"Hedging for Resilience: How Producers and Investors Navigate Price Volatility"
An exclusive look at the Hart Energy Converence Panel Sponsored by Pecos Operating.
It was an absolute honor to sponsor the Hart Energy Conference segment on hedging, featuring an all-star lineup.
In a market defined by volatility, producers and capital providers are thinking creatively about risk, reinvestment, and economic signals. This information is crucial for investors and family offices seeking to allocate their capital effectively. It's not just dropping a drill bit on the ground and money rolling into your account. It is about the global oil market and how best to take advantage of oil at the right price. Each well has its economics, but if you don’t understand the international oil market, you will not maximise returns.
During the session, Thomas Galloway, partner and CFO at Riverbend Energy Group, stated that he prioritizes utilizing free cash flow from production to redeploy into future acquisitions.
Billy McCartney, founding and managing partner at Wincoram Asset Management, said the investment to build out gas-powered AI data centers "from wellhead to watt" is in the order of tens of billions of dollars.
Dennis Kissler, senior vice president of the trading division at BOK Financial, shared some of his go-to indicators: Las Vegas hotel occupancy rates and beef prices. Beef prices near record highs are a sign of ample discretionary spending, he said.
I have included the video from the event for my Substack Subscribers and recommend that if you are in the industry, you listen to these experts and consider attending a Hart event near you.
A focus on backwardation in the oil futures curve characterizes the current market structure. They will analyze factors such as OPEC production, US production, and demand trends to assess the potential upside and downside risks associated with oil and gas prices.
Hedging practices and risk management are significant issues in the oil and gas market, and Thomas and Billy discuss how their companies approach hedging to manage commodity price volatility and protect their cash flows. They explain their use of various hedging instruments, including swaps, collars, and options.
The Impact of Tariffs and Trade Tensions was also addressed. They talked about the impact of tariffs and trade uncertainties on the energy industry and the broader economy. They discussed how the initial market reaction to tariff announcements was overblown and how the actual impact has been more muted so far.
The potential growth in natural gas demand from data centers is one of the key drivers I have discussed in the shift in the oil and gas market, “Changing of molecules by demand from oil to natural gas.” They discuss the possibility of a significant increase in natural gas demand from the development of data centers, with estimates ranging from 2 to 18 BCF per day. They also highlighted the complexity and uncertainty around the timing and scale of this potential new source of demand.
Indicators of economic health are critical to banks and investors. Dennis mentions that he examines indicators such as hotel occupancy rates in Las Vegas and beef prices as signals of broader economic conditions, which he views as generally positive despite the trade tensions.
Full Transcript
Below is the full transcript for your reference. If you have any questions, please reach out to me, and I will provide you with answers.
Richard Stube, Hart Energy Moderator [00:00:36] There we go. Time to go. All right, welcome. We're going to talk about hedging, the outlook for oil and gas, and what these folks are planning to do about it. I thought I'd just start by reviewing where we are now, which you may have heard that oil prices were up in the 70s, and now they're down in the 60s. Just checked before we came in, it was about $63 a barrel with natural gas features that are about... 370 with both of the futures curves and backwardation. So sort of thinking that prices are going to go down. And Dennis, we agreed to start with you.
Dennis Kistler, SVP, Trading Division, BOK [00:01:20] Bullish. I am a little bullish. Tell us why. Well, I mean, the way the curve is set up, like you said, we're in a backwardation-type structure. We see that front-month futures are over the back-end futures, especially, like I think, around a dollar over on the front month versus the second month. You know, it's a trader for 30-some years, and I would tell you that normally that's one of the first structures that we look at in the overall market, which way do I want to be.
It doesn't matter if it's the grain market, it doesn't It's a livestock market, doesn't matter if it's a metals market. When you've a market structure like NYMEX crude currently has, where the front month is consistently higher than the back months, that's a longer-term bullish signal. And one of the perceptions is, of course, that there's more demand for front-end than there is for back-end. You know, if you look at storage right now, we see Cushing, Oklahoma, around, what, 30, 40 percent below the five-year average. You see overall crude oil storage somewhere around 6 to 7 percent below the five-year average. So we've got supplies even a little tighter. Yet demand is still elevated to some point. And so when we look at the back end, of course, the market's expecting OPEC to increase production, and that's part of the negativism that we're seeing in some of the back-month futures. And normally what we always say is the trading side, and we used to be on the trading floors, the public more times than not is usually wrong. And they have the back into the curve, in my opinion, too cheap.
If I look at OPEc production, that's the biggest news that we've seen basically is okay. We're going to bring back the two and a half million barrels. Well, if they do that, let's go back and look where we were last time they were at those levels. And if we do that and I go back two years ago when the long-term charts, $75 a barrel. So of course we're seeing US production is raised too, but demand is also elevated as well. If I look at jet fuel demand example, jet fuel is elevated. We're higher jet fuel in North America, and even in Asia. For this time of year, worse than we were a year ago, and you would think that's impossible with the tariffs. But overall, I think the back end of the curve is basically too cheap.
As a hedger, I would look to leave upside in the back-end of the curb, as I would out in 26, 27. Whether you use callers, I like that, or whether you use outright puts and look to sell the calls later. But I think that market is undervalued. I think demand is there, so I think there's some upside left in the market. And like I said, if you hold a gun to my head and make me trade it one way or the other, do I think there's more risk in $7, $8 of upside versus $7-$8 of downside? I think the real risk is really to the upside with the geopolitical unrest that we've got with Russia, geopolitical and unrest we've gotten with Iran, basically. I would just say that there's no upside in this market.
Richard Stube, Hart Energy Modirator [00:03:57] Okay, we're not going to hold a gun to your head. I do want you to know that, but it is your money. So Thomas, you hear that scenario. What do you think and how are you running your business? I love it. You love it, okay.
Thomas Galloway, Partner and Chief Financial Officer, Riverbend Energy Group [00:04:16] You know, one of the hardest parts of our day-to-day job is managing sentiment like Dennis's, but pairing a business strategy on top of that. At the end of the day, at Riverbend, we're an acquisition shop. Every acquisition we make, we are underwriting to the NIMEC strip at the time, and so we take a very aggressive stance towards protecting those cash flows. If we're underwriting a strip, we should be okay taking that risk off the table. Additionally, we are building this portfolio for an exit, and our exit is inherently unhedged. So for us, that in and of itself is enough commodity exposure. And then the other core tenant to what we're doing is cash flow recycling. So we are compounding our equity returns vis-a-vis taking free cash flow out of the ground, putting that back into future acquisitions. And so by implementing a robust hedging program, if we can lock in that stream of free cashflow, compound our equity return, we're doing our job. And so I think we share similar sentiments to Dennis. I think have some frustrations when we see physical versus financial prices. But we have to table that when we're running a business. And our investors just don't like volatility. So anything we can do during our hold period to minimize that volatility, we're going to do.
Richard Stube, Hart Energy Modirator [00:05:29] It's kind of a, there's a lot of uncertainty. I mean, and, but Dennis has said the tariffs are here, they're, but the effect has not been very large yet. But there is, there is the uncertainty, but the prices honestly have not been moving that much. I mean after liberation day, the price dropped from 70 to about 60, and it's ticked around around 60 for a little bit. So I think of this as high, high uncertainty but low actual movement, and how do you respond to that?
Thomas Galloway, Partner and Chief Financial Officer, Riverbend Energy Group [00:06:02] Yeah, I mean, uncertainty is just never good for business and getting deals done, but you're right. I mean I think we at Riverbend are very supportive of the current environment, very inquisitive in the current and environment, and we see the setup for a longer term bullishness. There's just a lot of noise in the market right now, and energy's not alone in that. I mean across the full economic spectrum, everybody's dealing with the same noise. We've heard a lot from the panelists today about The effects to drilling completion cost being somewhat minimal. That is that's one aspect of it. The other aspect of is the global demand for the product we produce every given day. And that's just it's just an unknown that we have to manage and be prudent with our acquisition efforts and para hedging program to insulate ourselves from that.
Richard Stube, Hart Energy Modirator [00:06:49] Okay, just sort of a more variables than usual situation. So Billy, first you mentioned to me, obviously that one quorum is about to change its name, and I want to know if you want to talk about that first, and then I will have a question for you.
Billy McCartney, Founding and Managing Partner, Wincoram Asset Management [00:07:02] Yeah, we announced about a month ago we're going to be collapsing and merging with our joint venture partner, Stone Ridge Asset Management. We started right in the middle of COVID, which is a crazy time to start a business, but it has worked out well. We've deployed almost $7.5 billion with our JV partner, and we're doing this so that we can do that in a bigger and faster way going forward here. So we will no longer be WinCorum, when we're done, it will be Stone Ridge. Don't
Richard Stube, Hart Energy Modirator [00:07:32] Stone Ridge Energy, so I got the name wrong when we were talking about it earlier. So Wind Quorum, about to be Stone Ridge, is heavily focused on gas, does a lot of swaps. So talk to me about that strategy and how it's working right now.
Billy McCartney, Founding and Managing Partner, Wincoram Asset Management [00:07:48] Yeah, so when we started, we wanted to make, we thought with, you know, a natural gas market, you know crude was negative at the time when we start it, so no one wanted to touch it. But a natural-gas market had gone from 50 BCF a day to over a hundred. And we just thought that for the production side, the P out of the E&P, there needed be a more transparent and efficient way to capitalize the market. That is where we wanted to be, focus on gas production. And we have been, like I said, deployed a lot. We probably have almost 16,000 wells across six different basins. So, and in that, and with our structure, it is very important that we hedge to protect those cash flows, like Thomas was saying. And that's really our role in the market. We're the yield people in this. In this market, and that's what our investors want. They want certainty. So we started out, and we've done, every deal we've been different. We started our first deal, we bought some assets from HG Energy and Appalachia. We did physical fixed price transactions for seven years. It was hard. It was real hard, and at the point, so it was basis, it was fixed price, and the last deals that we've now, We've now, like Dennis was. So it's suggesting, looking at, we're doing collars and not just swaps, and part of that is our view on the market, but also protecting the downside for our investors. So we've tried to go from swaps to collars here to make sure that the size that we're doing, we've probably hedged across those deals almost 2 TCF a gas. So, there's, and that's a lot for the market to absorb. That level of a risk across the counterparty. So for us to continue to do what we're doing and do it in a big way, we try to evolve with what the market avails us with protecting downsides.
Richard Stube, Hart Energy Moderator [00:09:55] Who are your investors, mostly, because you talked about protecting them and ensuring their certainty.
Billy McCartney, Founding and Managing Partner, Wincoram Asset Management [00:10:01] So, the majority are large institutions that are some insurance companies as well, so they write a long-term annuity to somebody and they want the income back over time, so that's really the main, it's that simple.
Richard Stube, Hart Energy Moderator [00:10:22] Alright, the certainty is the key thing, and there's a willingness to pay for it.
Billy McCartney, Founding and Managing Partner, Wincoram Asset Management [00:10:25] Yeah, exactly. And that's the main thing, is they were willing to pay for it for that certainty, and really that's when we've been able to partner with other people, other operators, that want the upside. We're not heavy into development for that reason, so that we can have that certainty for our investors and ultimately their customers.
Richard Stube, Hart Energy Moderator [00:10:49] So, Dennis, we mentioned tariffs, and the landscape has changed quite a bit, and it's been two months and two days since Liberation Day, and things have moved up and down. But you have said the effect so far has been muted, and I'm interested in hearing about that. And I'm also interested in what are you looking at as you consider whether these tariffs may or whether the uncertainty around them. May have an effect on the economy in general and of course then the prices of oil and gas.
Dennis Kistler, SVP, Trading Division, BOK [00:11:25] Well, what I would say is the tariff deal when it first came out was overblown, I think, by the press, generally. It put a lot of fear, it put a ton of panic in the market. We saw panic go in the S&P 500 futures, the Dow Jones futures. We saw it go through some of the major moving averages. A lot of hedge fund managers use those futures contracts to balance their book instead of trying to get out of individual stocks. That way they can sell big blocks really quick. And when you see that kind of pressure, I believe it was over-exaggerated. You know, when President Trump came out and said that, you know, he was going to raise tariffs, whatever, and it went to 50, 100, 150 percent, whatever it was, it's a negotiating tactic. But the public didn't, I don't think, really understand it. I think they're beginning to understand it now. You know I feel that if they get to 8 or 10 percent, it is going to be a huge win. But to get there, you're seeing the door-in-the-face type approach, and that caused a panic in the market. No doubt it didn't. It did cause the panic in the energy market as well. And I believe OPEC, you know, President Trump promised lower prices to the American public for energy, and I think he got OPEc to help him out with that. And I think that's going to continue for a little while, but OPECs are very famous for changing gears very quickly. And they'll take a point of pain for a certain period of time before they reverse what they're doing. So, I think we're just buying time here, they're buying time, buying a low price to help the U.S. Consumer here for a little while. I don't believe tariffs are inflationary. I believe that's overblown as well. And I think that the majority of that is we've had tariffs raised before in the previous administration when Trump was there, and we never really saw the inflation. So what happens, I believe, is it comes to cost structure of what it really is going to be in the end. I think the market's starting to figure that out. We saw the S&P 500 futures go above the 100-day, 200-day moving average. We're in a bull market again, right? TSA said what over the weekend? We had record travel for Memorial Day weekend, right? So, is anybody ever been to Walmart lately? Are you seeing less people at Walmart? I'm not. I'm seeing more. I have to bypass it. I can't stand to park in the parking lot, right. So, I think that's part of the fear factor is over. So eventually I think that comes back to the energy sector. We saw some demand destruction, no doubt about it. We saw less driving happen. We saw Asia especially back off. But I think if we saw Singapore gasoline prices the last week went to a four or five month high. So I think the fear part of the tariff factor is over. We're realizing it's not such a big deal. I think you're gonna see the inflation part was really comes back and I'll try to speed this up a little bit. But the inflation that people don't understand it came back from when the M1 money supply that happened after COVID. When they increased the money supply basically by 300%. A lot of that M1 supply is still out in the public. And that's what's keeping the inflation going. So probably what I see going forward from being a negative part that could possibly happen to our industry, possibly happen to the US economy, is if we continue to not balance the deficit that we have. And I think that's where you're seeing the market starting to price and starting to look You're seeing the price of gold making new highs, right? So I think one of the things that people have to look at or be prepared for is look at the 10-year Treasury and all you're seeing in the press, you watch CNBC and some of these other publicists, they're saying how many interest rate cuts are we going to have? Two, three, two, one, maybe none. They can cut the short-term rates all they want to, but the long-term rates, when they don't come down, that should be a little bit of a fear factor. And my question to you people would basically be, if we took the ten-year Treasury note to six or seven percent, what's that going to do to the U.S. Economy? What's it going to do to the oil business? What's going to the drilling side? So I think that's the factor that we need to be looking at. That's where I think the tariffs come in, to finish up here, is I think we're trying, President Trump and the administration's trying to do something to back in, to basically bring that deficit down. Now whether tariffs are gonna be able to do that, that's gonna be the big question. I can't answer that. But we're gonna need to bring that deficit down or there is gonna be a little bit of a problem, I foresee, in the distant future. But taking that away, Demand is still going to be there, I think, for crude, at least in the near term. It's going to for natural gas, especially with AI coming on. So longer term, I'm still bullish. But that's my fear factor, is back into these Treasury notes need to be watched. OK, so.
Richard Stube, Hart Energy Modirator [00:15:56] I mean, I'm hearing a lot of things there and I definitely want to talk to you about Las Vegas in a second, but Thomas, I guess, like, when you hear that, is that like this checking boxes with you or is this like, I've got some other thoughts, where do you come down on this?
Thomas Galloway, Partner and Chief Financial Officer, Riverbend Energy Group [00:16:14] Yeah, I mean, you know, look, we're in a commodity business, and so we're used to day-to-day volatility, month-to month volatility. I mean what we can control is what we pay for assets and how we manage those assets. And so it starts with, you, know, sound underwriting, buying high-quality assets, capitalizing assets properly, but, and then hedging very aggressively. And so on the hedging side of the equation, you have to have a plan. You have to be able to table emotion and table recency bias because that can just skew your opinion and the execution of the plan. Number two is you need to have patience and time to execute that. Number three for us as an acquisition shop, we are very cognizant of our weighted average underwriting price. And if we see opportunities to take chips off the table at or above that, we do it. And so we just have a very consistent approach to it and we just try to table kind of the emotion and then what's going on around us, things that we can't control. And try to just take some of that volatility off the table. I don't disagree with anything Dennis is saying, and we certainly talk about it a lot, but we just try to be very consistent in our approach in how to manage a business, because it is just inherently volatile, and so we're just trying to reduce that in any way possible.
Richard Stube, Hart Energy Moderator [00:17:27] All right, then let's get to a forecast that we've heard quite a bit about today, which is – and, Billy, this one's for you. We're going to have data centers everywhere. We're gonna need loads of natural gas to supply them. I know – I talked to the people at Liberty Energy, and they are planning a – in Western Pennsylvania, they're planning, essentially, a data center where Liberty will provide the. The equipment, the generation, and range resources is going to supply the gas, and the idea is that we may see dozens, hundreds of these, and it's going to take lots and lots of natural gas. And I hear this so often that it sort of sets off my skepticism button, and is this really going to happen this way?
Billy McCartney, Founding and Managing Partner, Wincoram Asset Management [00:18:18] I think it is going to happen, but the question is how much, right? And I think that's really where we as an industry are working through all that. Because what you just described, you think about from the wells to the watt, right, how much capital is needed to do exactly what you said is tens of billions of dollars. Between drilling the wells, the pipeline, the power, the box, and the computers that sit in the data center. That's a lot of capital at risk. And I think that's really where we, as an industry, how many of those can we actually get financed and win? Now we have people, the hyperscalers at the other end, who seem to have endless capital, right? From that standpoint. So I've seen estimates from as low as two BCF a day to 12 BCF per day, right. That's why.
Richard Stube, Hart Energy Moderator [00:19:12] I think we heard 2 to 18 as a range earlier today. I'm wrong already.
Billy McCartney, Founding and Managing Partner, Wincoram Asset Management [00:19:18] But I think that is the key, and when those come on, and where, like you talk about it. Previous career was in trading for 15 years in natural gas, and I've never seen a situation like this in the supply and demand balances where that much demand is that mobile. We haven't set all the chess pieces yet. Is it in Appalachia? Is it in, you know, Metta's in Entergy or doing things in Louisiana? And those, when you throw those boulders into the lake, it changes the overall supply and demand on a regional basis, and done enough on a national basis here. So I think it's something that at this point, if someone as a trader, someone says, I know exactly what it's going to be, they're wrong, right? And I think that's something we're going to have to keep monitoring. It is a bullish sentiment, it's just a question of how bullish will it be and quickly. Can we just dispatch all that capital and bring that demand on?
Richard Stube, Hart Energy Modirator [00:20:19] I don't know about, I'm not sure how much you're helping me with my own investments by telling me something big and unpredictable is about to happen. But I am curious, like, there's also very much the issue of where these plants might go and just the ability to build a gas powered turbine plant is a multi-year project at this point. I'm hearing five and seven years. Delays, I mean not delays, but just that much time from the time you want it till the time you can have it. I mean all that figures into the mix, right?
Billy McCartney, Founding and Managing Partner, Wincoram Asset Management [00:20:54] That's all the complexity part of it as well, because do you have the turbines to create the power? If you have those, where do you sit in the queue for interconnects into the grid? So it looks very simple and easy on a spreadsheet, and we all know that it's much harder to do that. So I think that is – and that is hard to monitor, right? It's not like there's a daily report that comes out and, you know, say here's all the, here's the internet. Our interconnect queue and this is what's moving and you know it's going to be a lot of work, a lot detail to understand exactly how the view of how this will play out, you know, and when it will play from a project completion standpoint.
Richard Stube, Hart Energy Moderator [00:21:40] One of the great phrases that I heard in doing this job, I was reporting on a story and somebody told me that a project they were planning was a home run in Excel, which doesn't count. It's not an actual home run, it's only a home-run on the spreadsheet. So Dennis, I promised to get back to Las Vegas and you told me like, this is one of your indicators that you look at. So talk to me about that.
Dennis Kistler, SVP, Trading Division, BOK [00:22:08] No, it is. There's a lot of things from the trading side we look at. Two of the things that I would tell you, the reason I think the economy is still really good, at least here in near term, I didn't mean to scare anybody with a 10-year treasury, it's something to look at longer term, but near term. We look at the load in Las Vegas, which is running around over a 90% occupancy rate on a lot their weekends. We looked at the price of beef. That's one of the big things, one of big leaders in... Did you say the price? Of beef, steaks, the regular meat, meat complex. But when we see the price of beef elevated, it normally means longer term. You're seeing a lot of buying of the high end type of food products, kind of a discretionary income, so to speak. So we're seeing lot of that push. I think we're seein' record high beef prices right now. That tells me the economy's in good shape. And that's what we went back to say, there was a lot over exaggeration on this tariff thing. A lot of fear was put into the public that I think shouldn't have been done. And I think, we're gonna get back to a reality. So I think the fear is over for tariffs. It comes through to play out like the administration wants it to, I don't know. I can tell you that it's probably more of a negotiating tactic than I've said before, but the energy space, in my opinion, is a good place to invest.
Richard Stube, Hart Energy Modirator [00:23:20] I mean, I think kind of what you're describing what I'm hearing anyway is there was a big announcement and people thought it was a Big Deal and they sort of said, oh, maybe I should take stock of things before I do anything else. And then as sort of things didn't happen, they started going about their daily lives again.
Dennis Kistler, SVP, Trading Division, BOK [00:23:38] Is that fairly close? That's true and over on the crude oil side for example We had the least amount of longs in those four days after of course the announcement There was so much liquidation in the market that over exaggerated the downside and now we're starting to see that come back out But again with with OPEC raising production near term, you know, the market's gonna set set here for a little bit I think that we've got a little of a supply problem coming back, but demands not going away anytime soon I think you're gonna see Asian demand pick back up as well and that's gonna help us
Richard Stube, Hart Energy Moderator [00:24:05] Okay, we're in the 95-second range, so I'm going to fire out one last question. Thomas, we've talked some about hedging, but how do you avoid getting over-hedged?
Thomas Galloway, Partner and Chief Financial Officer, Riverbend Energy Group [00:24:15] Yeah, I mean, it sort of depends on your portfolio. I mean if you've got a big growth wedge upcoming, you can get to a spot where you're basically pre-hedging those volumes. I mean that is a risk that we look at all the time. And I mean the scenario where you have production curtailments and prices rise is a bad scenario for our portfolio. And so we're always risk weighting that, sensitizing on our PDP base. I mean when we go from operated to nonoptim minerals, the strategy will fluctuate. Also with what do we have coming online over the next three, six, 12 months. And so it's something that we think about all the time, bank covenants have restrictions on you on what you can do for good reason. We generally try to stay in the 60 to 75% range of PDP because that's a good comfort zone that gives us a little cushion. And then as new wells are either being drilled or completed, we'll start tacking on in anticipation of those volumes. Thank you, sir. I mean, really, we try to be very programmatic about it and stick to our plan, do it over a period of time, not pick one individual day.
Richard Stube, Hart Energy Moderator [00:25:20] Stay somewhere close to the middle of the seesaw and go forward.
Thomas Galloway, Partner and Chief Financial Officer, Riverbend Energy Group [00:25:22] Yeah, just try to keep the balance.
Richard Stube, Hart Energy Moderator [00:25:26] All right, well, I see 15 seconds left on our clock, so I'm gonna wrap this up, and I'd like you to thank our panelists for their time. I understand.
Again, a shout-out to Hart Energy and the entire panel. As I said at the beginning of the article, please let me know if you have any questions about the topics.