Hedging the Storm in Energy

Hedging the Storm in Energy - Marketing ImageVF


Hedgeye’s Macro and Energy teams will host a guest speaker call TOMORROW (Wednesday, January 21st at 1p.m. EST) to discuss current trends in and implications of the commodity hedging practices of US E&Ps, natural gas processors, and various industrial commodity consumers.


The call will feature Wayne Penello and Andy Furman of Risked Revenue Energy Associates (“R^2”).  R^2 is an independent hedge advisor serving E&P companies, midstream service providers, and large consumers.  Wayne Penello is the President and Founder of R^2, and has 30 years of experience in commodity options trading, market-making, and asset management.  Andy Furman has 25 years of experience in energy trading and is an expert at valuing and trading options.


Topics for Discussion:

  • Overview of R^2’s services, clients, and proprietary risk management systems;
  • The mechanics of entering into a commodity hedge;
  • Assessment of current industry hedge positions;
  • R^2’s commodity price outlook for crude oil, natural gas, and NGLs;
  • Client psychology – what E&Ps are currently thinking and doing in the oil, gas, and NGL markets;
  • Likely result of borrowing-base determinations from financial institutions;
  • The challenge and opportunity in hedging NGLs;
  • And more…


About Risked Revenue Energy Associates:

R^2 is a consultant and market agent in the energy space serving upstream, midstream, and end users of energy-related commodities (including private equity interests).  R^2 brings over 150 years of experience including but not limited to market-making, trading, asset management, and industry expertise. The firm utilizes a patented risk management strategy to help implement and stress test a company’s hedge book, leverage, and cash flows, among a long list of other metrics under various scenarios. R^2 suggests the most relevant hedging strategies and negotiates/executes on behalf of their clients on a daily basis.


Wayne Penello is the President and Founder of R^2. He has 30 years of market-making, option trading and asset management experience in the energy industry. Mr. Penello began his career on the New York Mercantile Exchange, where he was a market maker and served as Ring Chairman of options trading. Subsequently, he held positions managing globally distributed energy assets for Vitol S.A., Vitol U.S.A., Tenneco Gas Marketing and Torch Energy. Mr. Penello was formerly a research scientist. He holds a Masters degree in Marine Sciences from Stony Brook University and an undergraduate degree in Marine Biology from Southampton College.


Andy Furman was co-founder and CEO of Atlantic Capital Consultants, an options market-making firm on the NYMEX from 1987 – 2001. After leaving the NYMEX trading floor in 2001, Mr. Furman traded for hedge funds. Most recently he held the position of Managing Director for Hudson Capital Group, LLC where as Manager and Trader for Energy Futures and Options he used spread arbitrage and option strategies to achieve consistent profitability. Mr. Furman holds a Bachelor of Science degree in Chemical Engineering from MIT.


Macro Team


Retail Callouts (1/20): Black Books, Idea List, JCP Catalog, BONT, COH

Takeaway: Hedgeye Retail Black Books-FL (1/22) & HIBB (1/26). Ideas List. JCP brings catalog back from the dead. BONT Holiday. COH new marketing push.

We're releasing a Black Book this Thursday the 22nd to review our Short Call on Foot Locker, and then will follow up with another Book on Hibbett on Monday the 26th. Our 90-page Athletic Black Book we released last month was very heavy on industry trends and themes -- while these will be almost entirely focused on picking apart company financials and debunking the bull cases.



Retail Callouts (1/20): Black Books, Idea List, JCP Catalog, BONT, COH - 1 20 chart1B





JCP - J.C. Penney Resurrects Its Catalog



Takeaway: By this logic Blockbuster should have gone back to VHS to offset the declining rental market brought on by streaming content. Maybe that's an unfair analogy, but we have a hard time seeing how a 120-page Home catalog moves the needle in a meaningful way for JCP. When the company shuttered its catalog business 5 years ago - the average age of the consumer who actually used the catalog to make purchases was approaching 70 years old -- yes, that's actually true. While not a big investment this time around, we can't help but think that the money could be better spent improving JCP's presence.  The company's got a pretty big hole from which to climb. From 2005-13, JCP DTC sales were flat compared to KSS and M at 39% and 32% respectively.


BONT - Reports a 5.3% Comparable Store Increase in Holiday Sales



Takeaway: This is the first retailer we've seen during the January preannouncement schedule who meaningfully surprised to the upside on comp but took down guidance because of margin pressure due to the 'highly promotional retail environment'. Most retailers ignored the margin topic all together. But, our sense is that BONT won't be the last retailer to take it on the chin with margins when 4Q numbers are reported.


COH - Coach Taps Chloë Grace Moretz and Kid Cudi



Takeaway: This is a smart move by Coach (it's so rare that we say that). Moretz is extremely relevant to the teen crowd -- an audience that Coach lost long ago. And unlike high profile sponsorships like Taylor Swift/Keds (WWW) the financial risk here for Coach is likely de minimis. 

Retail Callouts (1/20): Black Books, Idea List, JCP Catalog, BONT, COH - 1 20 chart2





HD - The Home Depot Names Craig Menear Chairman






Cisco Security Poll: Companies Have False Confidence



AMZN - Amazon to Produce Original Feature-Length Movies for Theaters



Gucci Said to Have Appointed Alessandro Michele as Creative Head


European Banking Monitor: Euribor-OIS Inflection

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email 




Key Takeaways:

The XLF shed another 2.6% last week, bringing the month-over-month decline to 5.2%. The focus of late is weak earnings and ongoing international risks. Euribor-OIS is showing the first signs of rising in a long time, gaining 3 bps week-over-week. 


European Financial CDS - Swaps mostly widened in Europe last week but only by an average 0.4%, as European markets have been propped up recently by hopes of ECB asset purchases. Greece and Russia were the exceptions, as usual, as concerns around the election and solvency, respectively, continued to weigh on their banking sectors.


European Banking Monitor: Euribor-OIS Inflection   - chart1 financials CDS


Sovereign CDS – Sovereign swaps mostly tightened last week on rising investor expectations for ECB asset purchases. Spanish sovereign swaps tightened by -13.3% (-14 bps to 89) while Italian sovereign swaps tightened by -10.8% (15 bps to 126).


European Banking Monitor: Euribor-OIS Inflection   - chart2 sovereign CDS


European Banking Monitor: Euribor-OIS Inflection   - chart3 sovereign CDS


European Banking Monitor: Euribor-OIS Inflection   - chart4 sovereign CDS


Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 3 bps to 14 bps.


European Banking Monitor: Euribor-OIS Inflection   - chart5 Euribor OIS SPread



Matthew Hedrick



Ben Ryan



the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Commodities Weekly Sentiment Tracker

Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative market positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.    



1.       CFTC Net Futures and Options Positioning CRB Index: The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close), and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative positions.

  • The SUGAR, SILVER, and COFFEE markets experienced the most BULLISH relative positioning changes week-over-week
  • The ORANGE JUICE, SOYBEANS, and WHEAT markets experienced the most BEARISH relative positioning changes week-over-week

Commodities Weekly Sentiment Tracker - chart1 sentiment


2.       Spot – Second Month Spread: Measures the market expectation for forward looking prices in the near-term.

  • The LEAN HOGS, BRENT CRUDE OIL, and RBOB GASOLINE markets are positioned for HIGHER PRICES near-term
  • The HEATING OIL, LIVE CATTLE, and ORANGE JUICE markets are positioned for LOWER PRICES near-term

Commodities Weekly Sentiment Tracker - chart2 spot 2nd month basis


3.       Spot – 1 Year Spread: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.

  • The BRENT CRUDE, WTI CRUDE, and NATURAL GAS markets are positioned for HIGHER PRICES in 1-year  
  • The LIVE CATTLE, COCOA, and LEAN HOGS markets are positioned for LOWER PRICES in 1-year  

Commodities Weekly Sentiment Tracker - chart3 spot 1 year basis


4.       Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.


Commodities Weekly Sentiment Tracker - chart4 open interest


Ben Ryan



Takeaway: PENN should post strong Q4 earnings and we see the momentum continuing in Q1. 2015 growth opportunities are becoming more visible.

We're adding PENN as a long to the Hedgeye Best Ideas list in conjunction with our "REGIONAL GAMING MOMENTUM TO CONTINUE" note published today.

Plenty To Do In Global Macro

Client Talking Points


The Euro stops going down at the low end of our $1.15-1.19 immediate-term risk range as the entire world preps for (and in some cases begs for) Mario Draghi to deliver the central planning drugs. Since European equity markets are mostly at the top-end of our risk ranges, we’ll say the risk there is once again to the downside on a continued EUR/USD bounce.



If there’s one thing that Gold loves its Dollar Down, Rates Down (and you’re getting both this morning with the UST 10YR -4 basis points to 1.80% and EUR/USD basing); so after a big +5% week, Gold rips another +1.3% putting it back into bullish TREND position @Hedgeye ahead of ECB Thursday.

S&P 500

U.S. equity beta down for 3 straight weeks (-3.5% correction from the no-volume all-time DEC year end highs) and is sitting right on our TREND signal line of 2019 right now with an immediate-term risk range of 1984-2037. Great macro markets to be trading, both ways right now.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.


As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.


Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November. We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.


Three for the Road


TREASURIES: nice start to the wk for Long Bond Bulls, 10yr = 1.80% = -37bps YTD (thats already -12%) $TLT



When change is necessary, not to change is destructive.

-A. R. Bernard



S&P 500 (Index + Emini) = +110,971 net LONG position (-59,269 last week but up big vs. the 1 year average of -11,681). S&P 500 (SPX) had its highest net LONG position since 2007 only 2 weeks ago at +170,240.

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.