ConocoPhillips was mentioned as one of the largest detractors from relative returns during the quarter, alongside Chevron, due to a pullback in crude prices resulting from easing Middle East tensions and negotiations between the U.S. and Iran. Despite this pressure, the letter indicates a continued high conviction in the energy sector, emphasizing the importance of energy security, supply-chain resilience, and capital discipline, while noting that depleted inventories should support durable cash flow opportunities for well-capitalized, low-cost producers.

ConocoPhillips, the largest U.S. pure-play upstream oil producer, has low-cost, long-lived inventory that we believe is underappreciated relative to peers. In the coming years, its free cash flow should inflect higher as the Willow project in Alaska comes online and transitions from a cash drag to a cash generator. We see the oil market as reasonably balanced, but risks may skew to the upside over the next couple of years as the world manages shortages from the Strait of Hormuz, and the path to its full and enduring reopening remains murky.

We sold ConocoPhillips to strengthen our weighting in the unpopular oil sector. Despite the strengthening of oil stocks with even minor price increases, we believe that ConocoPhillips has not positioned itself favorably. The company has sold off expensive assets and focused on lower extraction costs, but the break-even for many of its projects remains in the mid 40-USD range per barrel, which raises concerns about its long-term viability in a fluctuating market.

ConocoPhillips was a top performer over the quarter, benefiting from a spike in the oil price due to supply constraints. The Fund's energy overweight was the largest ever, indicating strong confidence in the sector. However, following the price spikes, the Fund moderated its energy exposure, which included trimming holdings in ConocoPhillips. This reflects a strategic approach to capitalize on recent gains while managing risk in a volatile market.

We significantly increased our Energy holdings over the past six months by adding to existing positions and starting a new position in ConocoPhillips (COP). Energy increased from 9% of the portfolio on 9/30/2025 up to 16.5% as of 3/31/2026. We believe a new Energy bull market likely began in late 2025 that could continue to drive Energy stock outperformance.

ConocoPhillips was a detractor during the quarter. The U.S.-headquartered oil and gas exploration and production company’s stock price declined sharply in April due to market uncertainty, as there were concerns about reduced oil demand from potential trade wars and retaliatory tariffs. This market backdrop overshadowed solid first-quarter 2025 earnings with total production exceeding consensus expectations. In our view, ConocoPhillips’ assets are among the highest quality in the industry.