“This aggression will not stand, man” - The Dude

**If you enjoy this newsletter - do us a favor & forward it to your friends or colleagues**

Subscribe now

**Note: we will be writing sporadically, for the indefinite future; if the note is too “hot”, it will only go out via email (will not be available on the site); the aim, at this point, is for a monthly note**

MACRO.

Over the past few weeks, LNG cargos have been rerouted from South Asia to Europe, depriving the former markets of gas. Many crops in Ukraine - the breadbasket of Europe - will not be planted.

The real-world economic consequences of recent economic warfare has only just begun.

The race to fill up gas storage for next winter will result in political & economic turmoil. And when spring turns to summer, we’ll begin to see the fallout in agricultural markets.

While Russia is the target (and will be the biggest loser) in this unprecedented economic war, other economies will also suffer.

The lowest bidders (the poorest markets) will likely see orders unfilled.

And note that revolutions often follow lesser events of economic unrest.

In thinking about what may transpire, we’ve found ourselves thinking about the 2nd & 3rd order effects of what may come to pass.

The following interviews & research have either been predictive of recent events or - we believe - have the capacity to be predictive going forward (beyond 1st order effects) -

Research / Data / Commentary:

• The artist(s) known as @ViscosityRedux published a comprehensive analysis of the potential energy shortages resulting from recent sanctions

• Alex Turnbull on Sanctions Evading

Podcasts:

• An interview with Julia Friedlander - a former policy advisor for Europe in the U.S. Treasury Department’s Office of Terrorism and Financial Intelligence - on economic warfare & sanctions; previously, her role at the Treasury was executing sanctions

• In an interview from December, Russian-born Dmitri Alperovitch - the former CTO and co-founder of CrowdStrike, the world’s largest cybersecurity company - makes the call that Putin will invade Ukraine

• Last week, following the invasion, Dmitri Alperovitch returns to be interviewed on the topic of Russia & Ukraine - and his correct calling of the matter

We’ve thought a lot about a ~90sec tangent in an interview from 2018 with Fabrice Grinda (a former emerging markets tech entrepreneur & venture capitalist) on emerging market risk.

Roughly a decade ago, he the made the call that specific political choices would lead to negative economic outcomes for investments in many emerging market economies.

It has - unfortunately - been a great call -

OTHER NEWS.

• This event will cause prices to inflate, globally (and monetary policy won’t solve it)

• How a Nickel becomes a Dime

• Doomberg on the LME crisis

• A California VC Narrative Violation

• We warned a Russian friend of this possibility a couple weeks ago; if you have Russian friends, it may be worth reminding them that many countries in the Americas (especially the US & Canada) were built by people leaving bad situations in Europe

That’s it for now - hope y’all enjoy the rest of your week -

“Strikes and gutters, ups and downs” - The Dude

Subscribe now

"So the universe is not quite as you thought it was. You'd better rearrange your beliefs, then. Because you certainly can't rearrange the universe" - Isaac Asimov

**If you enjoy this newsletter - do us a favor, forward it to your friends or colleagues**

Subscribe now

Editor’s Note: Well, we’re back for the 3rd time in 2x weeks. We’re still not promising a regular schedule…

Following-up on Last Week's Note:

• The equities we highlighted w/ Russian exposure were down an avg of 12%

• Excluding IOC's, our list was off 17% on avg

• At the same time, the S&P was ~flat

Going forward, there's 2x major risks that - in our opinion - are not fully priced into the market:

• The partial removal of Russian & Ukrainian commodities (e.g. coal, oil, gas, wheat, metals) from global markets in 2022

• The impact on banks w/ exposure to these markets, and the cascade of counterparties that will have liquidity issues as a result of bank stresses

Expect wheat (and thereby corn & rice) prices to continue to rise - aside from price increases, this will cause geopolitical instability in emerging markets (e.g. the last time there was a spike in wheat prices, the Arab Spring happened).

And - unless the practice of “self-sanctioning” reverses - energy commodities should also continue their rise.

Regarding banks - there’s 2x concerns:

• Direct Russian exposure

• Exposure to Russia-linked collateral

The banks that we highlighted last week had relatively large businesses, physically in Russia.

The comparatively unknown issue of financings - with Russia-linked collateral - will play out by ~end of the month:

• Loans (like RCFs) that financed Russian collateral will face defaults or deficiencies, needing the be restructured or refinanced

• Both the banks & the borrowers will face stresses, causing counterparty issues to arise

• The worst case scenario for non-Russian firms is a full collapse of the Russian Central Bank / Banking System

Subscribe now

Other Notes & Thoughts:

• No one seems to be preparing for a Firebird Round 2…

• #OSINT is Twitter’s opensource intelligence community - we’ve added a few of its most active accounts to our Russia | Ukraine Twitter List; within that community, @Osinttechnical is noteworthy

• An alleged letter from an FSB whistleblower (Russian version; English translation here); take it with a grain of salt, misinformation from both sides is high

• Expect a mass-exodus of Chinese / Russian money from London & Switzerland to Singapore & Dubai (recent sanctions have spooked more people than were actually targeted by those sanctions)

• Will & Robert - our friends who were in Mariupol a few days back - made it out in one piece… by the skin of their teeth -

That’s it for today - catch y’all next time -

Share Reserve Report

“It is a matter of life and death. So the EU will provide weapons for Ukraine’s armed forces. It is the moment to stand up and to speak out” - Josep Borrell, High Representative of the EU for Foreign Affairs

Subscribe now

Editor’s Notes:

• We have friends w/ family in Kyiv & Lviv; there are a number of ways to support - an easy one is World Central Kitchen

• This piece - like the last one - is a one-off

We may not be back for a while -

SELF-SANCTIONING.

Russian exposures aside (above), there are reports of “self-sanctioning” in the crude & products trade.

While energy exports were excluded from sanctions, some of these commodities are traditionally financed via European bank trade finance desks.

That appears to be disrupted; unsurprisingly, Brent Crude is up 5% tonight.

That trade may run for a while -

BANK RUNS.

The ECB Says Sberbank Europe Is Failing or Likely to Fail. The inverse of this situation - European banks with Russian subsidiaries - will likely play out en masse in the next few hours, when Russian markets open.

RUSSIAN EXPOSURES.

France - Renault in particular - has disproportionately large Russian exposures.

Outside of France, Coca-Cola HBC (listed in London) - the Eastern European / Russia / CIS Coke bottler - faces material volatility going forward.

Non-traditional resources:

• A Twitter account following Russian air-force radio communications

• Flight tracking (unusual flight pattern changes have materialized ahead of official announcements)

• If you have not read The Prize, *read it now*

That’s it for tonight - hoping for a swift end to this chaos -

Subscribe now

“... in moments of crisis our thoughts do not run consecutively but rather sweep over us in waves of intuition and experience...” - John Le Carré

Russia - a few things of note:

• Two weeks ago, we were convinced this would happen

• Last week, we heard a good argument (from a George Friedman interview) on why Russia *would not* do what they just did (and subsequently had less conviction)

• Last night, we set up a Russia-focused Twitter List for the purposes of following coming events

The Friedman interview is still worth listening to, as it contains valid takes on expected Western responses to this event.

For those unfamiliar with George, he’s had - in the past - US / Russian / Asian / Euro Generals (among others) on payroll as sources; he probably (still) does today.

That said, we still think an invasion is imminent.

A final note re/Russia: for those who want photographic updates, Robert Cooper (this guy) - a friend from South Texas - is on assignment as cameraman for journalist Will Cathcart.

They’ll get unreasonably close to the action. Hopefully, not too close…

Re/ our overdue China work: we’ve amassed too much to publish in email form; TBD on how we will publish it, but it will not be coming imminently -

Subscribe now

Q: “What was the single biggest driver of the deal for XEC?”
A: “It makes us a better company”

@NextWaveEFT: ‘Nailed it’ (sarcasm)

Subscribe now

CHANGE OF CONTROL.

Merger arbitrage usually refers to an investment strategy - whereby - an investor simultaneously purchases the stock of merging companies, *exploiting* market *inefficiencies* before a merger.

In the absence of a reasonable explanation for the Cimarex | Cabot merger, investors & analysts are voicing that the tables have been turned.

The merger appears to trigger change of control clauses.

And management appears to be using *the merger to exploit an executive compensation inefficiency*:

“Ryan Lance at COP had notoriously massive change of control of like $120MM at one point. They changed it, but at a glance he would get 2-3x his comp of around $30MM. So (COG) Mr. Dinges $40MM is... modest?” - Paul Sankey

In support of this argument is a history of alleged misalignment of incentives at Cimarex:

Since 2014, there have been 160 insider transactions at Cimarex:

• 152/160 were sales

• Total sold: $85.2MM

• Total bought: $570K - @EnergyCynic

The great thing about public transactions is that the market’s vote is transparent.

*Both* COG & XEC traded down ~7%, on a day when almost all other E&Ps were up -

DEMAND.

• China’s oil demand has already reached pre-pandemic levels

• US mobility recovered to 16% below pre-pandemic levels

• Goldman sees oil hitting $80/bbl

Oil demand appears to be recovering faster than excess supply (Iran, etc.) is hitting the market.

We could go with more details, but - TBH - S&P put together an infographic that visualizes the story better than we can tell it.

Check out the infographic here -

OTHER NEWS.

• Japan & others push back on IEA report

• White House EO on climate

• Bids come in for Shell refinery

• Shell sells separate refinery to Pemex

• LP ESG #s

That’s it for this week - we’re betting on Chelsea & ManU - catch y’all next Tuesday -

“We are masters of the unsaid words, but slaves of those we let slip out” - Winston Churchill

Subscribe now

ECONOMIC SHOCKS.

The world appears to be dead-set on supply, demand, & supply-chain shocks:

• Covid-related trade disruption,

• *Hopeful* energy policy, &

• Helicopter money…

…are leading to:

• Port bottle-necks,

• Higher energy prices, &

• Labor shortages (Uber drivers now make > than some banking analysts)

Right now, the semiconductor shortage is the supply problem in the world.

The shortage is is hitting everywhere…

…from server-farms to *farming* itself:

“The worldwide shortage of computer chips will impact all aspects of agriculture for the next two years and beyond.  Almost every piece of farm equipment, like most everything else in our lives, needs a computer chips to operate.”

“Due in part to the Covid 19 Pandemic, there is a massive worldwide shortage of chips; and the industry is unable to meet the skyrocketing demand. Industry sources say the current shortage will not be resolved until sometime in 2022” - Gary Truitt

Assuming that gets solved, we expect that - in the long term - oil & oil products will take the pole position.

If governments even attempt to follow the IEA’s latest report guidelines, then the outcome would be something on the scale of the 1973 oil price shock (~300% price increases).

The press has even called out the absurdity of the report:

“Finally, the IEA has a credibility problem. The agency was saying the opposite (we need more investment in oil) as recently as 2017. So either it was completely wrong then, or perhaps it's now. But the old messages from the IEA, and the new ones are difficult to square” - Javier Blas, Bloomberg

Unfortunately, the world has been trending towards the absurd…

We’re reminded of the Hunter S. Thompson quote:

“When the going gets weird, the weird turn pro”

Today, there’s no shortage of policy “pros” doing weird things -

Subscribe now

OTHER NEWS.

Michael Burry (of The Big Short fame) is massively short Tesla…

…that trade has functionally stolen the name “widow-maker trade” from those lost souls who’ve bet against Japanese government bonds…

The event has our attention -

• On Montney well economics

• The German / Coal drama continues

• US lender recovery rates drop

• Dutch Nat Gas trading booms

• Gulfport is heading back to the NYSE

• On the SPR drawdown

• Ownership of US equities by age

That’s it for this week - we’re rooting for the Spurs & Golden State on Thursday night - catch y’all next Tuesday -

“Our goal is to make money, and not creating problems for society,” DarkSide [group that attacked Colonial, from the FT]

Editor’s Note: Matt is working w/ the Marshall Society on their digital speaker series.

Tomorrow, the Marshall Society is hosting a panel on the virus / recovery efforts.

Panelists:

• James Sweeney - Chief Economist / Americas CIO at Credit Suisse

• Dr. Claudia Sahm - Former Section Chief at the Federal Reserve

• Jeanna Smialek - Federal Reserve Reporter for the NYT

Y’all are welcome to join (panelists will be taking questions live) - the event kicks off at 6pm London time (1pm NYC / noon Texas) tomorrow.

Event link / details -

Subscribe now

COLONIAL CYBERATTACK.

On Friday, the Colonial Pipeline suffered a ransomware attack. The hacker-group DarkSide is allegedly behind the attack.

Colonial is responsible for delivering 40%+ of the American Southeast’s gasoline supply. Obviously, an outage of this sort can affect gasoline prices.

This event further raises cybersecurity concerns about American infrastructure.

But - putting that aside - the public response from the hackers stole the story…

…it read like a passage from absurdist fiction:

“We are apolitical, we do not participate in geopolitics, do not need to tie us with a defined government and look for other our motives.

“Our goal is to make money, and not creating problems for society.

“From today we introduce moderation and check each company that our partners want to encrypt to avoid social consequences in the future” - DarkSide

Joe Weisenthal (Bloomberg) had a few good takes on the ordeal.

The FT noted:

“In a sign of how ransomware has become a professionalised industry, DarkSide operates its own “press office” and claims to have an ethical approach to choosing its targets” - FT

What’s clear - from this attack (and, well, all recent major hacks) - is that hacking risk is a tail risk that the market (industry) is not appropriately valuing -

OLD WORLD ATTACKS.

Rocket-fire has followed a conflict at Jerusalem’s al-Aqsa mosque.

Israeli police & Muslim protesters clashed over planned home evictions & restrictions at the mosque.

Hundreds of Palestinians were wounded - Hamas responded by firing ~200 rockets.

Israel then responded to Hamas:

“The Israel Defense Force’s spokesman Jonathan Conricus said the military had a ‘green light’ to hit military targets until Hamas ‘gets the message and learns its lesson’” - the FT

Politics aside, history would tell us that Hamas has not quickly gotten “the message”.

We expect to see that Israel will continue to respond with (more) air-strikes.

And - as of today - we don’t expect these events to escalate into a larger conflict -

Subscribe now

OTHER NEWS.

OPEC+ restraint appears to to be faltering…

• Iron ore prices hit records on Monday

• The biggest jobs (data) miss on record

• Check out pg2 of JPM’s annual energy report

That’s it for this week - check out the panel tomorrow - catch y’all next Tuesday -

"It's important not to overreact to this volatility in prices resulting from the unique circumstances of the pandemic" - John Williams [NY Fed President]

Editor’s note: A few weeks ago, we were alerted to the fact that the spot price of bee-tee-cee traded below the CME futures contracts. On the surface, that’s free money.

We’re guessing a few of you were also aware - here’s the best thread we’ve seen on the trade (and its risks).

OK - back to oil -

Subscribe now

Q1.

Diamondback reported Q1 adjusted EPS & EBITDA of $2.30 & $836MM, beating consensus estimates of $1.83 & $740MM.

M&A was the story.

• This is the 1st quarter post the QEP / Guidon acquisitions

• Diamondback also announced two divestures

Oasis (emerged from Ch.11 in Nov) is buying Diamondback’s Williston Basin assets for ~$745MM, financed entirely by debt (via their RBL & a bridge).

Considering recent history, that’s aggressive.

Diamondback also sold a small chunk of non-core Permian assets for $87MM.

Hedging hurt a bit, and will continue to - throughout 2021 - at these oil price levels.

[re/ FANG: we liked the presentation of the tables (above) from BAML]

From the other side of the world, Aramco reported Q1 net income of $21.7BN (also beating consensus estimates).

When you produce numbers like *that*, you get to skip the analyst Q&A call.

And Aramco is doing just that.

Later today, Conoco, CDEV, PVAC, Pioneer, & Devon report, among others -

OTHER NEWS.

Mohamed El-Erian has recently made a few good points about the Fed, bank policy distortions, & global supply chain issues. We think the latter faces structural / policy concerns going forward, even if (or when) short-term issues are addressed.

And we don’t think that’s a good thing.

• Did Munger slip the Berkshire successor?

• Pickering enters EVs (listen on Clubhouse, on Wed)

• A great thread on L/S

Subscribe now

That’s it for this week - hope y’all enjoy Cinco de Mayo w/ a couple Mexican Martinis - catch y’all next week -

“Occasionally people will look at me and do a doubletake and they'll look at me like they're trying to think where they know me from” - Nick Hoult

Editor’s note:  Day late -

Subscribe now

PVAC.

We did a doubletake on PVAC…

Penn Virginia’s wells, and our December look at Magnolia - another oily Eagle Ford E&P - caught our eyes.

PVAC is an Eagle Ford E&P company headquartered in Houston:

• The company focuses on Lavaca & Gonzales Counties

• Juniper Capital now owns ~60% of PVAC

From PVAC’s most recent operational update:

• 16,324 bbl/d

• 20,534 boe/d

• 80% oil cut

• $364MM net debt (the equity is trading at a ~$500MM valuation)

PVAC’s latest reserve report lists 500 future locations:

• They own ~91,000 net acres in the EFS

We built out type curve parameters (using ’19 & ’20 vintage wells) with ShaleProfile‘s state-level data.

A $52.5 WTI break-even is pretty good, in our minds.

On a multiples basis, PVAC looked good, too.

On top of that, their well efficiencies have been improving 15% per year over the last 3yrs (on both a total EUR basis & per 1000ft drilled), which is pretty rare.

So, the plan was to write up another (surprisingly boring) story about an E&P just drilling good wells…

…and then we looked at the capital structure…

And we found senior debt, junior debt, preferred shares, dividend restrictions, and a HoldCo / SubCo structure w/ one shareholder controlling 59%…

OK, not so boring.

At this point, we decided to throw the quick-and-dirty analysis out the window and focus on the assets.

So we ran a production forecast & built out the model.

We sensitized what we found:

• For this analysis, we ran a prod forecast using 3rd party data, covering 500 operated PDP wells owned by PVAC

• The above results represent NAV sensitivities (PDPs + PUDs - $ in MM) of PVAC’s wells

• Inventory is drilled over 8 years

• Our 2021 Oil Production is 18,209k/bbl

Two major take-aways:

• At the current strip, PVAC seems to be overvalued

• PVAC is more sensitive to the price of oil than drilling inventory depth

A 25% increase in WTI - from $60 to $75 - translates to a ~100% increase in value:

• A good way to value an E&P like PVAC is to apply probabilities to the above table, and take the sum (of the each scenario multiplied by the assigned probability)

• Doing so would likely result in a higher valuation than a point-estimate using today’s strip which is in steep backwardation

We expected to see this sensitivity to the price of oil with PVAC.

We did not expect the valuation - at today’s strip - to be so low.

[to be fair, we think Juniper did very well w/ their November investment]

The whiplash from looking at this E&P felt all-too familiar.

US E&Ps are never as simple as they look from the surface (or the screen) -

Subscribe now

OTHER NEWS.

• Doug Lawler is abruptly retiring

• Another Guyana discovery for Hess & Co

• On tax policy - an argument made twice in one week

That’s it for this week - the Ohtani dream has come to life - catch y’all next week -

“…from ESG - tweeting that it is ‘the paper straw of investing’ because it’s ‘symbolic, not substantive’ - to SPACs: ‘There’s so much dog sh*t there,’” - from Michelle Celarier’s profile (in II) of Carson Block / Muddy Waters

Editor’s Notes:

• Last week, we were trigger-happy - the newsletter fired while in-edit…

• Next week - ahead of earnings - we plan to profile a US E&P

• For now, we’ll just say: we like the stock

  ---

  Subscribe now

OIL.

A number of variables in the Oil supply / demand equation are in play.

We’ll start with the good:

• The US is recovering faster than expected

• China is recovering faster than expected

• *Excessive* global stimulus

The (potentially) bad:

• An Indian virus variant is of new concern

• Lockdowns have “resumed” in Germany / France

• The Iran-China deal

And, the hard-to-forecast:

• Libya’s NOC declares force majeure

• OPEC(+): meetings re/ Iranian production (& China deal), Russia’s compliance / willingness, &

So far, these variables have netted out to - in the short-term - higher crude prices.

Our take - if the US / China recoveries surprise (further) to the upside, then expect crude prices to continue rise -

Subscribe now

OTHER NEWS.

India is expected to follow China, building new coal plants. As pointed out by Javier Blas, China is now expected to hit a *new* peak in coal consumption this year…

• This time last year, WTI went negative

• A series of interviews worth watching

• The (retired) king of gas stirs the pot

• Gas price earnings surprises may be coming

If you have a few minutes to spare, the II profile of Carson Block is worth the read.

That’s it for this week - for anyone following the European Super League news, we’ll note that it reminds us of the origins of the EuroLeague basketball system - if you’re struggling to grok what European football (soccer) may look like going forward, then check out the EuroLeague (basketball) license format - that’s our best guess as to what may come - catch y’all next week -

“I always thought of economics as a quantitative field and when I hear people talk about why this is the right thing to do, they say things like ‘we really need to go big’, or ‘the ‘09 stimulus was too small’” - Larry Summers

**Editor’s note: we fat-fingered the send button during editing this AM; this one may be rough around the edges**

Subscribe now

IATROGENIC VOLATILITY.

“Iatrogenic illness is when you go into a hospital and you catch an infection there. Iatrogenic volatility is when policymakers, whose role is to stabilise markets, destabilise them with their actions. I think there is a risk of that taking place” - Larry Summers

As part of the FT’s Economists Exchange series, Martin Wolf interviewed Larry Summers (yesterday).

Summers shocked us - he pulled no punches:

“Today’s situation is a bit like the 1960s. It was then hoped that the laws of economic arithmetic could be suspended and that it would all work out. That experiment didn’t work out well for Lyndon Johnson, economically, and it didn’t work out well for the Democratic party” - Summers

Before continuing - we recommend reading the entirety of Martin Wolf’s interview.

OK - back to what Summers said.

It’s not that his words were especially profound.

It’s that they were as directly critical as could be, while remaining - to an extent - polite.

Still, Summers intentionally broke party ranks.

For almost 5yrs, financial speculators have been calling for “financial / asset bubbles” to pop.

Many will read into this interview, seeing another harbinger of such an event.

As we read (and reread) this interview, thoughts of cyclical political-economic concerns surfaced:

• Unproductive government spending

• An increasing welfare state

• Inflation

At a time when the world is now economically competitive w/ the US, can the US (or an economy), really afford this kind of structural slippage?

Hopefully, it doesn’t come to that & the dissent is heeded -

Subscribe now

OTHER NEWS.

BaFin (the German equivalent of the SEC) is facing a criminal probe over its handling of the Wirecard fiasco. It’s refreshing to see prosecutors take allegations of regulatory abuse seriously.

• On inflation & the base effect

• Another excellent Paul Graham essay

• US SPACs raise more than US PE in Q1

• On regional US Base Declines

• Diamondback’s revised guidance

• A little drama for Argentina's Vaca Muerta

• Russia is going for 25% of the hydrogen trade

• Total | Uganda | Kenya (finally) sign key agreements for the Lake Albert project

That’s it for this week - tonight, PSG plays Bayern in the Champions League (this one is too close for us to bet) - catch y’all next week -

“You don’t want to do an extension or fringe, you have to be in the areas with truly low break-evens” - Cody Campbell (DoubleEagle | DoublePoint)

Editor’s Note: **If you enjoy this newsletter - do us a favor, forward it to a colleague** -

Subscribe now

Transaction Notes:

• Pioneer | DoublePoint Presentation

• Pioneer PR | Double Eagle PR 

• @WAR527 commentary

• 8K | Purchase Agreement

A $6.4BN PARLAY.

The long Easter weekend provided cover for one of the larger recent Permian deals - the Pioneer acquisition of DoublePoint.

DoublePoint will receive:

• ~11% of Pioneer’s equity

• $1BN in cash

Pioneer will receive:

• ~100,000 boepd (at close)

• ~1,200 core locations

Relative to recent Permian transactions, the deal looks expensive.

However, those transactions were executed at a lower strip; with higher prices, we could understand a valuation that’s ~double.

That said, this deal was expensive, even on that basis:

HUSTLE & GAMBLE.

There’s a couple noteworthy pieces to this story.

The Campbell & Sellers / DoubleEagle acreage acquisition machine has been incredibly effective at scale (in ‘17, they sold ~71k acres to Parsley for $2.8BN).

It appears that the duo’s operation has been better - at acquiring top Midland basin acreage - than anyone else.

This time around, they had to do more (drilling) to prove out the acreage.

In 2020 of all years…

Scaling production in ‘20 was a gamble that - in the simplest terms - bet on oil prices mean-reverting.

DoublePoint increased rig-count at a time when almost all of their competitors cut rig-counts by half or more.

Doing so, DP committed to drilling wells at a negative NPV.

That’s a leveraged bet on WTI - like buying out-of-the-money calls on oil futures.

On top of that bet, the wells had to work.

And they did:

And - somehow - DoublePoint financed this bet with debt.

They drew-down on commitments to drill these wells, and then they re-fi’d those commitments with a private placement.

• An acreage bet

• A drilling bet

• And a financing bet

All three paid out - for a $6.4BN parlay -

Subscribe now

OTHER NEWS.

• On Iran oil exports

• India’s energy minister on net-zero targets

• An interesting take on Netflix & Europe

• Even the sell-side thinks the PXD/DP deal is expensive

That’s it for this week - congrats to Baylor - catch y’all next Tuesday -

“The only reason oil is higher is because Saudi has defended the price by cutting production. Demand hasn't come back. So the thesis we're putting on the table is if demand does recover as most people are expecting in a post-COVID world” - Doug Leggate, BAML

Subscribe now

BILL HWANG.

There are two new verb phrases on Wall Street:

• “Going-Bill-Hwang”: taking a large, concentrated leverage position

• “Getting Hwang’d”: a lender - unwinding a margin call - that takes a large loss

Bill Hwang’s family office (started with $200MM in capital, 8yrs ago) took >10% of Credit Suisse & Nomura’s market caps.

[Tbh, that’s an achievement]

For years, Bill Hwang apparently ran leveraged positions in Chinese large-cap tech equities.

That was an all-time-great trade.

And leveraging up a great - multi-year - trade is how you turn $200MM into ~$15BN.

But Bill, like many US Oilmen, found himself with a case of Winner’s Tilt.

He was caught long TMT names - with 4x+ leverage - as they crashed, while short the S&P500 (which is somehow up YTD).

And the following margin-call wiped out the run-of-the-decade, as well as a few bank risk managers in the process -

CREDIT.

OK - here’s where things don’t make sense.

[Bill Hwang’s trade fired up a few thought]

• The 10yr is up ~80bps YTD

• High growth tech stocks (EM Cloud Index) are down YTD

• S&P500 is up YTD

Rising rates should imply that the terminal value component of a DCF declines…

…and yet, the S&P isn’t budging.

[At least credit markets are still being rational]

US IG Corp Credit registered the 2nd largest quarterly loss on record, at -4.4%.

Which is *to be expected* when the 10yr rises.

The credit markets are convinced that interest rates will rise.

And equity markets are convinced that they won’t -

Subscribe now

OTHER NEWS.

• When oil workers are under siege (Moz)

• Suez Canal reopens

• Saudi wants to extend cuts

• Indonesia refinery fire

• The artist fka-Encana sells EF assets

• An Equinor discovery

• New global solar PV installations to increase 27%

• Total / Iraq talk $7BN infrastructure deal

That’s it for this week - catch y’all next Tuesday -

“The financial services industry is duping the American public with pro-environment, sustainable investing practices” - Tariq Fancy [former BlackRock CIO of sustainable investing]

Editor’s Note: we’re back, after a work-necessitated break. Thanks for waiting.

**If you enjoy this newsletter - do us a favor, send it to a friend or colleague** -

Subscribe now

GREENWASHING GAS.

Last week, Blackrock’s former head of “Sustainable Investing” - Tariq Fancy - eviscerated the “E” & the “S” in ESG.

***On National TV***

His arguments are well known to the Oil / Gas / Nuclear worlds, as well as to sober investors.

Still, it was surprising to see Tarik as the messenger.

It’s not quite the same as the Pope becoming a Protestant…

…but perhaps a Cardinal - certainly an Archbishop - screaming heresy to his [former] Church.

Given enough time, reality tends to rip away the veils of ignorance.

Tariq being a case in point.

Yesterday, another - similar - veil appears to be falling off a very large face.

The FT reported that the EU is considering labelling gas as “sustainable”.

There’s no doubt that if your goal is less carbon - and you don’t want to use nuclear - then increasing natural gas usage is the only way you get there.

There was a doubt as to if the EU / many Western governments could do math.

Their stated sustainable finance plans didn’t add up to a feasible solution.

With gas, they do.

And we think that at least a couple European IOCs (Total et al.) were the beneficiaries of their regulators tipping their hands.

Years ago.

And they planned accordingly.

It’s not like the European IOCs could (or even try to) hide the cards (like Mozambique) that they played over the past few years.

The deals were too big.

However, the certainty of Total’s language - like calling LNG “an Energy of tomorrow” - specifically in the context of yesterday’s headline out of Brussels, means that - to us - they knew this language was coming.

And front-ran the trade -

Subscribe now

STUPID-CYCLES.

11yrs ago, BAML ran a note (below) on “commodity super-cycles”:

The trade was a bloodbath.

History was rightly cruel to this thesis.

[To be fair, most of the sell-side held this thesis - we bring up BAML bc they gave the best arguments for, albeit incorrect in hindsight]

It’s worth examining why the thesis fell apart.

We’ll start with the idea of persistent, multi-year “insufficient production capacity”.

That played out - for oil & gas - about as accurately as a flat-earther’s description of the universe.

For some commodities (like Helium), prices did appreciate dramatically.

Today, there’s still a shortage of cheap Helium.

But prices of just a few commodities dramatically rising *is not* inflation.

Those *are* cases of “insufficient production capacity”.

Worse still, the inflation argument (from the above report) completely fell apart.

But the ghost of inflation still haunts equity investors….

The late 70's saw the peak of the Misery Index coincide with high oil prices.

And recent fears of inflation (which may come to pass) are causing investors to search for trades that historically performed well in high inflation environments.

Those investors return from their studies with the trade “long-oil”.

Well, oil spiked in the late ‘70s on account of supplies being disrupted by the Iranian Revolution & the start Iran-Iraq War.

*Not inflation*.

But investors don’t do that much homework.

They like themes…

“…humongous ETF inflows into energy past 4 weeks as inflation theme dominates…” - BAML Flow Show, March 18th 2021

Over the same time-period, WTI is down ~3% & XOP is flat.

For an investor, the theme to ride is not ~“inflation causes commodity prices to rise”…

..it’s “insufficient production capacity” causes commodity pries to rise.

Which has been happening to a number of commodities…

…this year:

Chinese environmental regulations have caused Steel & Aluminum prices to go interstellar.

On cue, “insufficient production capacity” strikes again.

We think the blind commodity inflation thesis is baseless.

Don’t buy it.

But - if a commodity has production capacity issues - there’s your trade -

Subscribe now

OTHER NEWS.

• Cheapest shale refinancing conditions in last 7yrs

• More on inflation & data from Macro Hive

• An interesting Guyana Basins Summit note

• Gas bills, post-TX-blackouts

Btw, if you want an inflation hedge - just buy BeeTeeCee; it quite literally can’t be inflated, by design -

That’s it for this week - outside of investing & commodities, we’ve been listening to the neuroscientist Andrew Huberman’s podcast: Huberman Lab - if you’re looking for a non-fiction / non-work / science related podcast, then we strongly recommend it (also strongly recommend for athletes) - catch y’all next Tuesday -

“In just 10 years, vast majority of politicians & economists have switched from a view that large budget deficits are highly irresponsible to view that anything but large deficits is highly irresponsible. That should make people less confident in the claim, but it's the opposite” - John Arnold

Editor’s note: Due to work / logistical issues, we’ll be off for the next ~3 weeks. If something big happens, then we’ll send out a short update -

Subscribe now

THREE BUBBLES.

• Equities

• Debt

• Bee-Tee-Cee

In the least couple weeks:

• US equities hit an all-time high

• Italy offered 10yr bonds at a 0.57% yld

• Bitcoin breached $50,000

Just about everyone agrees that massive deficit spending from governments around the world are fueling these bubbles.

And that they have been, for at least the last ~10mths, if not longer.

Right now, something’s different:

• The US 10yr is on the rise

• And commodity prices are ripping up

So - now - we’ve seen financial asset prices & commodity prices inflate.

The question is: do the central bankers change course & treat this situation w/ traditional counter-inflationary policy?

We expect that - eventually - they will have to.

But that could be years from now.

Aggressive deficit spending policies have fueled these bubbles for much longer than past bubbles [for a digression on past bubbles, read this].

“It's going to be great when ‘deficits don't matter’ becomes universally unquestioned conventional wisdom right at the moment it stops being true” - @HedgeDirty

Absurd deficit-thinking got us here.

And it’s eventually going to take us to a place where we don’t want to be -

OIL.

In Q3, will the market be oversupplied, or undersupplied?

The answer will likely hinge on Russia’s response to the March 4th OPEC+ meeting (or any subsequent meetings in the 1st half of ‘21).

And Russia’s response will likely hinge on *US Shale activity*.

*That* takes us back to our favorite tweet of the year:

“Meet Billy. Absolute Legend. Be Like Billy” - @MOAR_Drilling

The oil market has their eyes on Russia.

And Russia’s got its eyes on Billy -

Subscribe now

OTHER NEWS.

Sheikh Ahmed Zaki Yamani - the former Saudi Energy Minister - passed away. He lived & experienced some of the most interesting times in the oil market.

In ‘73, he & OPEC executed the infamous oil embargo. In ‘75, he survived one of the world’s most dramatic kidnappings by Carlos the Jackal.

Sheik Yamani left us with a few witty, prescient quotes (we’ll save those for another day). He was 90.

• Petrobras gets new management

• Physical market update

• A few thoughts on ERCOT

• Daft Punk is no more

That’s it for this week - we should be back by ~mid-March - catch y’all then -

“The East Texas oilfield looks today a bit like the Samotlor field in Siberia” - Javier Blas

• Yesterday afternoon, it was 55F (13C) in Cambridge, England

• At the same time, the wind-chill in Corpus Christi, TX was 1F (-17C)

• We’re not sure if Hell froze over…but Texas certainly did

Subscribe now

BLACKOUTS.

• Permian oil output is down ~1MM bbl/d

• U.S. GoM refiners runs rates are down ~3MM bbl/d

Last month, headlines read “Wind power overtakes coal in Texas electricity generation”.

*Bad timing*

The “R” in ERCOT stands for Reliability.

Well, the Texas power grid has been anything *but that* for the last couple days.

The cold has now frozen wind-mills, as well as many layers of the gas system.

Outage Stats:

• ~4MM homes & businesses lost power in Texas

• ~5MM homes & businesses went dark in Mexico

What happened?

• Demand exceeded the max supply forecast

• At the same time, 30% of capacity went off-line

• And the ISO doesn’t know when it will be fixed…

If you’re looking for more details on the outages, then we recommend following Jesse Jenkins for updates -

OTHER NEWS.

• On Wed nights (9PM CT), @EnergyCredit1 & @nimblephatty host a show on Clubhouse - check it out

• A couple days back, Dan Yergin dropped into separate room / talk on oil on Clubhouse - the app has been a great place to discuss oil & gas

We took the long-weekend off - hopefully you did too - we’ll be back w/ our regularly scheduled programming next week -

“I don’t think anybody dares to short the market when Saudi is like this,” - OCBC economist Howie Lee

Subscribe now

CRUDE.

• Brent is >$60/bbl

• WTI is >$58/bbl

The oil markets have started off the year strong, riding the waves of bullish headlines including:

• China demand

• Shell’s North Sea raid

• Saudi’s restraint

Looking closer at these headlines, we’ve found that the stories are nuanced…

re/China:

“BBG talking about the 127 VLCC's heading to China. But many of these are the cargoes that were agreed and purchased in November when there was a surge after quotas. That is the past. the present shows weakening demand as differentials are following and many cargoes unsold” - @Big_Orrin

China’s demand for oil & oil products remains strong; however, the concern is that they have already stocked up:

“… analysts S&P Global Platts spoke to expecting a consumption growth of 3.5%-4.5% year on year, but imports of crude oil may not witness similar growth as the country grapples with bloated inventories” - S&P Global Platts

re/Shell:

“The North Sea oil market has flipped, with the sellers dominating again after Shell appeared to take a step back. The Brent CFD curve has also flipped, with 1st week in cotango to later weeks. Worse, has also plunged, as Rosneft offers more cargoes” - @JavierBlas

&

“Said this was likely to be shell squeezing the 2H feb North Sea market. Likely they are selling their big winning paper position which is causing contango. Likely to start reselling their cargoes soon” - @Big_Orrin

What appeared to be recent strong North Sea buying may have been Shell playing a game of sorts (which they seem to have won) -

re/Saudi:

Putting China & the rest aside, we think this is the only thing that (really) matters:

“Saudi Arabia pledged extra supply cuts in February & March following reductions by other members of the OPEC & its allies” - Stephanie Kelly, Reuters

As long as this cooperation remains, oil prices won’t crash.

Strangely, Covid & the Navalny situation in Russia may have helped oil prices:

• Russia broke up the group last year

• They need strength at home to do it again

• Covid & Navalny have lowered Putin’s approval rating

Putin’s approval is still relatively high compared to his peers (despite being low for him).

However, Putin tracks & polls opinions.

We *don’t* think that crashing oil prices would be popular, right now.

Therefore, we think *that* - and Saudi’s restraint - will hold up the market -

Subscribe now

OTHER NEWS.

• Mubadala posts the highest bid for Petrobras refinery

• Qatar’s LNG expansion moves forward as expected

• Oil Majors win UK Wind Auction

• Hedge funds are now long oil

• SPAC Economics

That’s it for this week - Congrats to Tampa - for those watching La Liga, this decision is shaping up to be an all-time worst sports management call (reminiscent of Brady leaving the Pats) - catch y’all next Tuesday -

“HOLD THE LINE!” - the r/WallStreetBets battle-cry

***Editor’s note:  if you enjoy this newsletter - do us a favor - forward it to friend or colleague***

Subscribe now

THE BIG SHORT SQUEEZE.

Undoubtedly, Michael Lewis’s next book will be about the events of last week.

Two simple ideas spurred the madness:

1. Numerous Hedge Funds bet that GameStop would go bankrupt

2. *One anonymous Reddit user* thought GameStop was a deep value play

We’ll start this story from the beginning.

A modern-Machiavelli had an idea…

SEPT 8TH, 2019 - THE UNDERDOG.

“Hey Burry thanks a lot for jacking up my cost basis” - u/DeepF***ingValue

In early September, an anonymous Reddit user - DeepF***ingValue - posted a screenshot of a ~$53K long-dated call option trade in the r/WallStreetBets subreddit, along w/ the quote above.

The call options were on GameStop.

The “Burry” reference was to Michael Burry - the hero of Michael Lewis’s “The Big Short” - who disclosed a large position in GameStop.

Another update followed at the end of September -

SEPT 30TH, 2019 - THE MONTHLY UPDATE.

At the end September, DeepF***ingValue posted an update of his original screenshot.

GameStop’s share price closes out the month at $5.52.

He continued to post an update on the last day of every month.

By the end February of 2020, the position was in drawdown…

APRIL 13TH, 2020 - THE BIG SHORT SQUEEZE.

The trade begins to work.

It’s the first time DeepF***ingValue provides the context that there is a short squeeze component to his thesis.

The trade is now up ~200% -

JULY 14TH, 2020 - ROARING KITTY.

A YouTube channel - focused on investing - by the name of “Roaring Kitty” emerges.

The anonymous host describes himself as:

“I'm probably best classified as a fundamentals-focused deep value investor”

AUGUST 21ST, 2020 - THE CALL.

In a video titled “The Big Short SQUEEZE from $5 to $50? Could GameStop stock (GME) explode higher?”, the host of the Roaring Kitty YouTube channel delivers a 5min GameStop pitch.

In hindsight, this is an epic call -

NOVEMBER 16, 2020 - THE CATALYST.

The former CEO of Chewy, Ryan Cohen, acquires ~10% of GameStop & sends a letter to the board.

Cohen calls for the board to seek a strategy that is coincidentally similar to the Roaring Kitty’s value investment thesis.

CHRISTMAS DAY.

The anonymous Reddit user DeepF***ingValue outs himself as the host of the Roaring Kitty.

We now have a face, but no name.

His GameStop position was now worth $3.6MM -

JANUARY 11TH, 2021.

Ryan Cohen joins the GameStop board.

GameStops’s share price rises from ~$20 on Jan 11th to ~$40 on the 14th.

A portion of DeepF***ingValue’s calls expire on Jan 15th.

DeepF***ingValue closes those calls, up 15,000% on those contracts alone.

The Big Short Squeeze is only beginning -

JANUARY 25TH.

At this point, the >2MM members of the r/WallStreetBets subreddit are worshipping DeepF***ingValue like a cult does its leader.

At the same time, the WSB cult also realizes the trade isn’t over.

They had identified that short-sellers were still short GameStop more than there were shares outstanding.

The community bands together - buying shares of GameStop - perpetuating the squeeze & driving up the price.

Melvin Capital - a large fund that is short GameStop - is bailed out by two other hedge funds.

All the while, Davos (the World Economic Forum) is underway, and *NO ONE is watching*.

A group a message-board traders are dominating headlines - the talk is that their trade is threatening the survival of major market participants.

GameStop’s share price closes *at >$76* -

JANUARY 29TH.

The will of the members of the r/WallStreetBets subreddit to hold their positions - perpetuating the short squeeze - is unprecedented.

Even hedge funds join the trade.

The trade becomes a gigantic coordination game.

Their battle-cry of “HOLD THE LINE!” - as in, ‘don’t sell’ - enables a giant Nash Equilibria.

The fallout is profound:

• Citron Research discontinues short selling research

• Retail brokerages straggle to post margin to clearing houses

• Subsequent trading restrictions cause national outrage

• r/WallStreetBets gains 6MM new members

**GameStop’s share price closes the week out at $328**

And our hero is doxxed - his name is Keith Gill, a 34yr old dad who lives Boston -

Subscribe now

TODAY - THE FALL OUT.

Pre-market, GameStop’s share price is still trading at ~$170 per share.

The squeeze is still alive, but losing steam.

Last week had consequences.

But it also shined a light on how markets are behaving, and - more importantly - how they are *not behaving*.

We’ll close w/ our noteworthy takeaways:

• Asset prices are not necessarily representing fundamentals, especially on the downside

• Short & Long/Short strategies are much more difficult than in the past

• Hedge funds de-leveraged / de-grossed, perhaps permanently

• Reddit/WSB can easily pump an asset price

That’s it for this week - hopefully things cool-off & we can get back to oil - catch y’all next Tuesday -

“Will the SEC step in to protect Wall Street from aggressive Mom & Pop traders?” - Joe Weisenthal

Subscribe now

FEDERAL LANDS.

• The DOI suspended approvals of new drilling permits & leases across U.S. federal lands for 60 days

• Plays affected: New Mexico, GoM, & Powder River Basin

• Plans have leaked that would freeze on new drilling rights across 700k+ acres of federal lands

The current DOI move shouldn’t impact existing federal permits or leases.

However, it should be expected that the current Colorado permitting process playbook (which has situationally blocked new drilling) will be rolled out by the new administration.

Conoco (via Concho) & EOG have some of the best performing recent wells, in New Mexico.

If the temporary DOI permit / lease suspensions turn into outright bans, then they will lose out on some of the best onshore US inventory.

Concho’s (now Conoco) NM wells vs TX

EOG’s NM wells vs TX

Source: ShaleProfile (message Enno, start a trial today)

If federal bans move forward, US oil production will decrease, to the benefit of other producers (both in the US & abroad), as well as to the benefit of oil prices -

NORD STREAM 2.

• 94% complete

• European Parliament calls for halt of construction

• Germany & Denmark have allowed a restart of construction, despite US sanctions

From DW:

“It [the European Parliament] issued the call in response to Russia arresting opposition figure Alexei Navalny upon his return to Russia. He had been in Germany recovering from an attempted assassination with a military grade nerve agent.”

The insincerity of the Germans in their advocacy of peaceful support of democracy was noted across Europe.

Poland's President Andrzej Duda sat down with the FT, making the comment:

“There is no other peaceful tool for applying pressure to a state that breaks the rules of international law. The primacy of international law is fundamental here. As long as international law is observed, there is no war. If international law is broken, the effect of this is always conflict”

That comment was as much a shot at Germany, as it was a shot at Russia -

Subscribe now

OTHER NEWS.

• Enerplus is buying Bruin

• SpaceX is drilling gas wells in Texas

• Shell acquires UK's largest EV charging network

• WallStreetBets is winning the GameStop battle

• The now infamous Russian palace video

That’s it for today - catch y’all next week -

“I do not agree with what you say, but I will defend to the death for your right to say” - Voltaire

***If you enjoy this newsletter, do us a favor - send it to a friend or colleague***

Subscribe now

VARIANTS.

In the last week of November, we listened to an interview w/ Prof Yaneer Bar-Yam, that caused us to make this call:

“The - likely, in our mind - event of a 3rd wave (and a subsequent 3rd lockdown) will have consequences for oil markets & their participants, as well as the broader global economy”

The UK is already weeks into that lockdown, and France is nearly there, under curfew (the writers of this newsletter are currently in the UK & France).

Fortunately for oil, we’ve been wrong on there being demand consequences, so far.

The past few weeks have seen new information about COVID emerge - information that we’ve found to be relevant.

And regarding these variants, there’s two things that we think are worth a closer look:

• Transmissibility

• Antibody Immunity

The good news is that on the topic of antibody immunity, studies are showing antigen persistence. In other words, antibodies broadly appear to hold up.

The bad news is in transmissibility.

There’ve been hundreds (if not thousands) of variants of this virus.

However, as of now, four stand out as having relatively high transmissibility (a higher R(0)):

• UK variant (B.1.1.7)

• California variant (L452R)

• Brazil variant (P.1)

• South Africa variant (501Y.V2)

UK:

This is the most discussed variant, so we’ll be brief:

• It’s ~30-70% more transmissible

• For context, that’s like changing an R(0) from a 2 to a 3

Cali:

In December, the Cali variant was in “3.8% of their samples. By January, it had jumped to 25.2%” (NYT). In the last ~6 weeks, California has seen a higher rate of spread, compared to other regions of the US.

The virus’s relative outperformance in California has been in spite of lockdowns, while - at the same time - there are numerous reports of Florida bars in *overflow*.

Brazil:

• Noteworthy in that this variant is much more deadly than other variants for younger populations

• Governments around the world got the message & issued flight bans

South Africa

• Appears to be ~as contagious as the UK variant

• A specific mutation (E484K) reduces antibody recognition

Given the antibody recognition concerns in the South African variant & the mortality issues in the Brazilian variant, we expect to see extended travel bans to those regions.

Our immediate thought was “short LATAM Airlines”. Well, they’re already in Ch.11…

We also expect travel bans to pop-up with relative frequency for the short & medium terms.

If specific variants have antibody concerns & the current development vaccine process remains in place (requiring months of trials), then we expect (at least) regional outbreaks to continue -

Subscribe now

OTHER NEWS.

• ADNOC is looong oil

• …while Total is hedging their position

• LNG prices come back down to earth

That’s it for this week - GO PACK GO - catch y’all next Tuesday -