A weird and quick one this weekend. Over the past few years, I feel like I’ve some traditional correlations get broken. I think I can show this best with an example. Consider two companies that I’ve looked at in the past: CNX and BSM. These are energy companies, so it makes sense that they’d trade in line with moves in commodities. Here’s a chart of them over the past year versus oil and natural gas.
Here's some of the reasons why I think BSM should correlate more to oil prices than natural gas prices:
BSM (Black Stone Minerals) is an oil and gas LP which owns royalty interests on approximately 7MM net acres in the US. BSM received about 60% of its revenue from oil production in 2023 and 44% in 2022. So while natural gas is a very large part of production it's less relevant for actual revenues.
BSM also runs with swaps on about 60% of their natural gas production 1 year in advance. (they also have swaps on about 55% of their 1 year advance oil production as well) So there is a natural damping of volatility as compared to both oil and natural gas prices. However, since natural gas is naturally more volatile you should generally see a higher correlation to oil prices.
Royalty companies can sometimes act as a sort of annuity where if you get more of your payout (read drilling) earlier then you get a higher IRR because the earlier payments are less discounted (like a PE fund with a great IRR, but maybe low MOIC due to paying out earlier). So, because BSM has a royalty interest I would expect it to trade more in line with drilling activity (which I believe is more correlated to oil prices than natural gas prices [natural gas can sometimes be just a byproduct of oil drilling]). BSM (and royalty companies in general) also tend to receive minimum payments as part of their leases so even if natural gas prices fall below "profitability" on a single well basis, BSM will still receive profitable payments. These should all make it trade more in line with oil prices than natural gas prices.
BSM is also a limited partnership (on top of being a royalty company) so I don't think it is eligible for many indices. I'm fairly confident that it isn't included in any passive index. You also get the additional "benefit" of a K-1, which is particularly fun this time of the year.
I doubt that this is a perfect answer to the question, and I'm probably missing something, but maybe it will help. For anyone who is curious about BSM in general, Andrew had an excellent podcast with Andrew Carreon on it in 2022.
I can't comment on BSM and CNX; however, for some of the Canadian natural gas companies, I have noted that a relatively large percentage of their profit (but not revenue) was related to the price of the natural gas liquids components they obtained from their natural gas. These natural gas components were highly correlated to the price of oil. So, even when the price for the dry natural gas component was very low, the companies seemed to be happy to pump all they could (especially from wetter gas reservoirs) in order to make a profit from the liquids components. Might that contribute to the better correlation to oil than gas that you observing?
The rub “it really helps if you have a company that’s buying back stock”
@hkuppy (and listen to @PauloMacro on @TheMarketHuddle this weekend mention it) has been nails on this: passive algo flows buy your target stock iff share count is decreasing and then fits the buy program
many gold stocks lagged the gold move recently. NEM had a bit of a draft following the dividend cut and took awhile to react. Smaller caps lagging the larger caps (more normal).
Here's some of the reasons why I think BSM should correlate more to oil prices than natural gas prices:
BSM (Black Stone Minerals) is an oil and gas LP which owns royalty interests on approximately 7MM net acres in the US. BSM received about 60% of its revenue from oil production in 2023 and 44% in 2022. So while natural gas is a very large part of production it's less relevant for actual revenues.
BSM also runs with swaps on about 60% of their natural gas production 1 year in advance. (they also have swaps on about 55% of their 1 year advance oil production as well) So there is a natural damping of volatility as compared to both oil and natural gas prices. However, since natural gas is naturally more volatile you should generally see a higher correlation to oil prices.
Royalty companies can sometimes act as a sort of annuity where if you get more of your payout (read drilling) earlier then you get a higher IRR because the earlier payments are less discounted (like a PE fund with a great IRR, but maybe low MOIC due to paying out earlier). So, because BSM has a royalty interest I would expect it to trade more in line with drilling activity (which I believe is more correlated to oil prices than natural gas prices [natural gas can sometimes be just a byproduct of oil drilling]). BSM (and royalty companies in general) also tend to receive minimum payments as part of their leases so even if natural gas prices fall below "profitability" on a single well basis, BSM will still receive profitable payments. These should all make it trade more in line with oil prices than natural gas prices.
BSM is also a limited partnership (on top of being a royalty company) so I don't think it is eligible for many indices. I'm fairly confident that it isn't included in any passive index. You also get the additional "benefit" of a K-1, which is particularly fun this time of the year.
I doubt that this is a perfect answer to the question, and I'm probably missing something, but maybe it will help. For anyone who is curious about BSM in general, Andrew had an excellent podcast with Andrew Carreon on it in 2022.
I can't comment on BSM and CNX; however, for some of the Canadian natural gas companies, I have noted that a relatively large percentage of their profit (but not revenue) was related to the price of the natural gas liquids components they obtained from their natural gas. These natural gas components were highly correlated to the price of oil. So, even when the price for the dry natural gas component was very low, the companies seemed to be happy to pump all they could (especially from wetter gas reservoirs) in order to make a profit from the liquids components. Might that contribute to the better correlation to oil than gas that you observing?
The rub “it really helps if you have a company that’s buying back stock”
@hkuppy (and listen to @PauloMacro on @TheMarketHuddle this weekend mention it) has been nails on this: passive algo flows buy your target stock iff share count is decreasing and then fits the buy program
https://pracap.com/just-smash-the-buybacks/
many gold stocks lagged the gold move recently. NEM had a bit of a draft following the dividend cut and took awhile to react. Smaller caps lagging the larger caps (more normal).