Chuck Yates Needs A Job

0:20 Hey everybody, welcome to Chuck Yates needs a job, the podcast, in the never-ending quest to talk about things I know nothing about. We have exhibit A coming up, but really lucky that Brian

0:35 Sandspary from EGS. energy is my guest today. Welcome in, Brian. Oh, thanks. Thanks for having me. So you and I were kind of texting emailing back and forth because we never met And I think

0:48 your opening remark was, yes, Yates, you never hired me for any portfolio companies that came. Is that really true? That is true. We may have met once when you came into a pitch, we were doing

1:01 it at Caine. And I will, because I love your podcast and I always watch and I would just remind your viewers that you didn't hire us and you were subsequently fired. So I don't know if that's

1:13 directly related, but that's what I know. So I was talking to a CFO of one of the oil and gas companies today. And he said, you know what, I'm glad you got fired Yates because prices have only

1:26 gone up since they kicked you out. So I've got that going for me too. So there we go. So you have kind of this wild story on how you started ages, all that eagis, sorry. I'm gonna say ages five

1:42 times. I apologize -

1:45 Walk me through that real quick 'cause you weren't a lifelong energy guy - No, in fact, I spent 22 years outside of energy and taking what was an advisory business and into a really tech driven

1:59 business which we can certainly talk about, but had a good friend who was in the business, worked for one of our competitors. He was struggling a little bit on little crossways with some future

2:12 decision making and what they wanted to do with their company. I knew I didn't want to do what I was doing for a long time. And so I said, why don't you start your own? And

2:24 there were a lot of concerns, capital, leadership, all sorts of things. I said, I'll back you. You start it. And someday I'll be able to walk away from what I'm doing now. And I'll join you,

2:35 which I don't think he ever thought would happen. But he just was formed over several bottles of wine at a beach one night while I was on my way to transfer up to Chicago Most good stories start that

2:47 way. All buddy made it be start with too much wine. So literally y'all started. When was that? 2013, I think September 2013 was our formation date. I joined full time in October of 2017. So he

3:03 just kind of grew up as an advisory business early on. While I was in my prior career and had a chance to transition out and Join me this full time in 17. some fun things with it since then. Cool.

3:17 So what do you guys do? And maybe when you talk about that kind of evolution over time of what you do. Sure. So yeah, we'll start

3:31 with today. Software, advisory, great people, helping people navigate the hedging and carbon offset markets. That's the simplest of across oil and gas manufacturing, transportation, etc. So

3:44 the businesses evolved a lot. When we started the business, it was very much founded on this belief that hedging transactions, complex derivatives that people use to protect their prices,

3:56 especially in oil and gas. We were in Houston. It was the logical place to start that people needed help facing off with the likes of Goldman Sachs and JP Morgan and Citi and the big players on

4:08 what's the right structure, what's the right tenor, what's a fair price, etc. So it was a pure advisory business. when we started - Yeah, 'cause what always happened, it seems like you're

4:20 making acquisition, right? You're an EMP company and you're closing on, let's say July 15th and all the week up to it, you generally had to, at least back in the day, do your hedging through the

4:37 bank that has your borrowing base, as your RBL And they always quoted you, quoted you, quoted you. And then literally on the day of closing, the market moved a dollar a barrel or something 'cause

4:49 they had you over the barrel. There was such nice guys at JR. and yeah, exactly - Well, yeah, look, that's kind of part of it. And we thought that people that are finding oil and gas and

5:02 exploring, and now it's transitioned to people who are making beverages or growing eggs moving product, they need to focus on doing that. They don't need to be experts in the derivatives market.

5:14 And so that has always been at the core of who we are, is that we can help them be better at the table when they're facing off and hedging their commercial risk - And so, I mean, producers,

5:29 kind of when I got into the business, you actually wanted to be unhedged, 'cause that's why investors were investing. They wanted to exposure to the commodity markets. And then you would have

5:39 downturns in which everybody would get fired 'cause you went bankrupt And then CEO started saying, We might want to hedge, that might be better. And so you grew up with, in terms of oil and gas

5:54 companies wanting to hedge, lock in prices, there always had to be somebody on the other side of those trades. Well, you just said that I think's interesting that I don't know anything about and

6:06 I'd love to hear more about is, who's on the other side of the trades?

6:12 And are they really locking in? cost because it would make a lot of sense. I mean, if I'm an airline, theoretically, I should be locking in costs just for predictability. Yeah. So what we

6:23 everything that we do is bilateral in nature, direct contract between a producer or consumer. Okay. And back to that and a financial institution. That is how these markets are made. And so we

6:36 don't have an oil and gas company facing off with an airline per se, both of them would be facing off with a financial institution who's then able to lay that market out or lay that risk off in the

6:45 market or hold it if they'd like. But you're exactly right. If I'm a if I'm a real quick, I'm gonna cut you off. I'm sorry. Financial institutions that do that, you have the big money center

6:57 banks that all seem to have arms. Are there other folks doing that? There are that you have a number of folks who are doing both secured and unsecured folks like cargo or next era or your coke was

7:08 in the business for a for a long time they're starting to get into KOCH Coke.

7:12 So there are a number of different players. Shell, BP have desks that do different trading as well. So you're right. Money center banks and a number of others who are willing to take positions and

7:23 sometimes they're not secured away - Gotcha. So, okay, that's interesting. So basically they're sitting in the middle end of make sense 'cause you need a balance sheet if you're gonna take

7:36 the trade And so the producer side of it makes sense to me. Hey, we, you know, oils at 75 grade. I wanna lock that in. Do you work with any of the consumers? Oh, cool. Tell me something about

7:53 that 'cause that's something I don't know anything about - Sure. So we've got beverage manufacturers that have massive aluminum exposures. If you think about purchasing billions of aluminum cans a

8:02 year. So we made an acquisition of a company called Next to this commodities about a year and a half ago got us into that space and now people can lever. When we say producers or consumers, when

8:12 you're a consumer, your price risk is the exact opposite way if you're a producer. And so you can hedge those risks also. When you're in manufacturing, you can see, I take a big beverage

8:23 manufacturer and just play that through. They also have diesel exposures because they're shipping their products different places. They have bunker fuel exposures as they put that product on ships.

8:33 They have FX exposures because they're selling at multiple countries. In many cases, they have interest rate exposures because they've got debt on their facilities. They've got power exposures and

8:43 exposure natural gas because they're consumers of all of those different commodities. And if you're a beverage manufacturer, I would think your revenue top line dollar per bottle is pretty sticky.

8:59 I mean, you

9:01 have inflation and you adjust prices and all, but for the most part, Coke wants to sell the bottle the same price every year That's right.

9:10 consumer on the end of it, the product expects to pay a certain price when they walk into a convenience store or grocery store. You have seen those prices move substantially here lately, like

9:20 everything, but you're right. If you're a manufacturer, you

9:25 want to keep your prices consistent. Yeah. The thing I saw it move this weekend that struck me that I hadn't noticed before is when you go buy ice, you know, like ready-made ice from the grocery

9:39 store, they're no longer 10-pound bags. They're seven and they still cost two bucks. Yeah, it's a seven-pound bag now. When you go to the grocery store and just check it out because that's the

9:51 other way you handle inflation, right? You just give them less. It's interesting. So what would a typical consumer

10:01 or I guess yes, consumer look like. and just totally make this up. And again, it's because I know nothing and this is interesting to me is, are they hedging three years out, five years out, six

10:16 months out? And I know everybody's gonna be different but give me an example of - Yeah, so you're gonna see oil and gas producers right now as you know, getting out three years in most cases. We

10:27 just did transit, someone hedged out all their production for five years, 100 did

10:33 a recap and that's a great way to lock in your cash flows. Most markets won't allow you to go out that far. When you look in the metals markets, you're looking at a year or two years generally

10:43 speaking is about as far out as you can get. And there's a lot of back radiation in those markets, lumber's even shorter than that. So you see home builders hedging, lumber costs, jet fuel, you

10:54 can get out a little further a couple of years. So we're seeing airlines get a lot more interested in hedging again, those programs that went, people got so scared of for a while I see and those

11:04 come back. you could hedge jet fuel, you could buy calls on jet fuel for 90 cents in the middle of the pandemic. And now jet fuel is a lot more expensive than 90 cents right now. So that was a

11:18 really good hedge to make. And they also had every plane sitting on the ground. That's right. So is this a true statistic? I'm sorry, I'm jumping around, but problem with ADD podcast shows. You

11:30 know,

11:33 the one issue that the airlines have is it's my understanding that at least historically, I don't know if this true post pandemic is some ridiculous percent of the ticket sales on each individual

11:47 flight 80. I'll kind of make that up happen in two weeks before the flight,

11:54 which is good. Well, but for them, if that's your revenue and you're talking about locking in the price of fuel, I now understand why it's kind of tough for them. Right. Well, there's no doubt

12:06 about that. But if you're setting a schedule out, because people are purchasing tickets on flights six months a year from now, that's all people talking about buying flights that are really

12:16 expensive out of year from now. If you can start to lock in your cost and you have a lot more control of every move you make from a revenue perspective can just be a lot smarter if you understand

12:28 what you're underlying. No, airlines really. That's sophisticated. I would think they are They're pretty darn sophisticated. Hey, we've got X number of miles bought a year out. Let's go lock in

12:37 the fuel costs today. And we've guaranteed our profit. Absolutely. Oh, that's interesting. Because I think it was Southwest

12:50 airlines at one point hedged out five years when oil prices were really low and the great profit run they had. And they were writing articles about how well they were doing literally was just the

12:58 hedge Yeah. Well, you know, we were actually talking about that this morning and the office that I I wish people didn't even talk about it. Because if you remember the language it was being used

13:07 back then, and we'll compare it to what's being happening today, they were talking about these huge gains they were getting on their hedge book, right? And you hear the same sort of language being

13:16 used with hedging today on these big losses that people have on their hedge book if you're an upstream oil and gas producer, right? And that is a mark-to-market loss, and we can certainly see. But

13:27 as my good friend Gary Tanner at Quantum always says that the country club is filled with people who sold too early. Yeah. And so if you're an oil and gas producer and you, well, let's just use it

13:39 in what people think about it. If your cost of Apple stock is 2 a share, and you sell it for 5 a share, and it proceeds to go to 9 a share, how much did you lose? Yeah. I mean, you didn't lose

13:52 anything. You made money, you decided to sell at five. Right, you can't worry about what the stock did afterwards and you have to think about hedge programs the same way.

14:02 If you sold your gas at 5 and you're lifting costs for two, you're making a lot of money. Could you have made nine? Sure. But you protected yourself and had certainty. I'd say the same thing

14:14 about Southwest Airlines. They had, quote, gains on their hedge book, but they paid a higher cost in the field. What they did is they locked in their price, so they had surety. That's what

14:23 hedge you need to be about, is about surety, not about trying to drive alpha in an investment portfolio. No, I think

14:31 certainty and you're right. The beta just so dominates our industry really on both sides because the great Amazon run of all time, well, we had historically record low oil prices, ie. low

14:46 gasoline. That's why all those vans got to run around. There's definitely a day of reckoning coming to those guys. Well, I thought you all did a great job on zero talking about Amazon's carbon

14:56 footprint for exactly those reasons. You're right.

15:01 those were built on the back of low crude prices. And there's no other way to say it - Yeah, I tweeted out one day that they need to pay for the plugging and bandwidth and liabilities of all the old

15:14 wells. So we've kind of got this active market on, what I'll call the consumer side of energy. How has that market changed over time? And I'm thinking, but you correct me where I'm wrong One,

15:31 it's gotten a lot more sophisticated. And then two, there's probably a lot more in the way of software and technology to help predict and manage that, or is it still all kind of spreadsheets - Well,

15:46 it depends on who you ask. But you asked about the evolution of our firm. So I joined in 2017. I had a lot of pattern recognition on, hey, there was an advisory business. We were happy to be

15:58 focused on HR.

15:60 myself a bit, go back, when I started 1995, 401 statements, you may remember this 401 statements came quarterly. You could change your election quarterly, you enrolled in benefits on a piece of

16:13 paper, like this plan and pensions, which aren't really around anymore, but pensions, your ability to figure out what you had was basically zero. And so there was this shift on bringing all that

16:25 online. So now that's ubiquitous. Everybody knows that to be on line and things you can do. So we started looking at Aegis in late 17 and saying, well, this is this is an interesting advisory

16:37 business. I think there's a lot of application for technology. Started out simple. What did people need to report to the board on how much is hedge and what weighted average price? And we kind of

16:46 started really slowly. And it ultimately came, we ultimately built out our technology to do things like ingest, confirmations, digitally read them, match them to a trade, and allow you to dock

16:57 you sign through. same thing with a settlement that came in from a hedge. And so every year it's just gotten more and more advanced. More recently we've been applying analytics. So you were in the

17:08 industry a long time. People used to say, oh, it should be 75 hedged in the front and 50 next year and 25. Well, that's silly. That doesn't tell you anything other than maybe the bank had that

17:21 written end of the RBL. But there's a more sophisticated way to think about what am I trying to solve for? Am I solving for a revenue per unit, a top line revenue, e-but-duh, et cetera. So we're

17:32 now applying analytics to allow people to model the impact of hedges. And then most importantly, just the modernization of how these transactions get done.

17:43 I kept stepped into this business and most people were doing it over the phone. Literally pick up the phone, call five banks, get bids, or offers, try to decide. By the time you got the fifth

17:53 bid, the first bid was no good anymore. Market moved on us. Yeah, that's what you're talking about. And so, and the

18:01 more advanced folks are using

18:05 IceChat, which we're users of IceChat ourselves, but it's effectively like changing - And what's Ice? Ice is a broad market, does lots of different things. They have a product called Chat that's

18:14 effectively like - So that's the intercontinental exchange, gotcha. So that kind of, is that a competitor of the NIMEX? Yes, correct They would all have different markets for trading, settling,

18:27 different securities and derivatives. But we - so IceChat is effectively like you and I negotiate in this significant bilateral contract over WhatsApp or text message, which we thought was odd,

18:41 someone that was new to the industry. And so we started building out some software to be able to help facilitate those transactions. Hey, can we push information out to multiple banks

18:51 simultaneously, collect bids and offers on a single screen. have some of work in order, close out that transaction pass and do reporting - Bring us to like circa '97 - Correct world, right? Every

19:03 other market on the planet works that way and it was hard to figure out why this bilateral market didn't and I think we just, where we ultimately landed was the banks didn't really have an incentive.

19:15 Goldman building a platform for JP Morgan to trade on wasn't really going to happen and no individual company could build it themselves right in a way that banks would facilitate it. So by virtue of,

19:27 it's privacy and we have over 25 of US oil and gas volume flowing through our platform every day on the energy side. And so we were large enough where we could afford to make that investment to build

19:39 that technology out. Let us into a whole different discussion but that sort of full picture of reporting to analytics to executing trades on a platform has been

19:53 a really fundamental shift since even the late.

19:55 2018. So was it just the oligopoly didn't want the transparency because they were making enough money or was it more kind of just stuck in their ways or all of the above? I don't know is the short

20:10 answer. But I just don't think that the market had a logical person to build it. For 40 different banks and unsecured folks to get together and come up with

20:23 a platform, that's a long path. And so I just don't think there was the incentive for anybody to get together and get a platform that would make sense. So

20:33 back before I joined Kandy Anderson, I was with Stevens, Little Rock, Arkansas investment bank. And that was, so I was there in '94 to 2001 and you saw the rise of the internet. And you also had

20:49 the rise of Enron during that in Ron. at some point came up with something in Ron online. And that was gonna be fully transparent. You're trading with, we're in Ron, you no longer have to call,

21:07 get quotes from us, you can get quotes and everything. And what was interesting about that is in Ron was big enough and powerful enough at that point that people were really scared. Do we wanna

21:20 trade straight with them? We're giving them our information. And so one of the ideas we came up with at Stevens was we were gonna, and I forget what we were gonna call it, but it was basically,

21:37 it was gonna be some anonymous site that would trade with in Ron online. So we'd literally just sit in the middle between people that wanted to trade with in Ron online, but needed to come So we put

21:51 it together. The Siemens family was willing to back it, 'cause it was gonna take some balance sheet type issues to do. I wanna say we had four or five different meetings with Enron, including one

22:03 that I think skilling set a high at. I don't, you know, and all that for whatever reason, we didn't get it done. And thank goodness. That's why we should have been swept up in the bankruptcy.

22:15 But there's, I just kind of lay out that story because I think a lot of energy trading historically has always had the paranoia of wanting to retain the information, wanting to own it. And so that

22:29 was probably a legacy. So the software kind of stuff that you guys set up is that a product you sell, or is that just clients of the firm use it? How does that work? So it's evolved a bit at this

22:43 point. So it's part of our offering. So our customers would. our traders are on behalf of our customers. We'll use the software. We also have customers who only use this for technology. We don't

22:53 do trading for though. They'll be able to

22:57 do that trade as well. Now, the shift to swap execution facility, which I'm sure you'll talk about here in a second, actually opens it up where it's gonna be available to all folks like us. So

23:11 other hedge advisors, including our competitors, and there's a bit of a long story on how we got there. But it'll actually be open up to any market participant, including individual consumers,

23:23 producers, other hedge advisors like Aegis, even introducing brokers, et cetera. So it'll be open access to the broader community - Cool. Okay, so walk me through creating a software and giving

23:38 it to competitors -

23:41 That wasn't necessarily the design.

23:45 But what we did, when we created the software, we sat down with our council, regulatory council and said, Hey, we just wanna make sure that we're doing this right. We don't wanna become a FCM or

23:58 DCM or all these. And any sort of exchange was kind of the way I would say it. And we got a clean bill of health in the review and reading the regs. And we just, we should just talk to the CFTC

24:11 and just make sure that we've got this right. Legal opinion's one thing What is the CFTC? It's commodities. Commodity future trading commission. Future trading commission. Future trading

24:21 commission. Yes, they oversee all the derivative markets. They played a huge role as you can imagine in Dodd-Frank and what that, they were really tasked with enforcement and rollout of all the

24:34 rules around Dodd-Frank, which was meant to bring some additional transparency into the derivatives markets. Yeah, basically for all the kids in the audience, we almost melted down. It was the

24:45 name of the hedge fund that, that, oh gosh, one of the ones that brought all the Dodd-Frank stuff around. There was a, there was a hedge fund out there that

24:57 was the definition of systematic risk and almost, almost went down. And so Dodd-Frank, at least as I understand it, was basically about let's try to force as many of these trades that go on

25:11 privately public somehow. Let's get them clearing through exchanges, et cetera - Yeah, credit default swaps and a bunch of those things were at the core of that and you're right. But, and so

25:22 Dodd-Frank came along

25:31 and said, We just know there's these opaque derivative markets. Let's see if we can't get a little more, you know, a little more visibility to them, fundamentally. And so, CFTC does that. They

25:35 also work with the National Futures Association, which is a bit of their oversight arm. And we had a conversation with them and it opened up a really interesting dialogue and them understanding what

25:46 folks like us hedge advisors, you know, broadly termed what we did and how we function in the market. And, you know, the question was simple, have we done anything that requires additional

25:58 registration. We've talked with our council, they say no, we'd like your opinion And a couple of months they came back and said, yeah, actually, yes, you've got to register as a swap execution

26:09 facility, which is the, there's, there's 10 things we could have heard that probably was the worst outcome and we really tried to understand why that was Brian, I'm a bit of a prick here but when

26:21 you go ask a barber if you need a haircut, they always say yes, I'm just saying, but go ahead But we wanted to be, we wanted to be clear we didn't, we didn't want to be out there with something

26:32 that could could cause us some problems and they told us it wasn't at all about the technology that we talked about they told us it was about our business model. And this was very confusing for us

26:44 and for the entire industry, they said, multiple to multiple trading facilities must register as SFS. That's a lot of words. And we always say, well, we're not multiple to multiple because

26:55 everything we do is bilateral. One producer facing off with multiple banks. That's a single to multiple. And they said, well, you do it for more than one customer. So therefore you are multiple

27:09 to multiple Which we didn't understand that, but

27:14 they're the boss. But we said, okay, so fine, we just won't use our technology 'cause if we're not a trading facility, we don't need to worry about it. They said, no, trading facility is

27:24 defined as any form of interstate commerce. Again, a lot of words that goes on to say, including phones, chats, other electronic communications. Which men, if you do this in this way, have

27:36 more than one customer facing off with multiple banks and you use a phone chatter. other communication. That was a definition of what we did as a core business, then you have to register as a staff.

27:48 What does staff stand for? Swap execution facilities. Cool, got it. Yeah, that's the term for the regulated entity. We thought, Okay, we need to fill out an application. I always tell people,

27:59 I literally went to Starbucks one day in

28:03 Denver, said, 'I'll just fill out the application while I'm sitting here. ' As I opened up, this is going to be a little more complicated than we thought. A year later, in 2600 pages, we had

28:13 our application in. And rightly so, it's incredibly complex. Are you complying with cybersecurity policies and open access requirements and all the things that are in the regs? But one of those

28:24 things, wrapping back the original question, is it's got to be open access. It's not just for you. It has to be for anyone who wants to become a market participant And so that opened it up to say.

28:36 other hedge advisors, other introducing brokers, individual participants who want to participate on it can enter. And so, again, it wasn't by our design to start that way, but we actually think

28:50 that's going to be really good for the industry over time if we drive some standards and have a place where there is some additional oversight and tracking and auditing of these transactions. Yeah,

29:01 interesting, interesting. And just as a side note, I am actually a commodity pool advisor or operator, CPO. So I had to take the test and I've chatted with the NFA in Chicago. My test was a no

29:19 joke. Yeah, no, it was kind of hard. I thought I'm a pretty sharp guy and I'm sitting there sweating out when I hit the inner button of did I get my stuff right? But so that'll be cool. So

29:32 theoretically software and that kind of helps because I mean, calling people on a phone typing into Excel just needs to go away. I mean, that's - Yeah, it is, like you said earlier, it's one of

29:46 the last markets that trade this way. And by the way, it's very similar to the carbon markets, which we're actively involved in too, where this idea of trading is just very much a phone,

29:58 brokerage game or a chat brokerage game. And so it's just time for this market to be a little more modern - Last question kind of on the business and just for the listeners out there, I told Brian,

30:11 we're gonna jump in and talk about trends and all this. And we'll get to Aegis at the end. And of course we've spent all this time, but it's been interesting. So your primary

30:23 business is bilateral swaps.

30:28 Tell us real quick what that is and how those things kind of look like.

30:36 Yeah, and it's most basic, it's called a swap 'cause you're swapping a variable price for a fixed price. That's kind of the simplest thing. So, if I want to lock, if I have production next year

30:45 and I want to guarantee a price, then I will effectively sell my crude oil or natural gas at that price. And I enter into a contract. So if the price is higher than what I agreed to sell it for,

30:57 then I owe the bank money and if it's lower, then they owe me money. So it's effectively a, I guarantee the price that I'm going to get for that contract. There are other derivatives of that. So

31:08 not unlike any market, you can have options, you can have

31:13 puts, et cetera, and some callers and calls. And so there's lots of different ways to hedge it, but you're effectively entering into a contract that gives you certainty around the price you're

31:23 gonna receive in the future. And this is really going back into the brain 'cause I've had a lot to drink since I left Kane - You did great - But is.

31:34 Are they done under ISTA - Yes - Okay, what's an ISTA - Ours are, oh gosh, I've never done that - Do you even know what it stands for - I've used it, no, I don't. But the agreement, the A is

31:44 agreement. It's I, S, D, A, but yeah, but it's basically a standardized contract that you'd enter these swaps with - Exactly, it defines how things will be settled, how things will be

31:55 calculated, what sort of credit charges, so it lays out all of the underlying terms of the deal, if you will - Yes - And when you do a bilateral, does it get cleared through an exchange? It

32:09 doesn't go through NIMEX, it doesn't go through ICE, and wow, I'm recalling my NFA test. To be excluded from that under Dodge Frank is because you're actually an operator, is that why - Yeah,

32:26 it's called a permitted transaction to get, if you remember that term, so there's required transactions that have to be cleared, these are permitted. commercial end user. So you have to be

32:37 hedging an action will business risk. So this is not speculators that come out and enter into these what are called permitted transactions that don't require clearing, but we can get out of the time

32:47 - So two hedge funds aren't doing bilaterals - That's exactly - They're, they could theoretically, if they have an ISDA set up with each other and they could enter into a bilateral transaction,

32:56 that's pretty rare though, because two hedge funds entering into an ISDA would be - Yeah, that making sense. I gotcha - Okay - All right, let's jump into trends. So oil, I've never seen this

33:09 level of backwardation and it doesn't make any sense to me. Am I right? Am I wrong? What's cinnamon out there on that - Yeah, our job is to make the bear and bull case and talk about what's the

33:23 best way to protect risk. Do we try not to make calls on rice - We'll make both sides of it then, yeah - Look, I think the bull case on crude is pretty simple. massive underinvestment for a long

33:35 time. And this has been obviously well documented, well talked about, not as much capital going into the space. Therefore, production's just not coming. The way we thought demand is continued to

33:49 increase. And I think you're going to, you're at a place where we are under supplied at this point. The bear case is also equally simple How do we avoid a recession at this point? I don't know,

34:05 right? How long, I paid 559 for gas yesterday in Texas. I just don't know how long people are going to continue to put up that. And

34:16 are we going to see demand destruction? Look, let's hope we never have COVID again, but what's the next outbreak? What if Putin pulls back and says he's sorry in Ukraine and we go back to normal?

34:28 I think there's a whole bunch of things that could, you know, that could, you know, that could bring prices down, but I think the bull case is hard to ignore on Christmas - So I've had a theory

34:38 about backwardation because

34:43 I just don't understand how low it can be 110 and you can go out to Dece 25, by the way. It sounded like I was a trader there. Dece is just December, but anyway, Dece 25 and get a barrel I think

34:57 for 75 bucks for something like this I've always been an efficient market guy. I mean, it doesn't, NIMEX futures doesn't mean they're right, but it is the collective intelligence, if you will,

35:13 of every participant. You know, the airlines have been in the tank and historically they've been the buyer of the trade, you know, particularly kind of like years two and three in the out years

35:26 and they've just been in a world about the last six to eight weeks, really. I mean, they're starting to hit 90 some odd percent of kind of pre-COVID type numbers. I think they're realizing they're

35:39 gonna be around as an industry now and all. But is there any chance we're just in backwardation because you had every producer who saw minus 37 oil who would be willing to hedge at some price and you

35:54 just, the natural other side of the trade just wasn't there Is that anything or? Yeah, I mean, you're hitting on the right point. Who knows is somewhat the answer, but you're right, the market,

36:05 the forward curve is not designed to be efficient, right? It's just what someone's willing to pay right now. It's not necessarily saying what the price will be. You know what, but hedging is one

36:17 of those things, right? I wasn't that long ago when we were talking to customers who were saying, gosh, if crude would just get back to 40. right, we'd have a fighting chance. And now you can

36:28 sell your crude two years out for

36:34 85. Back to our country clubs filled with people who sold too early. If I could lock in those kind of returns, that's not the worst bet that someone could make. So it's just all a matter of how

36:45 much you're willing to live with. I hear people say they invest in oil and gas because they want exposure to commodity prices. I just, I don't buy that I think they want exposure to great companies

36:57 that know how to drive returns on their capital and that's what they're after - I always say they want the optionality that they don't want the downside - Yeah,

37:06 that's the more honest way to say it. Gas is really interesting. So your crude is harder to hedge. I will get into call skew right now - So real quick before we jump to natural gas 'cause I don't

37:17 understand natural gas at all, I always get that wrong. Are you, is it your sense that your customers on

37:26 the producing side are sort of willing these days to hedge out three to five years? Are you seeing shorter duration on what they're willing to do - Yeah, we're seeing a bit shorter duration than

37:36 we've seen in the past - Bless the optimist oil guy - Absolutely - It was just a minus 37, but it's got that 110 - Different this time, right - Yeah - And I know you've hit that before on your

37:46 podcast. It's not. I mean, capital is efficient and we'll find good homes and you're starting to see a little wearing on the renewable sector already.

37:55 But gas is - Well, last question on oil - Consumers, the other side of the trade the client should work with there. Are you getting any sort of sense of they want to lock in longer that maybe they

38:10 feel like

38:12 backwardation is historically weird, or does it go back to your point of whatever their base business is and whatever they can hedge on the metal side or whatever? Yeah. Well. It's harder for them

38:22 to do. Yeah, different markets. But you're seeing people who kept thinking, We'll wait this out, these high crude prices, and it is crushing diesel, arbob, gasoline, etc So you're starting to

38:36 see people say, or jet fuel just back to the airlines, where you were saying, The curve being backwarded is good for us right now. Maybe it is time. These prices are historically high, but I'd

38:49 rather be able to lock into something lower today and not have to wear that risk as long. So it's just people will tend to hedge at the wrong time a lot because it's all I was really good at that

39:03 It's all unsintimate, and you just have to really see through that right now, but it's a better time for consumers are the products to hedge. And we've got a refining issue from a crude perspective.

39:16 Refineries are running at 90 plus percent right now. And so figuring out how to get more of that product to market is going to be, we'll get some seasonal uplift coming out of the summer, but it's

39:27 a tough - Yeah, and refineries historically don't do very well operationally when they run at full tilt for a long time. I mean, that's

39:39 the scary thing - Well, on your even seeing the administration right now, trying to convince people to bring shuttered refineries back online. I mean, the irony of this, you just shouldn't be

39:47 lost on anyone. Now, how long does it take to bring a refinery back up? I don't know, but I think that's a pretty long term solution - That's crazy. So natural gas. I totally missed the

40:02 associated natural gas story and why natural gas went to, pay you to take it away. totally missed that during kind of the shale revolution. I also missed back, you know, call it 2005 to 2012,

40:21 the decline in natural gas, even though the strip the whole way was in, you know, Contanga the whole way. What are people saying about natural gas? Yeah, we've got a potential issue near term

40:35 and natural gas, right? You know, so this is back to really bullish in the front of the curve and we need to be really cautious in the back. We're way under supplied right now. We're going into

40:46 kind of peak season with 350 BCF under our historical average. You know, that's a huge number. And so if we if we come out and we also have a cold winter, you know, colder than normal, now

41:01 that's not necessary of the base case. But if we do, you know, there's we're pretty short. So I think the near term. outlook for natural gas, pretty strong. However, and this is where we have

41:14 to spend on it. Yeah, our customers need to be thinking two and three years out. You know, we've kind of seen the end of

41:20 LNG for a couple of years. I mean, that has been nothing but straight up in terms of, you know, the demand that that's driven for natural gas. We don't have any more projects coming online for

41:30 two years. So we've got to, when you said project, you mean export capability Capacity to create it and send it out. And so that demand source is going away. And I think the sentiment out there

41:42 is production is going to come back. I mean, these prices are going to bring production back. It's been slower than anybody had thought at this point. But I think we've got to be, you know, got

41:52 to be cognizant that production can come back. And, you know, so someone starts to say, gosh, you know, as we look at hedging options in the out years, we've got to, there's a, there's a,

42:02 there's a point in the market right now we've never really seen before where there's a lot of calls. Okay, so what that means is. If I can swap in at 5, then I can get a floor at four and upside

42:16 at 10. Okay, for instance, I've got a lot more upside for the same dollar and so collar structures. If you're an upstream natural gas producer, not hedging your out-years with collars right now,

42:30 we should probably talk because the market should give you a great opportunity

42:38 to participate in the upside and limit your downside It's pretty unique. So, I heard a theory on this and I need to give credit to it. It's Brad Olson. I don't know if you've ever met Brad. I

42:47 heard about Brad Brad's mid-30s long-only hedge fund called Recurrent. And Brad's actually, he's a rice guy, so I'll pimp my college rice. He's really smart, all that. But Brad's dug into the

43:03 data And actually what Brad has found is the number of rigs running. We all think it's the higher price, the more rigs we have running, right? That's the, he actually has found a tighter

43:15 correlation between trading multiples of public companies and the number of rigs running. Meaning if I'm trading at 12 times EBITDA, I'm putting as many freaking rigs out there. I don't care if the

43:28 price is 40, 30, it's I'm getting paid 12 times for generating this EBITDA. I'm gonna go do it at three times where we're trading today and some of the natural gas guys are even lower than that.

43:41 It's like, I don't have the incentive to go run all those rigs and mess with all that sort of stuff. And so guess what? I'm just gonna send the money back to my shareholders. And so, when he told

43:54 me that, I was like, Yeah, you're crazy, you're stupid. But the more you think about it, show me your incentives, I'll show you your actions. And so, 'cause, I mean, I remember just looking

44:04 at the Delaware basin And if you got too west up. there in Colberson County, it became really gassy. And at about 75, you're like, man, we can't do that. Doesn't make any sense, but today at

44:16 nine, I mean, you could get, and I said, Colberson County, that's Permian Basin. I was county dyslexic, which was very much a hazard for being a oil and gas guy, but you get out West and the

44:30 Delaware Basin, I mean, you can hit 30 million a day wells of natural gas And so there's tons of it to go drill, the Hanesville, et cetera - Right. Well, and that's, I just believe over time,

44:42 you are gonna see the capital come back to the space. I'm not saying that's gonna be next year or the year after, but the long-term trends have to be that this is here for longer than any of us are

44:54 gonna be alive, that we're gonna be completely dependent on hydrocarbons and we don't need it -

45:02 That's not what it's different. So anyway, we're not trying to, you know.

45:07 we just want to paint the upside. And when we talk about when should you be hedging to us, it needs to start with when are you making money - Yeah - And if you can guarantee that you're going to

45:17 make money and you can continue to fund your drilling programs or your dividends or your debt repayment or whatever those things may be, it's hard to get worried about small price movements beyond

45:29 that - So give us one other trend that maybe folks in the audience haven't thought about, haven't heard about something out there that you can kind of let us in on - I don't know that people haven't

45:44 heard about this. I actually find the work that oil and gas producers are doing. And by the way, there's certain things we don't say. We don't say energy transition. We don't, I actually try not

45:57 to say energy anymore to describe this space 'cause I just think oil and gas is so much more important than just energy. You get my podcast canceled, but go ahead - We could talk a little bit about

46:08 that. But I actually think that what's been really fun for us to see, because we work with so many producers and see so

46:18 much of the oil and gas industry is what people are doing to reduce emissions and become much better stewards of the environment. And I think, for all the talk of carbon offsets and what is

46:33 volunteering mean and greenwashing and those sorts of things. I've been just really proud of the industry and watch what they're

46:39 doing in terms of monitoring, making real adjustments to drive emissions down and then even taking steps to go beyond that and try to get their footprint closer

46:53 to net zero. And we can, that means a lot of different things to a lot of different people.

47:00 where we're now seeing some producers who are able to turn their operations into credits, carbon capture utilization sequestration, CCUS for an answer to recovery, putting CO2 down hold to do some

47:14 last mile recovery of oil is actually carbon negative. And you can generate credits as a result of that, which is going to enable more investment back into it. It's just a really fascinating trend

47:26 to watch on as people are getting smarter about how they're managing their operations and being better stewards of the environment. It's creating a lot of new opportunities to do. Well, what I tell

47:36 people is you can sit there and say it's big bad government making me

47:43 do this,

47:45 or it's all these wacky environmentalists making us do this. It's not. I mean, the reason we have all this pressure from all these institutions is because Joe Blow American really cares about it.

47:59 And we can have a choice. We can go be obnoxious assholes to those people and tell them they're stupid. In which case, we'll probably be legislated out of business or we can go educate and we can

48:12 be a partner with those folks because there is a lot of ignorance there. And ignorance does not mean stupid, it just means uneducated. And so, I mean, the pension fund that says,

48:26 I care about this, I wanna hear about emissions, is saying that because they either report to a government official that was elected by the people or

48:39 they are reporting, they have restrictions and guidelines from their members, teachers, police officers, firemen are saying that. And so, and it's getting to the point in the future where

48:51 literally if you wanna be an oil and gas, if you wanna be able to sell a property, you want to be able to access insurance, financing, whatever the case may be. You're going to have to be

48:59 cognizant of this and we need to embrace that. So. Perfectly said. Yeah. And I think, and it's the right thing to do. Absolutely. And I've heard you say many times that the industry needs to

49:10 rebuild trusting and I kind of go the next step and say get on their front foot about telling these stories a little bit differently. I just think there, what's happening again, what we just talk

49:22 about monitoring changing operations is real and people are doing are just much better stewards They need to be able to tell that story. Back to why I talk about oiling ass versus energy.

49:36 All the talk of electric vehicles. Let's just use that as an example as limiting fossil fuel. Well, okay, let's just talk about the tires on the car. Let's talk about the asphalt road roads that

49:47 you're on. Let's talk about the plastic that's inside. Let's talk about the crude oil that was burned, mining the lithium I mean, it's just, it's broader than. energy. And I just think it's the

49:60 one commodity that everybody on well, not everybody on the planet. Unfortunately, talk about that in a second. But that almost every American, the minute they pick up their cell phone has touched

50:10 that commodity today, the minute they get in the car, they've touched that commodity today. There's not many that there's not many commodities that people do that with. And I just think we need,

50:17 we need to talk about the role oil and gas plays in a different way that's yes, energy is important and will be again for the foreseeable future. And it does a lot. There's just a lot more to it.

50:28 Yeah, there's there's no question that I mean, it does a lot of good things. We need to highlight that message. One of the things we did the zero streaming event last week and a question I asked a

50:40 couple of times on the panels I was involved in is, okay, we're doing all this. How do we get credit for that? I think I think that's all of us in the industry need to be thinking through that is,

50:52 hey, we just did a great job with emissions on this field or that how do we get credit for that telling our story? And I've got to give credit to Addison Holmes with pickering energy partners. She

51:07 actually says the SEC guidelines that are coming forward where you're gonna have to report emissions is gonna be good for oil and gas 'cause it's gonna level the playing field. We're gonna understand

51:18 what Amazon's carbon footprint looks like and the other technology folks out there. So - Right. Well, and what's interesting to me, and this bothers me a bit that if I'm S and G, I'm really

51:31 frustrated because ESG has been, is now fully focused on climate and climate only. And I think that's one thing we've got to start to do is, and which is important by the way. I don't wanna, I

51:44 don't want to, I mean, we need to be better, but there's also the S in it, the social piece of this, the energy poverty around the world is a much bigger issue than most social issues we're

51:57 talking about today. you know, access to affordable housing, much bigger, you know, social issue today, you know, inflation and the impact on purchasing power for the middle class, much bigger

52:08 social issue today. That's a, that's a big thing. We've got to, we've got to factor into these discussions and then, you know, the governance is a fascinating one is, you know, someone who's a,

52:17 you know, chair of a comp committee of a public company. You know, I, I view my, I have a, I really know what governance means, right? I've actually held accountable to that. And, and, you

52:28 know, I think just simple governance on how long we're going to like to allow unprofitable ventures to continue to chew up capital in the name of, you know, social good is just something we're

52:39 gonna have to reconcile over time. I, I believe there should be investment. I believe renewables are needed. I believe they're additive to, you know, serving water are going to need to be, you

52:48 know, future, you know, energy needs. But, you know, we've got to, we've got to allow some of these things to run on their own and make a business case so that. to your point, we can level

52:57 the playing field across all of this - And we ignore

53:03 CO2 rising and temperature rising at our own peril. I mean, I don't know, my turn to get my podcast canceled instead of you. I mean, is the science ironclad that we know exactly what's gonna

53:16 happen in 75 or 100 years? How quickly this is gonna happen? I don't think it's that settled, but you'd hate to look up 100 years from now and go, oops - Yeah, totally agree. And to me, that's

53:28 why I just wish everyone used to work - We need to be thoughtful about it and we need to spend 100 on the problem instead of 500 'cause

53:40 that other extra 400 could do a lot of society - That's exactly right. We just don't use the word and enough, right? We need to do this and this, not this or this. And we'll get there. You start

53:51 to see some of the sentiment, you know, shifting a bit already, I think And we'll. We'll find our place. Everybody's hearts in the right place. We know these are things we need to get after.

54:02 We'll land. We'll figure it out - So speaking of heart real quick before we go, you gotta tell me about 17. So I'm gonna hold this up so that, where's my camera? So tell me about 17 'cause we are

54:17 not above this or below this or whatever, above this at the Chuck Yates needs a job. We take bribes and you brought a bribe Which was very cool if you tell me about 17 - Yeah, yeah, we actually,

54:30 we call it one seven just 'cause that's baseball speak. But my best friend and I were out in Napa and we had a lot of interesting things happen in 2017. We happened to both be the same number in

54:45 college. We were both 17.

54:48 The 2017's were in barrel at the time and we just got to talk and said, We need to have our own label. And so in baseball, you would say, one seven generally, if you're talking about someone's

54:60 number and referring to them. And so we decided to do our own label and I know you're a bit of a wine drinker. So I wanted to bring in on it. So it's just, we don't do anything to sell. We do

55:13 things to share, that's very cool and No. So it's -

55:17 much appreciated. And I'll just go ahead and get on the soapbox here. When you hang out at Digital Wildcat who's a bunch of 30 year olds, there is not a wine, a corkscrew in this whole place -

55:30 Yeah, I'd certainly go to brought one of those - Yeah, I should have brought one too. But anyway, Brian, appreciate you coming in. Good stuff. How do folks reach you - Yeah, we're eegis,

55:42 A-E-G-I-S dash hedgingcom is our website. And then everybody is first initial last name. So I'm B. Sandsbury at eegis dash hedgingcom. Love to hear from And so, so. folks want to hedge by so

55:58 you're there to help them out. Yeah, we're going to do everything from helping people just understand markets. And that's broadly across, you know, across oil and gas, you know, metals, also

56:08 including carbon offsets and other environmental offsets that compliance pieces. We're going to help them design hedging strategies. We'll help take those transactions to market if they like and

56:16 help them manage them on going.

56:19 Thanks again for coming in. Yeah, thanks for having me.