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BNO > SEC Filings for BNO > Form 10-K on 26-Mar-2013All Recent SEC Filings

Show all filings for UNITED STATES BRENT OIL FUND, LP | Request a Trial to NEW EDGAR Online Pro

Form 10-K for UNITED STATES BRENT OIL FUND, LP


26-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the financial statements and the notes thereto of USBO included elsewhere in this annual report on Form 10-K.

Forward-Looking Information

This annual report on Form 10-K, 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 USBO's actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe USBO'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 USBO cannot assure investors that the projections included in these forward-looking statements will come to pass. USBO's actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors.

USBO has based the forward-looking statements included in this annual report on Form 10-K on information available to it on the date of this annual report on Form 10-K, and USBO assumes no obligation to update any such forward-looking statements. Although USBO 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 USBO may make directly to them or through reports that USBO in the future files with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Introduction

USBO, a Delaware limited partnership, is a commodity pool that issues units that may be purchased and sold on the NYSE Arca. The investment objective of USBO is for the daily changes in percentage terms of its per unit NAV to reflect the daily changes in percentage terms of the spot price of Brent crude oil, as measured by the daily changes in the price of the futures contract for Brent crude oil traded on the ICE Futures that is the near month contract to expire, 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 (the "Benchmark Futures Contract"), less USBO's expenses. "Near month contract" means the next contract traded on the ICE Futures due to expire. "Next month contract" means the first contract traded on the ICE Futures due to expire after the near month contract. It is not the intent of USBO to be operated in a fashion such that the per unit NAV will equal, in dollar terms, the spot price of light, sweet crude oil or any particular futures contract based on light, sweet crude oil. It is not the intent of USBO to be operated in a fashion such that its per unit NAV will reflect the percentage change of the price of any particular futures contract as measured over a time period greater than one day. USCF believes that it is not practical to manage the portfolio to achieve such an investment goal when investing in Futures Contracts and Other Crude Oil-Related Investments.

USBO seeks to achieve its investment objective by investing in a combination of Futures Contracts and Other Crude Oil-Related Investments such that changes in its per unit NAV, measured in percentage terms, will closely track the changes in the price of the Benchmark Futures Contract, also measured in percentage terms. USCF believes the daily changes in the price of the Benchmark Futures Contract have historically exhibited a close correlation with the daily changes in the spot price of Brent crude oil.

The regulation of commodity interest trading in the United States and other countries is an evolving area of the law, as exemplified by the various discussions of the Dodd-Frank Act. The various statements made in this summary are subject to modification by legislative action and changes in the rules and regulations of the CFTC, the NFA, the SEC, the futures exchanges, clearing organizations and other regulatory bodies. Pending final resolution of all applicable regulatory requirements, some specific examples of how the new Dodd-Frank Act provisions and rules adopted thereunder could impact USBO are discussed in "Item 1. Business" and "Item1A. Risk Factors" in this annual report on Form 10-K.

Price Movements

Brent crude oil futures prices exhibited moderate daily swings along with an uneven upward trend during the year ended December 31, 2012. The price of the Benchmark Futures Contract started the year at $107.38 per barrel. The Benchmark Futures Contract reached its high for the year on March 1, 2012 at $126.20 per barrel and reached its low for the year on June 21, 2012 when the price dropped to $89.23 per barrel. The year ended with the Benchmark Futures Contract at $111.11 per barrel, up approximately 3.47% over the year. USBO's per unit NAV began the year at $74.54 and ended the year at $81.95 on December 31, 2012, an increase of approximately 9.94% over the year. USBO's per unit NAV reached its high for the period on March 16, 2012 at $88.40 and reached its low for the year on June 21, 2012 at $63.30. The Benchmark Futures Contract prices listed above began with the February 2012 contract and ended with the February 2013 contract. The return of approximately 3.47% on the Benchmark Futures Contract 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 achieve such a result. Furthermore, the change in the nominal price of these differing crude oil Futures Contracts, measured from the start of the year to the end of the year, does not represent the actual benchmark results that USBO seeks to track, which are more fully described below, in the section titled "Tracking USBO's Benchmark."

During the year ended December 31, 2012, in the United States, the level of contango remained mild, meaning that the price of the near month crude oil Futures Contract was less than the price of the next month crude oil Futures Contract, or contracts further away from expiration. Crude oil inventories, which reached historic levels in January 2009 and February 2009 and which appeared to be the primary cause of the steep level of contango, began to drop in March 2009 and continued to drop for the remainder of 2009 and the beginning of 2010. During the year ended December 31, 2011, crude oil inventories began to climb higher, which contributed to the crude oil futures market remaining in contango through the end of December 2012, however, the market for Brent Crude Oil remained in backwardation. For a discussion of the impact of backwardation and contango on total returns, see "Term Structure of Crude Oil Prices and the Impact on Total Returns" below.

Valuation of Futures Contracts and the Computation of the Per Unit NAV

The per unit NAV of USBO's units is calculated once each NYSE Arca trading day. The per unit 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. The Administrator uses the ICE Futures settlement price (a weighted average price of trades during a three minute settlement period from 2:27 p.m. to 2:30 p.m. New York time) for the contracts held on the ICE Futures, but calculates or determines the value of all other USBO investments, including NYMEX contracts 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 Crude Oil Market

Results of Operations. On June 2, 2010, USBO listed its units on the NYSE Arca under the ticker symbol "BNO." On that day, USBO established its initial offering price at $50.00 per unit and issued 200,000 units to the initial Authorized Purchaser, Merrill Lynch Professional Clearing Corp., in exchange for $10,000,000 in cash.

Since its initial offering of 50,000,000 units, USBO has not registered any subsequent offerings of its units. As of December 31, 2012, USBO had issued 4,100,000 units, 550,000 of which were outstanding. As of December 31, 2012, there were 45,900,000 units registered but not yet issued.

More units may have been issued by USBO than are outstanding due to the redemption of units. Unlike funds that are registered under the 1940 Act, units that have been redeemed by USBO cannot be resold by USBO. As a result, USBO contemplates that additional offerings of its units will be registered with the SEC in the future in anticipation of additional issuances and redemptions.

As of December 31, 2012, USBO had the following authorized purchasers: Citadel Securities LLC, Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., JP Morgan Securities Inc., Merrill Lynch Professional Clearing Corporation, Morgan Stanley & Co. LLC, Nomura Securities International Inc., Virtu Financial Capital Markets and Virtu Financial DB LLC.

For the Year Ended December 31, 2012 Compared to the Years Ended December 31, 2011 and 2010

Since USBO commenced operations on June 2, 2010, the comparison of USBO's results of operations for the year ended December 31, 2011 and the period from June 2, 2010 to December 31, 2010 may not be meaningful.

As of December 31, 2012, the total unrealized gain on Futures Contracts owned or held on that day was $739,330, and USBO established cash deposits and investments in Treasuries and money market funds that were equal to $44,440,122. USBO held 88.90% of its cash assets in overnight deposits and investments in money market funds at the Custodian, while 11.10% of the cash balance was held in investments in Treasuries and as margin deposits for the Futures Contracts purchased. The ending per unit NAV on December 31, 2012 was $81.95.

By comparison, as of December 31, 2011, the total unrealized loss on Futures Contracts owned or held on that day was $916,570, and USBO established cash deposits and investments in Treasuries and money market funds that were equal to $38,262,523. USBO held 78.31% of its cash assets in overnight deposits and investments in money market funds at the Custodian, while 21.69% of the cash balance was held in investments in Treasuries and as margin deposits for the Futures Contracts purchased. The increase in cash assets in overnight deposits, investments in Treasuries and in money market funds for December 31, 2012, as compared to December 31, 2011, was the result of USBO's greater size as of December 31, 2012 as measured by total net assets. The ending per unit NAV on December 31, 2011 was $74.54. The increase in the per unit NAV for December 31, 2012, as compared to December 31, 2011, was primarily due to the rise in the price of the Futures Contracts during the year ended December 31, 2012.

By comparison, as of December 31, 2010, the total unrealized gain on Futures Contracts owned or held on that day was $322,660 and USBO established cash deposits and investments in money market funds that were equal to $12,309,694. USBO held 74.25% of its cash assets in overnight deposits and investments in money market funds at the Custodian, while 25.75% of the cash balance was held as margin deposits for the Futures Contracts purchased. The increase in cash assets in overnight deposits, investments in Treasuries and money market funds for December 31, 2011, as compared to December 31, 2010, was the result of USBO's greater size as of December 31, 2011 as measured by total net assets. The ending per unit NAV on December 31, 2010 was $63.08. The increase in the per unit NAV for December 31, 2011, as compared to December 31, 2010, was primarily due to the rise in the price of the Futures Contracts during the year ended December 31, 2011.

Portfolio Expenses. USBO's expenses consist of investment management fees, brokerage fees and commissions, certain offering costs, the fees and expenses of the independent directors of USCF and expenses relating to tax accounting and reporting requirements. The management fee that USBO pays to USCF is calculated as a percentage of the total net assets of USBO. USBO pays USCF a management fee of 0.75% of its average net assets. The fee is accrued daily and paid monthly.

During the year ended December 31, 2012, the average total net assets of USBO were $52,138,476. The management fee incurred by USBO during the year amounted to $391,039. By comparison, during the year ended December 31, 2011, the average total net assets of USBO were $42,473,107. The management fee incurred by USBO during the year amounted to $318,548. By comparison, during the period ended December 31, 2010, the average total net assets of USBO were $10,921,511. The management fee incurred by USBO during the period amounted to $47,800.

In addition to the management fee, USBO pays all brokerage fees and other expenses, including tax reporting costs, ongoing registration or other fees paid to the SEC and FINRA and any other regulatory agency in connection with offers and sales of its units subsequent to the initial offering and all legal, accounting, printing and other expenses associated therewith. The gross total of these fees and expenses for the year ended December 31, 2012 was $168,689, as compared to $183,346 for the year ended December 31, 2011 and $129,043 for the period ended December 31, 2010. The decrease in gross total expenses excluding management fees for the year ended December 31, 2012 as compared to the year ended December 31, 2011 was primarily the result of USBO's decreased legal, accounting, printing and other expenses during the year ended December 31, 2012. The increase in gross total expenses excluding management fees for the year ended December 31, 2011 as compared to the period ended December 31, 2010, was primarily the result of USBO's greater size during the year ended December 31, 2011. For the years ended December 31, 2012 and 2011 and the period ended December 31, 2010, USBO did not incur any fees or other expenses relating to the registration or offering of additional units. During the years ended December 31, 2012 and 2011 and the period ended December 31, 2010, an expense waiver was in effect which offset certain of the expenses incurred by USBO. The total amount of the expense waiver was $47,248 for the year ended December 31, 2012, $104,431 for the year ended December 31, 2011 and $113,715 for the period ended December 31, 2010. For the years ended December 31, 2012 and 2011 and the period ended December 31, 2010, the expenses of USBO, including management fees, commissions, and all other expenses, before allowance for the expense waiver, totaled $559,728, $501,894 and $176,843, respectively, and after allowance for the expense waiver, totaled $512,480, $397,463 and $63,128, respectively.

USBO is responsible for paying its portion of the directors' and officers' liability insurance of USBO and the Related Public Funds and the fees and expenses of the independent directors who also serve as audit committee members of USBO and the Related Public Funds organized as limited partnerships and, as of July 8, 2011, the Related Public Funds organized as a series of a Delaware statutory trust. USBO 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 fund computed on a daily basis. These fees and expenses for the year ended December 31, 2012 amounted to a total of $540,586 for USBO and the Related Public Funds. USBO's portion of such fees and expenses for December 31, 2012 was $9,844. By comparison, for the year ended December 31, 2011 the fees and expenses amounted to a total of $607,582 and for USBO and the Related Public Funds. USBO's portion of such fees and expenses was $4,953. The decrease in directors' fees and expenses for the year ended December 31, 2012, as compared to the year ended December 31, 2011 was primarily due to the non-incurrence of the independent directors' deferred compensation expense for the year ended December 31, 2012, which was amortized during the years ended December 31, 2011 and 2010. By comparison, for the period ended December 31, 2010, these fees and expenses amounted to a total of $1,107,140 for USBO and the Related Public Funds, except USCI, USAG, CPER and USMI. USBO's portion of such fees and expenses was $421. The decrease in directors' fees and expenses for the year ended December 31, 2011, as compared to the year ended December 31, 2010, was primarily due to the non-incurrence of the independent directors' deferred compensation expense for the year ended December 31, 2011, the majority of which was amortized in the year ended December 31, 2010. Effective as of April 1, 2010, USBO became responsible for paying its portion of any payments that may become due to the independent directors pursuant to the deferred compensation agreements entered into between the independent directors, USCF, USBO and the Related Public Funds

USBO also incurs commissions to brokers for the purchase and sale of Futures Contracts, Other Crude Oil-Related Investments or Treasuries. During the year ended December 31, 2012, total commissions accrued to brokers amounted to $33,506. Of this amount, approximately $29,562 was a result of rebalancing costs and approximately $3,945 was the result of trades necessitated by creation and redemption activity. By comparison, during the year ended December 31, 2011, total commissions accrued to brokers amounted to $31,871. Of this amount, approximately $21,560 was a result of rebalancing costs and approximately $9,311 was the result of trades necessitated by creation and redemption activity. By comparison, during the period ended December 31, 2010, total commissions accrued to brokers amounted to $5,718. Of this amount, approximately $5,361 was a result of rebalancing costs and approximately $357 was the result of trades necessitated by creation and redemption activity. The increase in total commissions accrued to brokers for the year ended December 31, 2012, as compared to the year ended December 31, 2011, was primarily a function of increased brokerage fees due to a higher number of futures contracts being held and traded as a result of the increase in USBO's total net assets during the year ended December 31, 2012. The increase in total net assets required USBO to purchase a greater number of Futures Contracts and incur a higher amount of broker commissions. The increase in total commissions accrued to brokers for the year ended December 31, 2011, as compared to the period ended December 31, 2010, was primarily due to the fact that USBO was only operating for a portion of the year ended December 31, 2010 versus the full year of operations for the year ended December 31, 2011. As an annualized percentage of average daily total net assets, the figure for the year ended December 31, 2012 represents approximately 0.06% of average daily total net assets. By comparison, the figure for the year ended December 31, 2011 represented approximately 0.08% of average daily total net assets and the figure for the period ended December 31, 2010, represented approximately 0.09% of average daily total net assets. However, there can be no assurance that commission costs and portfolio turnover will not cause commission expenses to rise in future quarters.

The fees and expenses associated with USBO's audit expenses and tax accounting and reporting requirements are paid by USBO. These costs are estimated to be $75,000 for the year ended December 31, 2012. USCF has voluntarily agreed to pay certain expenses typically borne by USBO, to the extent that such expenses exceed 0.15% (15 basis points) of USBO's NAV, on an annualized basis, through at least June 30, 2013. USCF has no obligation to continue such payments into subsequent periods. For the year ended December 31, 2012, USCF waived $47,248 of USBO's expenses. This voluntary expense waiver is in addition to those amounts USCF is contractually obligated to pay as described in Note 4 in Item 8 of this annual report on Form 10-K.

Dividend and Interest Income. USBO seeks to invest its assets such that it holds Futures Contracts and Other Crude Oil-Related Investments in an amount equal to the total net assets of its portfolio. Typically, such investments do not require USBO to pay the full amount of the contract value at the time of purchase, but rather require USBO to post an amount as a margin deposit against the eventual settlement of the contract. As a result, USBO retains an amount that is approximately equal to its total net assets, which USBO invests in Treasuries, cash and/or cash equivalents. This includes both the amount on deposit with the FCM as margin, as well as unrestricted cash and cash equivalents held with USBO's Custodian. The Treasuries, cash and/or cash equivalents earn income that accrues on a daily basis. For the year ended December 31, 2012, USBO earned $15,494 in dividend and interest income on such Treasuries, cash and/or cash equivalents. Based on USBO's average total net assets, this was equivalent to an annualized yield of approximately 0.03%. USBO purchased Treasuries during the year ended December 31, 2012 and also held cash and/or cash equivalents during this time period. By comparison, for the year ended December 31, 2011 and the period ended December 31, 2010, USBO earned $8,043 and $3,479, respectively, in dividend and interest income on such Treasuries, cash and/or cash equivalents. Based on USBO's average total net assets, this was equivalent to an annualized yield of approximately 0.02% and 0.05%, respectively. USBO purchased Treasuries during the year ended December 31, 2011 and also held cash and/or cash equivalents during this time period. USBO did not purchase Treasuries during the period ended December 31, 2010 and held only cash and/or cash equivalents during this time period. Interest rates on short-term investments, including cash, cash equivalents and Treasuries, were slightly higher during the year ended December 31, 2012 as compared to the year ended December 31, 2011 and lower as compared to the period ended December 31, 2010. As a result, the amount of income earned by USBO as a percentage of average total net assets was higher during the year ended December 31, 2012, compared to the year ended December 31, 2011 and lower as compared to the period ended December 31, 2010.

For the Three Months Ended December 31, 2012 Compared to the Three Months Ended December 31, 2011 and 2010

Portfolio Expenses. During the three months ended December 31, 2012, the average daily total net assets of USBO were $47,168,678. The management fee incurred by USBO during the period amounted to $88,925.

By comparison, during the three months ended December 31, 2011, the average daily total net assets of USBO were $56,026,764. The management fee paid by USBO during the period amounted to $105,913. By comparison, during the three months ended December 31, 2010, the average daily total net assets of USBO were $11,645,518. The management fee paid by USBO during the period amounted to $22,015.

In addition to the management fee, USBO pays all brokerage fees and other expenses, including tax reporting costs, ongoing registration or other fees paid to the SEC and FINRA and any other regulatory agency in connection with offers and sales of its units subsequent to the initial offering and all legal, accounting, printing and other expenses associated therewith. The gross total of these fees and expenses for the three months ended December 31, 2012 was $46,180, as compared to $12,663 for the three months ended December 31, 2011 and $61,862 for the three months ended December 31, 2010. The increase in gross total expenses excluding management fees for the three months ended December 31, 2012, as compared to the three months ended December 31, 2011 was primarily a result of USBO's decreased legal, accounting, printing and other expenses associated therewith during the three months ended December 31, 2012. The decrease in gross total expenses excluding management fees for the three months ended December 31, 2011, as compared to the three months ended December 31, 2010, was primarily a result of the decrease in the estimated fees for tax, reporting, audit, licensing, directors and other fees. During the three months ended December 31, 2012 and 2011 and 2010, USBO did not incur ongoing registration fees or other expenses relating to the registration and offering of additional units. During the three months ended December 31, 2012 and 2011 and 2010, an expense waiver was in effect which offset certain of the expenses incurred by USBO. The total amount of the expense waiver for the three months ended December 31, 2012 was $18,231 and $55,213 for the three months ended December 31, 2010. During the three months ended December 31, 2011, USBO's expenses did not exceed 0.15% (15 basis points) of its NAV; therefore, no expenses were waived by USCF. For the three months ended December 31, 2012 and December 31, 2010, the expenses of USBO, including management fees, commissions, and all other expenses, before allowance for the expense waiver, totaled $135,105 and $83,877, respectively, and after allowance for the expense waiver, totaled $116,874 and $28,664, respectively.

USBO is responsible for paying its portion of the directors' and officers' liability insurance of USBO and the Related Public Funds and the fees and expenses of the independent directors who also serve as audit committee members of USBO and the Related Public Funds organized as limited partnerships and, as of July 8, 2011, the Related Public Funds organized as a series of a Delaware statutory trust. USBO 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 fund computed on a daily basis. These fees and expenses for the year ended December 31, 2012 amounted to a total of $540,586 for USBO and the Related Public Funds. USBO's portion of such fees and expenses for the year ended December 31, 2012 was $9,844.

USBO also incurs commissions to brokers for the purchase and sale of Futures Contracts, Other Crude Oil-Related Investments or Treasuries. During the three months ended December 31, 2012, total commissions accrued to brokers amounted to $7,626. Of this amount, approximately $6,968 was a result of rebalancing costs and approximately $658 was the result of trades necessitated by creation and redemption activity. By comparison, during the three months ended December 31, 2011, total commissions accrued to brokers amounted to $10,975. Of this amount, approximately $5,329 was a result of rebalancing costs and approximately $4,646 was the result of trades necessitated by creation and redemption activity. By comparison, during the three months ended December 31, 2010, total commissions accrued to brokers amounted to $2,037. Of this amount, approximately $2,037 was a result of rebalancing costs and approximately $0 was the result of trades necessitated by creation and redemption activity. The decrease in total commissions accrued to brokers for the three months ended December 31, 2012, as compared to the three months ended December 31, 2011 was primarily a function of increased brokerage fees due to a higher number of futures contracts being held and traded as a result of the decrease in USBO's total net assets during the three months ended December 31, 2012. The increase in total commissions accrued to brokers for the three months ended December 31, 2011, as compared to the three months ended December 31, 2010, was primarily a function of increased brokerage fees due to a higher number of futures contracts being held and traded as a result of the relative increase in USBO's total net assets for the three months ended December 31, 2011. As an annualized percentage of average daily total net assets, the figure for the three months ended December 31, 2012 represents approximately 0.07% of average daily total net assets. By comparison, the figure for the three months ended December 31, 2011 and 2010 represented approximately 0.08% and 0.07%, respectively of average daily total net assets. . . .

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