracts over the same period.
UNL’s investment objective is not for its NAV
or market price of shares to equal, in dollar terms, the spot price of natural gas or any particular futures contract based on
natural gas, nor is UNL’s investment objective for the percentage change in its NAV to reflect the percentage change
of the price of any particular futures contract as measured over a time period greater than one day. The general partner
of UNL, United States Commodity Funds LLC (“USCF”), believes that it is not practical to manage the portfolio to achieve
such an investment goal when investing in Natural Gas Futures Contracts (as defined below) and Other Natural Gas-Related Investments
(as defined below).
UNL invests primarily in natural gas futures contracts that
are traded on the NYMEX, ICE Futures Exchange (“ICE Futures”) or other U.S. and foreign exchanges (collectively,
“Natural Gas Futures Contracts”) and to a lesser extent, in order to comply with regulatory requirements or in view
of market conditions, other natural gas-related investments such as cash-settled options on Natural Gas Futures Contracts, forward
contracts for natural gas, cleared swap contracts and non-exchange traded over-the-counter (“OTC”) swaps that are
based on the price of natural gas, crude oil and other petroleum-based fuels and indices based on the foregoing (collectively,
“Other Natural Gas-Related Investments”). Market conditions that USCF currently anticipates could cause UNL to invest
in Other Natural Gas-Related Investments include those allowing UNL to obtain greater liquidity or to execute transactions with
more favorable pricing. For convenience and unless otherwise specified, Natural Gas Futures Contracts and Other Natural Gas-Related
Investments collectively are referred to as “Natural Gas Interests” in this quarterly report on Form 10-Q.
USCF believes that market arbitrage opportunities will cause
daily changes in UNL’s share price on the NYSE Arca on a percentage basis to closely track daily changes in UNL’s
per share NAV on a percentage basis. USCF further believes that daily changes in 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 UNL’s 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 UNL’s collateral
holdings, less UNL’s expenses.
UNL seeks to achieve its investment objective by investing
so that the average daily percentage change in UNL’s NAV for any period of 30 successive valuation days will be within plus/minus
ten percent (10%) of the average daily percentage change in the price of the Benchmark Futures Contracts over the same period.
Regulatory Disclosure
Accountability Levels, Position Limits and Price Fluctuation
Limits. Designated contract markets (“DCMs”), such as the NYMEX and ICE Futures, have established accountability
levels and position limits on the maximum net long or net short futures contracts in commodity interests that any person or group
of persons under common trading control (other than as a hedge, which an investment by UNL is not) may hold, own or control. These
levels and position limits apply to the futures contracts that UNL invests in to meet its investment objective. In addition to
accountability levels and position limits, the NYMEX and ICE Futures also set daily price fluctuation limits on futures contracts.
The daily price fluctuation limit establishes the maximum amount that the price of a futures contract may vary either up or down
from the previous day’s settlement price. Once the daily price fluctuation limit has been reached in a particular futures
contract, no trades may be made at a price beyond that limit.
The accountability levels for the Benchmark Futures Contracts
and other Natural Gas Futures Contracts traded on U.S.-based futures exchanges such as the NYMEX are not a fixed ceiling, but
rather a threshold above which the NYMEX may exercise greater scrutiny and control over an investor’s positions. The current
accountability level for investments for any one-month in the Benchmark Futures Contracts is 6,000 net contracts. In addition,
the NYMEX imposes an accountability levels for all months of 12,000 net futures contracts for investments in futures contracts
for natural gas. In addition, the ICE Futures maintains the same accountability levels, position limits and monitoring authority
for its natural gas contracts as the NYMEX. If UNL and the Related Public Funds exceed these accountability levels for investments
in the futures contract for natural gas, the NYMEX and ICE Futures will monitor UNL’s and the Related Public Funds’
exposure and may ask for further information on their activities, including the total size of all positions, investment and trading
strategy, and the extent of liquidity resources of UNL and the Related Public Funds. If deemed necessary by the NYMEX and/or ICE
Futures, UNL and the Related Public Funds could be ordered to reduce their aggregate net futures contracts back to the accountability
level. As of June 30, 2020, UNL held 188 Natural Gas Futures NG contracts traded on the NYMEX and did not hold any ICE Natural
Gas Futures contracts. For the six months ended June 30, 2020, UNL did not exceed accountability levels imposed by the NYMEX
and ICE Futures, however, the aggregated total of certain of the Related Public Funds did exceed the accountability levels. No
action was taken by NYMEX and UNL did not reduce the number of Natural Gas Futures Contracts held as a result.
Position limits differ from accountability levels in that they
represent fixed limits on the maximum number of futures contracts that any person may hold and cannot allow such limits to be
exceeded without express CFTC authority to do so. In addition to accountability levels and position limits that may apply at any
time, the NYMEX and ICE Futures impose position limits on contracts held in the last few days of trading in the near month contract
to expire. It is unlikely that UNL will run up against such position limits because UNL’s investment strategy is to close
out its positions and “roll” from the near month contract to expire and the eleven following months to the next month
contract to expire and the eleven following months during one day each month. For the six months ended June 30, 2020, UNL
did not exceed any position limits imposed by the NYMEX and the ICE Futures.
The regulation of commodity interest trading in the United
States and other countries is an evolving area of the law. The various statements made in this summary are subject to modification
by legislative action and changes in the rules and regulations of the SEC, Financial Industry Regulatory Authority (“FINRA”),
CFTC, NFA, the futures exchanges, clearing organizations and other regulatory bodies.
Futures Contracts and Position Limits
The CFTC is generally prohibited by statute from regulating
trading on non-U.S. futures exchanges and markets. The CFTC, however, has adopted regulations relating to the marketing of non-U.S.
futures contracts in the United States. These regulations permit certain contracts on non-U.S. exchanges to be offered and sold
in the United States.
The CFTC has proposed to adopt limits on speculative positions
in 25 physical commodity futures and option contracts as well as swaps that are economically equivalent to such contracts in the
agriculture, energy and metals markets, which rules were recently re- proposed in January 2020 (the “Position
Limit Rules”). The Position Limit Rules would, among other things: identify which contracts are subject to speculative
position limits; set thresholds that restrict the size of speculative positions that a person may hold in the spot month, other
individual months, and all months combined; create an exemption for positions that constitute bona fide hedging transactions;
impose responsibilities on DCMs and swap execution facilities (“SEFs”) to establish position limits or, in some cases,
position accountability rules; and apply to both futures and swaps across four relevant venues: OTC, DCMs, SEFs as well as certain
non-U.S. located platforms. The CFTC’s first attempt at finalizing the Position Limit Rules, in 2011, was successfully challenged
by market participants in 2012 and, since then, the CFTC has re-proposed them and solicited comments from market participants
multiple times. At this time, it is unclear how the Position Limit Rules may affect UNL, but the effect may be substantial
and adverse. By way of example, the Position Limit Rules may negatively impact the ability of UNL to meet its investment
objectives through limits that may inhibit USCF’s ability to sell additional Creation Baskets of UNL.
Until such time as the Position Limit Rules are adopted,
the regulatory architecture in effect prior to the adoption of the Position Limit Rules will govern transactions in commodities
and related derivatives. Under that system, the CFTC enforces federal limits on speculation in nine agricultural products (e.g.,
corn, wheat and soy), while futures exchanges establish and enforce position limits and accountability levels for other agricultural
products and certain energy products (e.g., oil and natural gas). As a result, UNL may be limited with respect to the size of
its investments in any commodities subject to these limits.
Under existing and recently adopted CFTC regulations, for the
purpose of position limits, a market participant is generally required, subject to certain narrow exceptions, to aggregate all
positions for which that participant controls the trading decisions with all positions for which that participant has a 10 percent
or greater ownership interest in an account or position, as well as the positions of two or more persons acting pursuant to an
express or implied agreement or understanding with that participant (the “Aggregation Rules”). The Aggregation Rules will
also apply with respect to the Position Limit Rules if and when such Position Limit Rules are adopted.
OTC Swaps
In October 2015, the Office of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, the FDIC, the Farm Credit Administration, and the Federal Housing
Finance Agency (each an “Agency” and, collectively, the “Agencies”) jointly adopted final rules to
establish minimum margin and capital requirements for registered swap dealers, major swap participants, security-based swap dealers,
and major security-based swap participants (“Swap Entities”) that are subject to the jurisdiction of one of the Agencies
(such entities, “Covered Swap Entities”, and the joint final rules, the “Final Margin Rules”).
The Final Margin Rules will subject non-cleared swaps
and non-cleared security-based swaps between Covered Swap Entities and Swap Entities, and between Covered Swap Entities and financial
end users that have material swaps exposure (i.e., an average daily aggregate notional of $8 billion or more in non-cleared swaps
calculated in accordance with the Final Margin Rules), to a mandatory two-way minimum initial margin requirement. The minimum
amount of the initial margin required to be posted or collected would be either the amount calculated by the Covered Swap Entity
using a standardized schedule set forth as an appendix to the Final Margin Rules, which provides the gross initial margin (as
a percentage of total notional exposure) for certain asset classes, or an internal margin model of the Covered Swap Entity conforming
to the requirements of the Final Margin Rules that is approved by the Agency having jurisdiction over the particular Covered
Swap Entity. The Final Margin Rules specify the types of collateral that may be posted or collected as initial margin for
non-cleared swaps and non-cleared security-based swaps with financial end users (generally cash, certain government, government-sponsored
enterprise securities, certain liquid debt, certain equity securities, certain eligible publicly traded debt, and gold); and sets
forth haircuts for certain collateral asset classes.
The Final Margin Rules require minimum variation margin
to be exchanged daily for non-cleared swaps and non-cleared security- based swaps between Covered Swap Entities and Swap Entities
and between Covered Swap Entities and all financial end-users (without regard to the swaps exposure of the particular financial
end-user). The minimum variation margin amount is the daily mark- to-market change in the value of the swap to the Covered Swap
Entity, taking into account variation margin previously posted or collected. For non-cleared swaps and security-based swaps between
Covered Swap Entities and financial end-users, variation margin may be posted or collected in cash or non-cash collateral that
is considered eligible for initial margin purposes. Variation margin is not subject to segregation with an independent, third-party
custodian, and may, if permitted by contract, be rehypothecated.
The initial margin requirements of the Final Margin Rules are
being phased in over time, and the variation margin requirements of the Final Margin Rules are currently in effect. The Fund
is not a Covered Swap Entity under the Final Margin Rules, but it is a financial end-user. Accordingly, the Fund is currently
subject to the variation margin requirements of the Final Margin Rules. However, the Fund does not have material swaps exposure
and, accordingly, the Fund will not be subject to the initial margin requirements of the Final Margin Rules.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “Dodd-Frank Act”) required the CFTC and the SEC to adopt their own margin rules to apply to a limited number
of registered swap dealers, security-based swap dealers, major swap participants, and major security-based swap participants that
are not subject to the jurisdiction of one of the Agencies. On December 16, 2015 the CFTC finalized its margin rules, which
are substantially the same as the Final Margin Rules and have the same implementation timeline. The SEC adopted margin rules for
security-based swap dealers and major security-based swap participants on June 21, 2019. The SEC’s margin rules are
generally aligned with the Final Margin Rules and the CFTC’s margin rules, but they differ in a few key respects relating
to timing for compliance and the manner in which initial margin must be segregated. UNL does not currently engage in security-based
swap transactions and, therefore, the SEC’s margin rules are not expected to apply to UNL.
Mandatory Trading and Clearing of Swaps
CFTC regulations require that certain swap transactions be
executed on organized exchanges or “swap execution facilities” and cleared through regulated clearing organizations
(“derivative clearing organizations” (“DCOs”)), if the CFTC mandates the central clearing of a particular
class of swap and such swap is “made available to trade” on a swap execution facility. Currently, swap dealers, major
swap participants, commodity pools, certain private funds and entities predominantly engaged in activities that are financial
in nature are required to execute on a swap execution facility, and clear, certain interest rate swaps and index-based credit
default swaps. As a result, if UNL enters into an interest rate or index-based credit default swap that is subject to these requirements,
such swap will be required to be executed on a swap execution facility and centrally cleared. Mandatory clearing and “made
available to trade” determinations with respect to additional types of swaps are expected in the future, and, when finalized,
could require UNL to electronically execute and centrally clear certain OTC instruments presently entered into and settled on
a bi-lateral basis. If a swap is required to be cleared, initial and variation margin requirements are set by the relevant clearing
organization, subject to certain regulatory requirements and guidelines. Additional margin may be required and held by UNL's FCM.
Other Requirements for Swaps
In addition to the margin requirements described above, swaps
that are not required to be cleared and executed on a SEF but that are executed bilaterally are also subject to various requirements
pursuant to CFTC regulations, including, among other things, reporting and recordkeeping requirements and, depending on the status
of the counterparties, trading documentation requirements and dispute resolution requirements.
Derivatives Regulations in Non-U.S. Jurisdictions
In addition to U.S. laws and regulations, UNL may be subject
to non-U.S. derivatives laws and regulations if it engages in futures and/or swap transactions with non-U.S. persons. For example,
UNL may be impacted by European laws and regulations to the extent that it engages in futures transactions on European exchanges
or derivatives transactions with European entities. Other jurisdictions impose requirements applicable to futures and derivatives
that are similar to those imposed by the U.S., including position limits, margin, clearing and trade execution requirements.
Money Market Funds
The SEC adopted amendments to Rule 2a-7 under the Investment
Company Act of 1940, as amended ("1940 Act") which became effective in 2016, to reform money market funds (“MMFs”).
While the rule applies only to MMFs, it may indirectly affect institutional investors such as UNL. A portion of UNL's assets
that are not used for margin or collateral in the Futures Contracts currently are invested in government MMFs. UNL does not hold
any non-government MMFs and does not anticipate investing in any non- government MMFs. However, if UNL invests in other types
of MMFs besides government MMFs in the future, UNL could be negatively impacted by investing in an MMF that does not maintain
a stable $1.00 NAV or that has the potential to impose redemption fees and gates (temporary suspension of redemptions).
Although such government money market funds seek to preserve
the value of an investment at $1.00 per share, there is no guarantee that they will be able to do so and UNL may lose money by
investing in a government money market fund. An investment in a government money market fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation, referred to herein as the FDIC, or any other government agency. The share price of a government
money market fund can fall below the $1.00 share price. UNL cannot rely on or expect a government money market fund’s adviser
or its affiliates to enter into support agreements or take other actions to maintain the government money market fund’s
$1.00 share price. The credit quality of a government money market fund’s holdings can change rapidly in certain markets,
and the default of a single holding could have an adverse impact on the government money market fund’s share price. Due
to fluctuations in interest rates, the market value of securities held by a government money market fund may vary. A government
money market fund’s share price can also be negatively affected during periods of high redemption pressures and/or illiquid
markets.
Price Movements
Natural gas futures prices were volatile during the six months
ended June 30, 2020. The average price of the Benchmark Futures Contracts started the period at $2.330 per million British
thermal shares (“MMBtu”). The high of the period was on May 5, 2020 when the average price of the Benchmark Futures
Contracts reached $2.648 per MMBtu. The average low price of the period was on February 28, 2020 when the average price of
the Benchmark Futures Contracts dropped to $2.050 per MMBtu. The period ended with the average price of the Benchmark Futures
Contracts at $2.404 per MMBtu, an increase of approximately 3.18% over the period. UNL’s per share NAV began the period at
$8.43 and ended the period at $7.55 on June 30, 2020, a decrease of approximately (10.44)% over the period. The average Benchmark
Futures Contracts prices listed above began with the February 2020 to January 2021 contracts and ended with the May 2020
to March 2021 contracts. The increase of approximately 3.18% on the average price of the Benchmark Futures Contracts listed
above is a hypothetical return only and could not actually be achieved by an investor holding Futures Contracts. An investment
in Futures Contracts would need to be rolled forward during the time period described in order to simulate such a result. Furthermore,
the change in the nominal price of these differing Futures Contracts, measured from the start of the period to the end of the
period, does not represent the actual benchmark results that UNL seeks to track, which are more fully described below in the section
titled “Tracking UNL's Benchmark.”
During the six months ended June 30, 2020, the natural
gas futures market experienced states of both contango and backwardation. When the market is in a state of contango, the price
near month natural gas futures contract is lower than the price of the next month natural gas futures contract, or contracts further
away from expiration. During periods of backwardation the price of the near month natural gas futures contract is higher than
the price of the next month natural gas futures contract, or contracts further away from expiration. For a discussion of the impact
of backwardation and contango on total returns, see “Term Structure of Natural Gas Futures Prices and the Impact on Total
Returns”
Valuation of Natural Gas Futures Contracts and the Computation
of the Per Share NAV
The per share NAV of UNL’s shares is calculated once
each NYSE Arca trading day. The per share NAV for a particular trading day is released after 4:00 p.m. New York time. Trading
during the core trading session on the NYSE Arca typically closes at 4:00 p.m. New York time. UNL’s administrator uses
the NYMEX closing price (determined at the earlier of the close of the NYMEX or 2:30 p.m. New York time) for the contracts
held on the NYMEX, but calculates or determines the value of all other UNL investments, including cleared swaps or other Futures
Contracts, as of the earlier of the close of the NYSE Arca or 4:00 p.m. New York time.
Results of Operations and the Natural Gas Market
Results of Operations. On November 18, 2009, UNL
listed its shares on the NYSE Arca under the ticker symbol “UNL.” On that day, UNL established its initial offering
price at $50.00 per share and issued 200,000 shares to the initial Authorized Participant in exchange for $10,000,000 in cash.
As of June 30, 2020, UNL had issued 5,800,000 shares,
600,000 of which were outstanding. As of June 30, 2020, there were 24,200,000 shares registered but not yet issued.
More shares may have been issued by UNL than are outstanding
due to the redemption of shares. Unlike funds that are registered under the 1940 Act, shares that have been redeemed by UNL cannot
be resold by UNL. As a result, UNL contemplates that additional offerings of its shares will be registered with the SEC in the
future in anticipation of additional issuances and redemptions.
As of June 30, 2020, UNL had the following Authorized
Participants: Citadel Securities LLC, Citigroup Global Markets Inc., Credit Suisse Securities USA LLC, JP Morgan Securities Inc.,
Merrill Lynch Professional Clearing Corp., Morgan Stanley & Co. Inc., Nomura Securities International Inc., RBC Capital
Markets LLC, SG Americas Securities LLC and Virtu Financial BD LLC.
For the Six Months Ended June 30, 2020
Compared to the Six Months Ended June 30, 2019
|
|
Six
months ended
June 30, 2020
|
|
|
Six
months ended
June 30, 2019
|
|
Average daily total net assets
|
|
$
|
3,322,639
|
|
|
$
|
4,685,340
|
|
Dividend and interest income earned on Treasuries,
cash and/or cash equivalents
|
|
$
|
18,458
|
|
|
$
|
52,963
|
|
Annualized yield based on average daily total net assets
|
|
|
1.11
|
%
|
|
|
2.28
|
%
|
Management fee
|
|
$
|
12,392
|
|
|
$
|
17,426
|
|
Total fees and other expenses excluding management
fees
|
|
$
|
36,628
|
|
|
$
|
45,600
|
|
Total amount of the expense waiver
|
|
$
|
33,705
|
|
|
$
|
42,114
|
|
Expenses before the allowance of the expense waiver
|
|
$
|
49,020
|
|
|
$
|
63,026
|
|
Expenses after the allowance of the expense waiver
|
|
$
|
15,315
|
|
|
$
|
20,912
|
|
Fees and expenses related the registration or offering
of additional shares
|
|
$
|
–
|
|
|
$
|
–
|
|
Total commissions accrued to brokers
|
|
$
|
521
|
|
|
$
|
636
|
|
Total commissions as annualized percentage of
average total net assets
|
|
|
0.03
|
%
|
|
|
0.03
|
%
|
Commissions accrued as a result of rebalancing
|
|
$
|
358
|
|
|
$
|
538
|
|
Percentage of commissions accrued as a result of rebalancing
|
|
|
68.71
|
%
|
|
|
84.59
|
%
|
Commissions accrued as a result of creation and redemption
activity
|
|
$
|
163
|
|
|
$
|
98
|
|
Percentage of commissions accrued as a result of creation
and redemption activity
|
|
|
31.29
|
%
|
|
|
15.41
|
%
|
Portfolio Expenses. UNL’s expenses consist of
investment management fees, brokerage fees and commissions, certain offering costs, licensing fees, registration fees, the fees
and expenses of the independent directors of USCF and expenses relating to tax accounting and reporting requirements. The management
fee that UNL pays to USCF is calculated as a percentage of the total net assets of UNL. The fee is accrued daily and paid
monthly.
Average interest rates earned on short-term investments held
by UNL, including cash, cash equivalents and Treasuries, were lower during the six months ended June 30, 2020,
compared to the six months ended June 30, 2019. As a result, the amount of income earned by UNL as a
percentage of average daily total net assets was lower during the six months ended June 30, 2020, compared
to the six months ended June 30, 2019.
The decrease in total fees and other expenses excluding management
fees for the six months ended June 30, 2020, compared to the six months ended June 30, 2019 was
due primarily to a decrease in total commissions accrued to brokers and expenses related to the registration or offering of additional
shares.
The decrease in total commissions accrued to brokers for the six
months ended June 30, 2020, compared to the six months ended June 30, 2019, was due primarily to a lower
number of Natural Gas Futures Contracts being held and traded.
For the Three Months Ended June 30, 2020
Compared to the Three Months Ended June 30, 2019
|
|
Three months ended
June 30, 2020
|
|
|
Three months ended
June 30, 2019
|
|
Average daily total net assets
|
|
$
|
3,538,221
|
|
|
$
|
4,454,673
|
|
Dividend and interest income earned on Treasuries, cash and/or cash equivalents
|
|
$
|
6,407
|
|
|
$
|
25,425
|
|
Annualized yield based on average daily total net assets
|
|
|
0.73
|
%
|
|
|
2.29
|
%
|
Management fee
|
|
$
|
6,598
|
|
|
$
|
8,330
|
|
Total fees and other expenses excluding management fees
|
|
$
|
19,446
|
|
|
$
|
22,803
|
|
Total amount of the expense waiver
|
|
$
|
17,683
|
|
|
$
|
21,137
|
|
Expenses before the allowance of the expense waiver
|
|
$
|
26,044
|
|
|
$
|
31,133
|
|
Expenses after the allowance of the expense waiver
|
|
$
|
8,361
|
|
|
$
|
9,996
|
|
Fees and expenses related the registration or offering of additional shares
|
|
$
|
–
|
|
|
$
|
–
|
|
Total commissions accrued to brokers
|
|
$
|
390
|
|
|
$
|
264
|
|
Total commissions as annualized percentage of average total net assets
|
|
|
0.04
|
%
|
|
|
0.02
|
%
|
Commissions accrued as a result of rebalancing
|
|
$
|
94
|
|
|
$
|
264
|
|
Percentage of commissions accrued as a result of rebalancing
|
|
|
24.10
|
%
|
|
|
100.00
|
%
|
Commissions accrued as a result of creation and redemption activity
|
|
$
|
296
|
|
|
$
|
–
|
|
Percentage of commissions accrued as a result of creation and redemption activity
|
|
|
75.90
|
%
|
|
|
–%
|
|
Portfolio Expenses. UNL’s expenses consist of
investment management fees, brokerage fees and commissions, certain offering costs, licensing fees, registration fees, the fees
and expenses of the independent directors of USCF and expenses relating to tax accounting and reporting requirements. The management
fee that UNL pays to USCF is calculated as a percentage of the total net assets of UNL. The fee is accrued daily and paid
monthly.
Average interest rates earned on short-term investments held
by UNL, including cash, cash equivalents and Treasuries, were lower during the three months ended June 30,
2020, compared to the three months ended June 30, 2019. As a result, the amount of income earned by UNL
as a percentage of average daily total net assets was lower during the three months ended June 30, 2020, compared
to the three months ended June 30, 2019.
The decrease in total fees and other expenses excluding management
fees for the three months ended June 30, 2020, compared to the three months ended June 30, 2019
was due primarily to an decrease in total commissions accrued to brokers and expenses related to the registration or offering
of additional shares.
The decrease in total commissions accrued to brokers for the three
months ended June 30, 2020, compared to the three months ended June 30, 2019, was due primarily
to a lower number of Natural Gas Futures Contracts being held and traded.
Tracking UNL's Benchmark
USCF seeks to manage UNL's portfolio such that changes in its
average daily per share NAV, on a percentage basis, closely track the daily changes in the average price of the Benchmark Futures
Contracts, also on a percentage basis. Specifically, USCF seeks to manage the portfolio such that over any rolling period of 30-valuation
days, the average daily change in UNL's per share NAV is within a range of 90% to 110% (0.9 to 1.1) of the average daily change
in the prices of the Benchmark Futures Contracts. As an example, if the average daily movement of the average of the prices of
the Benchmark Futures Contracts for a particular 30-valuation day time period was 0.50% per day, USCF would attempt to manage
the portfolio such that the average daily movement of the per share NAV during that same time period fell between 0.45% and 0.55%
(i.e., between 0.9 and 1.1 of the benchmark’s results). UNL's portfolio management goals do not include trying to make the
nominal price of UNL's per share NAV equal to the average of the nominal prices of the current Benchmark Futures Contracts or
the spot price for natural gas. USCF believes that it is not practical to manage the portfolio to achieve such an investment goal
when investing in Futures Contracts and Other Natural Gas-Related Investments.
For the 30-valuation days ended June 30, 2020, the simple
average daily change in the average of the prices of the Benchmark Futures Contracts was (0.219)%, while the simple average daily
change in the per share NAV of UNL over the same time period was (0.219)%. The average daily difference was 0.0% (or (0.0) basis
points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily movement of the average of the price the Benchmark
Futures Contracts, the average error in daily tracking by the per share NAV was (9.734)%, meaning that over this time period UNL’s
tracking error was within the plus or minus 10% range established as its benchmark tracking goal.
Since the commencement of the offering of UNL’s shares
to the public on November 18, 2009 to June 30, 2020, the simple average daily change in the average price of the Benchmark
Futures Contracts was (0.056)%, while the simple average daily change in the per share NAV of UNL over the same time period was
(0.057)%. The average daily difference was (0.001)% (or (0.1) basis points, where 1 basis point equals 1/100 of 1%). As a percentage
of the daily movement of the Benchmark Futures Contracts, the average error in daily tracking by the per share NAV was (0.104)%,
meaning that over this time period UNL’s tracking error was within the plus or minus 10% range established as its benchmark
tracking goal. The following two graphs demonstrate the correlation between the changes in UNL’s NAV and the changes in
the Benchmark Futures Contracts. The first graph exhibits the daily changes in the last 30 valuation days ended June 30,
2020 . The second graph measures monthly changes since March 31, 2015 through June 30, 2020.
*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
An alternative tracking measurement of the return performance
of UNL versus the return of its Benchmark Futures Contracts can be calculated by comparing the actual return of UNL, measured
by changes in its per share NAV, versus the expected changes in its per share NAV under the assumption that UNL’s returns
had been exactly the same as the daily changes in its Benchmark Futures Contracts.
For the six months ended June 30, 2020, the actual total
return of UNL as measured by changes in its per share NAV was (10.44)%. This is based on an initial per share NAV of $8.43 as
of December 31, 2019 and an ending per share NAV as of June 30, 2020 of $7.55. During this time period, UNL made no
distributions to its shareholders. However, if UNL’s daily changes in its per share NAV had instead exactly tracked the
changes in the daily total return of the Benchmark Futures Contracts, UNL would have had an estimated per share NAV of $7.53 as
of June 30, 2020, for a total return over the relevant time period of (10.68)%. The difference between the actual per share
NAV total return of UNL of (10.44)% and the expected total return based on the Benchmark Futures Contracts of (10.68)% was an error
over the time period of 0.24%, which is to say that UNL’s actual total return outperformed its benchmark by that percentage.
UNL incurs expenses primarily composed of the management fee, brokerage commissions for the buying and selling of futures contracts,
and other expenses. The impact of these expenses, offset by interest and dividend income, and net of positive or negative execution,
tends to cause daily changes in the per share NAV of UNL to track slightly lower or higher than daily changes in the price of
the Benchmark Futures Contracts.
By comparison, for the six months ended June 30, 2019,
the actual total return of UNL as measured by changes in its per share NAV was (11.21)%. This was based on an initial per share
NAV of $10.26 as of December 31, 2018 and an ending per share NAV as of June 30, 2019 of $9.11. During this time period,
UNL made no distributions to its shareholders. However, if UNL’s daily changes in its per share NAV had instead exactly
tracked the changes in the daily total return of the Benchmark Futures Contracts, UNL would have had an estimated per share NAV
of $9.05 as of June 30, 2019, for a total return over the relevant time period of (11.79)%. The difference between the actual
per share NAV total return of UNL of (11.21)% and the expected total return based on the Benchmark Futures Contracts of (11.79)%
was an error over the time period of 0.58%, which is to say that UNL’s actual total return outperformed its benchmark by
that percentage. UNL incurred expenses primarily composed of the management fee, brokerage commissions for the buying and selling
of futures contracts, and other expenses. The impact of these expenses, offset by interest and dividend income, and net of positive
or negative execution, tended to cause daily changes in the per share NAV of UNL to track slightly lower or higher than daily
changes in the price of the Benchmark Futures Contracts.
There are currently three factors that have impacted or are
most likely to impact UNL's ability to accurately track Benchmark Futures Contracts.
First, UNL may buy or sell its holdings in the then current
Benchmark Futures Contracts at a price other than the closing settlement price of that contract on the day during which UNL executes
the trade. In that case, UNL may pay a price that is higher, or lower, than that of the Benchmark Futures Contracts, which could
cause the changes in the daily per share NAV of UNL to either be too high or too low relative to the daily changes in the average
price of the Benchmark Futures Contracts. During the six months ended June 30, 2020, USCF attempted to minimize the effect
of these transactions by seeking to execute its purchase or sale of the Benchmark Futures Contracts at, or as close as possible
to, the end of the day settlement price. However, it may not always be possible for UNL to obtain the closing settlement price
and there is no assurance that failure to obtain the closing settlement price in the future will not adversely impact UNL's attempt
to track the Benchmark Futures Contracts.
Second, UNL incurs expenses primarily composed of the management
fee, brokerage commissions for the buying and selling of futures contracts, and other expenses. The impact of these expenses tends
to cause daily changes in the per share NAV of UNL to track slightly lower than daily changes in the price of the Benchmark Futures
Contracts. At the same time, UNL earns dividend and interest income on its cash, cash equivalents and Treasuries. UNL is not required
to distribute any portion of its income to its shareholders and did not make any distributions to shareholders during the six
months ended June 30, 2020. Interest payments, and any other income, were retained within the portfolio and added to UNL's
NAV. When this income exceeds the level of UNL's expenses for its management fee, brokerage commissions and other expenses (including
ongoing registration fees, licensing fees and the fees and expenses of the independent directors of USCF), UNL will realize a
net yield that will tend to cause daily changes in the per share NAV of UNL to track slightly higher than daily changes in the
average of the prices of the Benchmark Futures Contracts. If short-term interest rates rise above the current levels, the level
of deviation created by the yield would increase. Conversely, if short-term interest rates were to decline, the amount of error
created by the yield would decrease. When short-term yields drop to a level lower than the combined expenses of the management
fee and the brokerage commissions, then the tracking error becomes a negative number and would tend to cause the daily returns
of the per share NAV to underperform the daily returns of the Benchmark Futures Contracts. USCF anticipates that interest rates
may continue to stagnate over the near future near historical lows. It is anticipated that fees and expenses paid by UNL may be
higher than interest earned by UNL. As such, USCF anticipates that UNL could possibly underperform its benchmark so long as interest
earned is lower than the fees and expenses paid by UNL.
Third, UNL may hold Other Natural Gas-Related Investments in
its portfolio that may fail to closely track the Benchmark Futures Contracts' total return movements. In that case, the error
in tracking the Benchmark Futures Contracts could result in daily changes in the per share NAV of UNL that are either too high,
or too low, relative to the daily changes in the average price of the Benchmark Futures Contracts. During the six months ended
June 30, 2020, UNL did not hold any Other Natural Gas-Related Investments. If UNL increases in size, and due to its obligations
to comply with regulatory limits, UNL may invest in Other Natural Gas-Related Investments which may have the effect of increasing
transaction related expenses and may result in increased tracking error.
Term Structure of Natural Gas Futures Prices and the Impact
on Total Returns. Several factors determine the total return from investing in futures contracts. One factor arises from “rolling”
futures contracts that will expire at the end of the current month (the “near” or “front” month contract)
forward each month prior to expiration. For a strategy that entails holding the near month contract, the price relationship between
that futures contract and the next month futures contract will impact returns. For example, if the price of the near month futures
contract is higher than the next futures month contract (a situation referred to as “backwardation”), then absent
any other change, the price of a next month futures contract tends to rise in value as it becomes the near month futures contract
and approaches expiration. Conversely, if the price of a near month futures contract is lower than the next month futures contract
(a situation referred to as “contango”), then absent any other change, the price of a next month futures contract
tends to decline in value as it becomes the near month futures contract and approaches expiration.
As an example, assume that the price of natural gas for immediate
delivery, is $3 per MMBtu, and the value of a position in the near month futures contract is also $3. Over time, the price of
natural gas will fluctuate based on a number of market factors, including demand for natural gas relative to supply. The value
of the near month futures contract will likewise fluctuate in reaction to a number of market factors. If an investor seeks to
maintain a position in a near month futures contract and not take delivery of physical MMBtu of natural gas, the investor must
sell the current near month futures contract as it approaches expiration and invest in the next month futures contract. In order
to continue holding a position in the current near month futures contract, this “roll” forward of the futures contract
must be executed every month.
Contango and backwardation are natural market forces that have
impacted the total return on an investment in UNL’s shares during the past year relative to a hypothetical direct investment
in natural gas. In the future, it is likely that the relationship between the market price of UNL’s shares and changes in
the spot prices of natural gas will continue to be impacted by contango and backwardation. It is important to note that this comparison
ignores the potential costs associated with physically owning and storing natural gas, which could be substantial.
If the futures market is in backwardation, e.g., when the price
of the near month futures contract is higher than the price of the next month futures contract, the investor would buy a next
month futures contract for a lower price than the current near month futures contract. Assuming the price of the next month futures
contract was $2.94 per MMBtu, or 2% cheaper than the $3 near month futures contract, then, hypothetically, and assuming no other
changes (e.g., to either prevailing natural gas prices or the price relationship between the spot price, the near month contract
and the next month contract, and, ignoring the impact of commission costs and the income earned on cash and/or cash equivalents),
the value of the $2.94 next month futures contract would rise to $3 as it approaches expiration. In this example, the value of
an investment in the next month futures contract would tend to outperform the spot price of natural gas. As a result, it would
be possible for the new near month futures contract to rise 12% while the spot price of natural gas may have risen a lower amount,
e.g., only 10%. Similarly, the spot price of natural gas could have fallen 10% while the value of an investment in the futures
contract might have fallen another amount, e.g., only 8%. Over time, if backwardation remained constant, this difference between
the spot price and the futures contract price would continue to increase.
If the futures market is in contango, an investor would be
buying a next month futures contract for a higher price than the current near month futures contract. Again, assuming the near
month futures contract is $3 per MMBtu, the price of the next month futures contract might be $3.06 per MMBtu, or 2% more expensive
than the front month futures contract. Hypothetically, and assuming no other changes, the value of the $3.06 next month futures
contract would fall to $3 as it approaches expiration. In this example, the value of an investment in the second month would tend
to underperform the spot price of natural gas. As a result, it would be possible for the new near month futures contract to rise
only 10% while the spot price of natural gas may have risen a higher amount, e.g., 12%. Similarly, the spot price of natural gas
could have fallen 10% while the value of an investment in the second month futures contract might have fallen another amount,
e.g., 12%. Over time, if contango remained constant, this difference between the spot price and the futures contract price would
continue to increase.
The chart below compares the daily price of the near month
natural gas futures contract to the price of 13th month natural gas futures contract (i.e., a contract one year forward) over
the last 10 years. When the price of the near month futures contract is higher than the price of the 13th month futures contract,
the market would be described as being in backwardation. When the price of the near month futures contract is lower than the 13th
month futures contract, the market would be described as being in contango. Although the price of the near month futures contract
and the price of the 13th month futures contract tend to move together, it can be seen that at times the near month futures contract
prices are higher than the 13th month futures contract prices (backwardation) and, at other times, the near month futures contract
prices are lower than the 13th month futures contract prices (contango).
*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
An alternative way to view the same data is to subtract the
dollar price of the 13th month natural gas futures contract from the dollar price of the near month natural gas futures contract,
as shown in the chart below. When the difference is positive, the market is in backwardation. When the difference is negative,
the market is in contango. The natural gas market spent time in both backwardation and contango during the last ten years. The
chart below shows the results from subtracting the average dollar price of the near 12- month contracts from the near month price
for the 10-year period between June 30, 2010 and June 30, 2020. Investors will note that the natural gas market spent
time in both backwardation and contango.
*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
An investment in a portfolio that owned only the near month
natural gas futures contract would likely produce a different result than an investment in a portfolio that owned an equal number
of each of the near 12 months’ of natural gas futures contracts. Generally speaking, when the natural gas futures market
is in backwardation, a portfolio of only the near month natural gas futures contract may tend to have a higher total return than
a portfolio of 12 months’ of the natural gas futures contract. Conversely, if the natural gas futures market was in contango,
the portfolio containing only 12 months’ of natural gas futures contracts may tend to outperform the portfolio holding only
the near month natural gas futures contract.
Historically, the natural gas futures markets have experienced
periods of contango and backwardation. Because natural gas demand is seasonal, it is possible for the price of natural gas futures
contracts for delivery within one or two months to rapidly move from backwardation into contango and back again within the relatively
short period of time of less than one year. However, at the end of November 2014, global natural gas inventories grew rapidly
after two years of mild winters and the market was primarily in contango, with occasional periods of backwardation, particularly
in the severe winter months of 2018 and 2019, through June 30, 2020.
Periods of contango or backwardation do not materially impact
UNL’s investment objective of having the daily percentage changes in its per share NAV track the daily percentage changes
in the average of the prices of the Benchmark Futures Contracts since the impact of backwardation and contango tend to equally
impact the daily percentage changes in price of both UNL’s shares and the Benchmark Futures Contracts. It is impossible
to predict with any degree of certainty whether backwardation or contango will occur in the future. It is likely that both conditions
will occur during different periods.
Natural Gas Market. During the six months ended June 30,
2020, natural gas prices in the United States declined by 20.01%. Prices peaked in early January at $2.202 before falling
to $1.482 by late June. Natural gas prices ended the quarter at $1.751. Prices have averaged about $2.66 over the last three years.
During the first half of 2020, storage levels were persistently above and, at times, rising relative to prior year average and
five-year average levels. By June 30, 2020, the amount of natural gas in storage was 3,077 billion cubic feet, 30% above
2019 levels and 18% above the five year average.
Mitigation measures taken in the United States to slow the
spread of the COVID-19 pandemic led to a decline in natural gas consumption in the industrial sector and by other commercial users.
The Energy Information Administration (EIA) estimates that natural gas demand will decline by 3% in 2020. Simultaneously, the
EIA estimates that natural gas production will also decline by 3% in 2020. The fall in production is the result of reduced drilling
activity and shut-ins of crude oil wells where natural gas is a byproduct.
While natural gas prices declined steadily during the first
half of 2020, prices were not as impacted by the COVID-19 pandemic as other energy commodities. Lower prices were at least in
part due to the ongoing surplus of natural gas in storage and lower demand resulting from warm weather in the United States. Additionally,
crude oil and petroleum products are more sensitive to changes in commuter and air miles as well as manufacturing and industrial
production, all of which dropped dramatically during first half of 2020.
The 30-day annualized volatility of natural gas prices rose
notably from late February to late May of 2020 and averaged about 69% during the second quarter, considerably higher
than five-year average volatility of approximately 44%. However, natural gas price volatility during 2020 to date was not dramatically
higher than recent seasonal volatility peaks and was unusual only in that natural gas price volatility usually declines, rather
than rises, in spring months. Natural gas price volatility in 2020 never reached the extreme level that occurred during the 2018-2019
winter. Likewise, natural gas price volatility remained well below the levels of volatility seen in crude oil markets. While some
uncertainty in natural gas prices was likely a result of COVID-19 mitigation efforts, the effects from the COVID-19 pandemic were
more muted as compared to the impact on crude oil markets.
The ongoing surge in COVID-19 cases in the United States may
continue to add pressure to natural gas demand, and the full impact is indeterminate. The EIA expects natural gas inventories
to hit a record seasonal high in October of 2020, another potential headwind for prices in the near-term. However, these
headwinds could be outweighed by continued production declines over the next twelve months, which would be a bullish factor for
natural gas prices. Ultimately, the COVID-19 pandemic is likely to continue impacting both demand and supply and the ultimate
impact on natural gas prices remains uncertain at this time.
Natural Gas Price Movements in Comparison to Other Energy
Commodities and Investment Categories. USCF believes that investors frequently measure the degree to which prices or total
returns of one investment or asset class move up or down in value in concert with another investment or asset class. Statistically,
such a measure is usually done by measuring the correlation of the price movements of the two different investments or asset classes
over some period of time. The correlation is scaled between 1 and -1, where 1 indicates that the two investment options move up
or down in price or value together, known as “positive correlation,” and -1 indicates that they move in completely
opposite directions, known as “negative correlation.” A correlation of 0 would mean that the movements of the two
are neither positively nor negatively correlated, known as “non-correlation.” That is, the investment options sometimes
move up and down together and other times move in opposite directions.
For the ten-year time period between June 30, 2010 and
June 30, 2020, the table below compares the monthly movements of natural gas prices versus the monthly movements of the prices
of several other energy commodities, such as crude oil, diesel-heating oil, and unleaded gasoline, as well as several major non-commodity
investment asset classes, such as large cap U.S. equities, U.S. government bonds and global equities. It can be seen that over
this particular time period, the movement of natural gas on a monthly basis was neither strongly correlated nor inversely correlated
with the movements of large cap U.S. equities, U.S. Government bonds, global equities, crude oil, diesel-heating oil, or unleaded
gasoline.
*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
Correlation Matrix 10 Years
|
|
Large
Cap
US
Equities
(S&P 500)
|
|
|
US
Gov't
Bonds
(BEUSG4
Index)
|
|
|
Global
Equities
(FTSE World
Index)
|
|
|
Crude
Oil
|
|
|
Heating
Oil
|
|
|
Unleaded
Gasoline
|
|
|
Natural
Gas
|
|
Large Cap US Equities (S&P 500)
|
|
|
1.000
|
|
|
|
-0.421
|
|
|
|
0.966
|
|
|
|
0.459
|
|
|
|
0.360
|
|
|
|
0.538
|
|
|
|
0.212
|
|
US Gov't Bonds (BEUSG4 Index)
|
|
|
|
|
|
|
1.000
|
|
|
|
-0.401
|
|
|
|
-0.353
|
|
|
|
-0.370
|
|
|
|
-0.314
|
|
|
|
-0.088
|
|
Global Equities (FTSE World Index)
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.488
|
|
|
|
0.407
|
|
|
|
0.554
|
|
|
|
0.200
|
|
Crude Oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.776
|
|
|
|
0.732
|
|
|
|
0.046
|
|
Heating Oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.661
|
|
|
|
0.078
|
|
Unleaded Gasoline
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.142
|
|
Natural Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
Source: Bloomberg, NYMEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below covers a more recent, but much shorter,
range of dates than the above table. Over the one year period ended June 30, 2020, the movement of natural gas was
neither strongly correlated nor inversely correlated with U.S. government bonds, diesel heating oil, crude oil and unleaded
gasoline. The movement of natural gas was somewhat correlated with large cap U.S. equities and global equities.
*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
Correlation Matrix 1 Year
|
|
Large
Cap
US
Equities
(S&P 500)
|
|
|
US
Gov't
Bonds
(BEUSG4
Index)
|
|
|
Global
Equities
(FTSE World
Index)
|
|
|
Crude
Oil
|
|
|
Heating
Oil
|
|
|
Unleaded
Gasoline
|
|
|
Natural
Gas
|
|
Large Cap US Equities (S&P 500)
|
|
|
1.000
|
|
|
|
-0.595
|
|
|
|
0.993
|
|
|
|
0.509
|
|
|
|
0.316
|
|
|
|
0.778
|
|
|
|
0.375
|
|
US Gov't Bonds (BEUSG4 Index)
|
|
|
|
|
|
|
1.000
|
|
|
|
-0.637
|
|
|
|
-0.458
|
|
|
|
-0.547
|
|
|
|
-0.557
|
|
|
|
-0.185
|
|
Global Equities (FTSE World Index)
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.558
|
|
|
|
0.396
|
|
|
|
0.810
|
|
|
|
0.369
|
|
Crude Oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.885
|
|
|
|
0.879
|
|
|
|
-0.062
|
|
Heating Oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.691
|
|
|
|
-0.209
|
|
Unleaded Gasoline
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.184
|
|
Natural Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
Source: Bloomberg, NYMEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investors are cautioned that the historical price relationships
between natural gas and various other energy commodities, as well as other investment asset classes, as measured by correlation
may not be reliable predictors of future price movements and correlation results. The results pictured above would have been different
if a different range of dates had been selected. USCF believes that natural gas has historically not demonstrated a strong correlation
with equities or bonds over long periods of time. However, USCF also believes that in the future it is possible that natural gas
could have long term correlation results that indicate prices of natural gas more closely track the movements of equities or bonds.
In addition, USCF believes that, when measured over time periods shorter than ten years, there will always be some periods where
the correlation of natural gas to equities and bonds will be either more strongly positively correlated or more strongly negatively
correlated than the long term historical results suggest.
The correlations between natural gas, crude oil, diesel-heating
oil and gasoline are relevant because USCF endeavors to invest UNL’s assets in Natural Gas Futures Contracts and Other Natural
Gas-Related Investments so that daily changes in percentage terms in UNL’s per share NAV correlate as closely as possible
with daily changes in percentage terms in the average of the prices of the Benchmark Futures Contracts. If certain other fuel-based
commodity futures contracts do not closely correlate with the Natural Gas Futures Contracts, then their use could lead to greater
tracking error. As noted above, USCF also believes that the changes in percentage terms in the average of the prices of the Benchmark
Futures Contracts will closely correlate with changes in percentage terms in the spot price of natural gas.
Critical Accounting Policies
Preparation of the condensed financial statements and related
disclosures in compliance with accounting principles generally accepted in the United States of America requires the application
of appropriate accounting rules and guidance, as well as the use of estimates. UNL's application of these policies involves
judgments and actual results may differ from the estimates used.
USCF has evaluated the nature and types of estimates that it
makes in preparing UNL's condensed financial statements and related disclosures and has determined that the valuation of its investments,
which are not traded on a United States or internationally recognized futures exchange (such as forward contracts and OTC swaps)
involves a critical accounting policy. The values which are used by UNL for its Futures Contracts are provided by its commodity
broker who uses market prices when available, while OTC swaps are valued based on the present value of estimated future cash flows
that would be received from or paid to a third party in settlement of these derivative contracts prior to their delivery date
and valued on a daily basis. In addition, UNL estimates interest and dividend income on a daily basis using prevailing rates earned
on its cash and cash equivalents. These estimates are adjusted to the actual amount received on a monthly basis and the difference,
if any, is not considered material.
Liquidity and Capital Resources
UNL has not made, and does not anticipate making, use of borrowings
or other lines of credit to meet its obligations. UNL has met, and it is anticipated that UNL will continue to meet, its liquidity
needs in the normal course of business from the proceeds of the sale of its investments, or from the Treasuries, cash and/or cash
equivalents that it intends to hold at all times. UNL's liquidity needs include: redeeming shares, providing margin deposits for
its existing Futures Contracts or the purchase of additional Futures Contracts and posting collateral for its OTC swaps, if applicable,
and payment of its expenses, summarized below under “Contractual Obligations.”
UNL currently generates cash primarily from: (i) the sale
of baskets consisting of 50,000 shares (“Creation Baskets”) and (ii) income earned on Treasuries, cash and/or
cash equivalents. UNL has allocated substantially all of its net assets to trading in Natural Gas Interests. UNL invests in Natural
Gas Interests to the fullest extent possible without being leveraged or unable to satisfy its current or potential margin or collateral
obligations with respect to its investments in Futures Contracts and Other Natural Gas-Related Investments. A significant portion
of UNL's NAV is held in cash and cash equivalents that are used as margin and as collateral for its trading in Natural Gas Interests.
The balance of the assets is held in UNL's account at its custodian bank and in Treasuries at the FCM. Income received from UNL's
investments in money market funds and Treasuries is paid to UNL. During the six months ended June 30, 2020, UNL's expenses,
pre expense waiver, exceeded the income UNL earned and the cash earned from the sale of Creation Baskets and Redemption Baskets.
During the six months ended June 30, 2020, UNL used other assets to pay expenses, post expense waiver. To the extent expenses
exceed income, UNL's NAV will be negatively impacted.
UNL's investments in Natural Gas Interests may be subject to
periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example, most commodity
exchanges limit the fluctuations in futures contracts prices during a single day by regulations referred to as “daily limits.”
During a single day, no trades may be executed at prices beyond the daily limit. Once the price of a futures contract has increased
or decreased by an amount equal to the daily limit, positions in the contracts can neither be taken nor liquidated unless the
traders are willing to effect trades at or within the specified daily limit. Such market conditions could prevent UNL from promptly
liquidating its positions in Futures Contracts. During the six months ended June 30, 2020, UNL did not purchase or liquidate
any of its positions while daily limits were in effect; however, UNL cannot predict whether such an event may occur in the future.
Since the initial offering of shares, UNL has been responsible
for expenses relating to: (i) management fees, (ii) brokerage fees and commissions, (iii) licensing fees for the
use of intellectual property, (iv) ongoing registration expenses in connection with offers and sales of its shares subsequent
to the initial offering, (v) other expenses, including tax reporting costs, (vi) fees and expenses of the independent
directors of USCF and (vii) other extraordinary expenses not in the ordinary course of business.
UNL may terminate at any time, regardless of whether UNL has
incurred losses, subject to the terms of the LP Agreement. In particular, unforeseen circumstances, including the adjudication
of incompetence, bankruptcy, dissolution, or removal of USCF as the general partner of UNL could cause UNL to terminate unless
a majority interest of the limited partners within 90 days of the event elects to continue the partnership and appoints a successor
general partner, or the affirmative vote of a majority in interest of the limited partners subject to certain conditions. However,
no level of losses will require USCF to terminate UNL. UNL’s termination would cause the liquidation and potential loss
of an investor’s investment. Termination could also negatively affect the overall maturity and timing of an investor’s
investment portfolio.
Market Risk
Trading in Futures Contracts and Other Natural Gas-Related
Investments, such as forwards, involves UNL entering into contractual commitments to purchase or sell natural gas at a specified
date in the future. The aggregate market value of the contracts will significantly exceed UNL's future cash requirements since
UNL intends to close out its open positions prior to settlement. As a result, UNL is generally only subject to the risk of loss
arising from the change in value of the contracts. UNL considers the “fair value” of its derivative instruments to
be the unrealized gain or loss on the contracts. The market risk associated with UNL's commitments to purchase natural gas is
limited to the aggregate market value of the contracts held. However, should UNL enter into a contractual commitment to sell natural
gas, it would be required to make delivery of the natural gas at the contract price, repurchase the contract at prevailing prices
or settle in cash. Since there are no limits on the future price of natural gas, the market risk to UNL could be unlimited.
UNL's exposure to market risk depends on a number of factors,
including the markets for natural gas, the volatility of interest rates and foreign exchange rates, the liquidity of the Futures
Contracts and Other Natural Gas-Related Investments markets and the relationships among the contracts held by UNL. Drastic market
occurrences could ultimately lead to the loss of all or substantially all of an investor’s capital.
Credit Risk
When UNL enters into Futures Contracts and Other Natural Gas-Related
Investments, it is exposed to the credit risk that the counterparty will not be able to meet its obligations. The counterparty
for the Futures Contracts traded on the NYMEX and on most other futures exchanges is the clearinghouse associated with the particular
exchange. In general, in addition to margin required to be posted by the clearinghouse in connection with cleared trades, clearinghouses
are backed by their members who may be required to share in the financial burden resulting from the nonperformance of one of their
members and, therefore, this additional member support should significantly reduce credit risk. UNL is not currently a member
of any clearinghouse. Some foreign exchanges are not backed by their clearinghouse members but may be backed by a consortium of
banks or other financial institutions. There can be no assurance that any counterparty, clearinghouse, or their members or their
financial backers will satisfy their obligations to UNL in such circumstances.
USCF attempts to manage the credit risk of UNL by following
various trading limitations and policies. In particular, UNL generally posts margin and/or holds liquid assets that are approximately
equal to the market value of its obligations to counterparties under the Futures Contracts and Other Natural Gas-Related Investments
it holds. USCF has implemented procedures that include, but are not limited to, executing and clearing trades only with creditworthy
parties and/or requiring the posting of collateral or margin by such parties for the benefit of UNL to limit its credit exposure.
An FCM, when acting on behalf of UNL in accepting orders to purchase or sell Futures Contracts on United States exchanges, is
required by CFTC regulations to separately account for and segregate as belonging to UNL, all assets of UNL relating to domestic
Futures Contracts trading. These FCMs are not allowed to commingle UNL's assets with their other assets. In addition, the CFTC
requires FCMs to hold in a secure account UNL's assets related to foreign Futures Contracts trading.
In the future, UNL may purchase OTC swaps, see “Item
3. Quantitative and Qualitative Disclosures About Market Risk” in this quarterly report on Form 10-Q for a discussion
of OTC swaps.
As of June 30, 2020, UNL held cash deposits and investments
in Treasuries and money market funds in the amount of $4,679,600 with the custodian and FCM. Some or all of these amounts held
by a custodian or an FCM, as applicable, may be subject to loss should UNL's custodian or FCM, as applicable, cease operations.
Off Balance Sheet Financing
As of June 30, 2020, UNL had no loan guarantee, credit
support or other off-balance sheet arrangements of any kind other than agreements entered into in the normal course of business,
which may include indemnification provisions relating to certain risks that service providers undertake in performing services
which are in the best interests of UNL. While UNL's exposure under these indemnification provisions cannot be estimated, they
are not expected to have a material impact on UNL's financial position.
Redemption Basket Obligation
In order to meet its investment objective and pay its contractual
obligations described below, UNL requires liquidity to redeem shares, which redemptions must be in blocks of 50,000 shares called
“Redemption Baskets.” UNL has to date satisfied this obligation by paying from the cash or cash equivalents it holds
or through the sale of its Treasuries in an amount proportionate to the number of shares being redeemed.
Contractual Obligations
UNL's primary contractual obligations are with USCF. In return
for its services, USCF is entitled to a management fee calculated daily and paid monthly as a fixed percentage of UNL's NAV, currently
0.75% of NAV on its average daily total net assets.
USCF agreed to pay the start-up costs associated with the formation
of UNL, primarily its legal, accounting and other costs in connection with USCF’s registration with the CFTC as a CPO and
the registration and listing of UNL and its shares with the SEC, FINRA and NYSE Arca (formerly, AMEX), respectively. However,
since UNL’s initial offering of shares, offering costs incurred in connection with registering and listing additional shares
of UNL have been directly borne on an ongoing basis by UNL, and not by USCF.
USCF pays the fees of the Marketing Agent as well as BNY Mellon’s
fees for performing administrative, custodial, and transfer agency services. BNY Mellon’s fees for performing administrative
services include those in connection with the preparation of UNL's condensed financial statements and it’s SEC, NFA and
CFTC reports. USCF and UNL have also entered into a licensing agreement with the NYMEX pursuant to which UNL and the Related Public
Funds, other than BNO, USCI and CPER, pay a licensing fee to the NYMEX. UNL also pays the fees and expenses associated with its
tax accounting and reporting requirements.
USCF paid BBH&Co.’s fees for performing administrative
services, including those in connection with the preparation of UNL's condensed financial statements and its SEC, NFA and CFTC
reports through May 31, 2020.
In addition to USCF’s management fee, UNL pays its brokerage
fees (including fees to an FCM), OTC dealer spreads, any licensing fees for the use of intellectual property, and, subsequent
to the initial offering, registration and other fees paid to the SEC, FINRA, or other regulatory agencies in connection with the
offer and sale of shares, as well as legal, printing, accounting and other expenses associated therewith, and extraordinary expenses.
The latter are expenses not incurred in the ordinary course of UNL’s business, including expenses relating to the indemnification
of any person against liabilities and obligations to the extent permitted by law and under the LP Agreement, the bringing or defending
of actions in law or in equity or otherwise conducting litigation and incurring legal expenses and the settlement of claims and
litigation. Commission payments to an FCM are on a contract-by-contract, or round turn, basis. UNL also pays a portion of the
fees and expenses of the independent directors of USCF. See Note 3 to the Notes to Condensed Financial Statements (Unaudited)
in Item 1 of this quarterly report on Form 10-Q.
The parties cannot anticipate the amount of payments that will
be required under these arrangements for future periods, as UNL's per share NAVs and trading levels to meet its investment objective
will not be known until a future date. These agreements are effective for a specific term agreed upon by the parties with an option
to renew, or, in some cases, are in effect for the duration of UNL's existence. Either party may terminate these agreements earlier
for certain reasons described in the agreements.
As of June 30, 2020, UNL's portfolio consisted of 188
Natural Gas Futures NG Contracts traded on the NYMEX. As of June 30, 2020, UNL did not hold any Futures Contracts traded
on the ICE Futures. For a list of UNL's current holdings, please see UNL's website at www.uscfinvestments.com.