Energy Pod Thesis Example
How do pods play the energy space? I assume they mostly do E&P companies, but given the high oil beta I don't understand what an idea looks like unless it's an explicit bet on the price of oil.
Can anyone provide color on what an example thesis would look like? There's a really great post on here that explains how pods trade tech names, so I was hoping someone could help me understand what the energy version of this looks like.
A fill in the blank stereotypical thesis would be most helpful, e.g. for more value focused shops a general thesis might look like: "after years of poor execution by a prior management team midstream company xyz is on track to bring {super great assets} online by end of next year, after which it will earn x% revenue from take or pay contracts, creating stable cash flows enabling the business to transition from a high capex business to now returning cash to shareholders. The stock is trading cheaply because of a series of failures by the old management team...."
Doesn't have to be a long, but just hoping someone can demonstrate how these pods think.
Based on the most helpful WSO content, here's an example of how a pod might approach an energy thesis, particularly in the E&P space:
A stereotypical energy pod thesis could look like this:
"E&P company XYZ has historically underperformed due to inefficient drilling techniques and high breakeven costs. However, under the new management team, the company has adopted cutting-edge drilling technology and optimized its cost structure, reducing breakeven oil prices to $40 per barrel. With oil prices currently at $70 per barrel, XYZ is positioned to generate significant free cash flow (FCF). Additionally, the company has hedged a portion of its production at favorable prices, providing downside protection. The market is undervaluing XYZ due to skepticism around its ability to sustain these operational improvements, but we believe the upcoming quarterly results will demonstrate the durability of these changes. Our target price reflects a re-rating to a 5x EV/EBITDA multiple, in line with peers, as the market gains confidence in the turnaround."
This type of thesis typically focuses on operational improvements, cost reductions, and hedging strategies to mitigate oil price volatility, rather than making an outright bet on oil prices. Pods often look for companies with a competitive edge, such as superior technology or management, that can drive profitability even in a challenging pricing environment.
Sources: Oil and Gas Overview, PE professional, what's your process while judging an investment?, Oil and Gas Overview, Energy PE Recruiting, Energy Hedging 101: The Frac Spread
bump
Not at a pod but will guess at the answer
In theory it seems like an awesome place for pods to play - data rich, can hedge out the oil beta + commodity price factors, and/or take macro views + factor bets + commodity bets to an extent, while also doing the classic idio bets on specific companies.
The stock idio plays are going to be the same stuff as always right - take DVN which has had these bigger questions regarding capital efficiency and inventory quality, capital allocation, etc.
You can also get pretty detailed with the data available in this space, start getting into type curves in your models and whatever else.
So i'll assume you can back into for any E&P the key debate (inventory quality + efficiency + production growth), understand how that flows into terminal value perception (which has very large debates today depending on your E&P), and then narrow in on the results that will push you one way or another.
I think the bigger question you have is really how much leeway is there to incorporate some directional bets on commodity price beta, and if you'd even want to do that or not, and how that gets expressed in the pod.
Ex: a bet on XOM over CVX is also about downstream exposure to an extent, which is taking some views on different parts of hydrocarbon value chain and supply/demand balance along it.
Would love to see a pod's model on a company like SHEL. Makes me wanna throw up imagining trying to build that in excruciating detail... only for most of it to be trivial anyways. Idk on that front to be honest lmao - and I say that as someone who thinks SHEL has been / is a good long! (although not a fan of BP acquisition)
Can you link the tech pod thread?
JimCreamer seconded. Thanks
It won't let me post the link but it's called "The Investment Process -- How to find and develop good ideas (discretionary l/s equity)" by longandshort posted on June 15th 2024. It's not exactly pod specific but it's how I understand pods generally think SaaS investing.
Asset quality rate of change - both capital intensity and eur degradation feed into capital efficiency.
inventory quality/depth a big one for sure - I’d argue the biggest driver in multiple (ie this is still fundamentally a NAV business).
Return of capital programs were a big money maker in 21/22 but most everyone returns 50%+ so not a huge differentiator now.
Predicting the commodities is a fools errand. You have to be intimately aware of why the commodity is moving but really hard to predict intensity and how long it takes.
Really tough to trade day to day. You’ve got structural winners and losers and over time those generally play out how you’d expect but you get mean reversion trades fairly often and it’s not always obvious when/why they start.
Old school pod guys traded off state data and basis swings. That still happens but much less frequently. The reality is that most of the guys trading energy aren’t in the weeds like the old guard used to be (scraping Genscape data to back into how good/bad a new pad was looking, checking completion reports from the TXRRC, etc) and the consolidation in the space and high vol nature of the SMIDs means that most pods don’t go past about 20 names. I mean hell I know a fair amount of energy pods that don’t even have Enverus. So you’d think there should be alpha in having more data but there’s not as much as you’d think.
This was insightful. Any chance you know how credit pods (credit in general) look at the energy space and how a pitch could look?
They look at equity instead, even in a credit focused hedge fund… there’s not much exciting energy credit opportunities out there
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