Data and analytics house of the year: Mobius Risk Group

Energy Risk Awards 2021: Unique data pool and innovative risk-pricing methodology set advisory firm apart

Eric Melvin, Mobius Risk Group

With oil and gas markets facing seismic change, quality data and actionable analytics are essential to help firms make optimal decisions. 

A firm with a unique and innovative approach to data and analytics is Mobius Risk Group, a 20-year-old boutique technology and advisory service with deep energy sector expertise and a strong risk management focus. The firm recently added innovative risk-pricing analytics to its core Mobius RiskNet platform, enriching its constantly evolving service and winning it the 2021 Energy Risk data & analytics house of the year award.

The firm’s ground-breaking risk-pricing methodology, M-Risk, was launched and trademarked in 2019 and visualization tools were added in 2020. M-Risk uses proprietary algorithms to provide firms with unusually deep insight into portfolio risk, enabling better decisions and more impactful and efficient hedging.

With M-Risk, firms can view their portfolio by production volumes but also by market value, hedged value and hedging costs, to gain an understanding of the true cost of hedges and vastly improve a hedging programme. M-Risk was designed to overcome many of the drawbacks of value-at-risk and other methodologies for pricing market-based deal risk. It is available as a standalone module on top of a firm’s existing commodity trading and risk management platform, as part of RiskNet, accessible via desktop or on the go using RiskNet’s mobile app.

“For years we’ve put band aids on risk due to the industry tools that were available,” says Eric Melvin, Mobius Risk’s founder and chief executive. “Tools like Garch (generalized autoregressive conditional heteroskedasticity), Monte Carlo, VAR and cashflow-at-risk are all good tools, but everyone knows they have limitations. We wanted to find a healthier way to express risk and its impact, particularly on capital plans.”

One firm benefiting from Mobius’s approach is a mid-continental petro producer that was making an acquisition anticipated to triple its size. The portfolio consisted volumetrically of 70% natural gas, 10% natural-gas-to-liquids (NGLs) and 20% crude. On the face of it, the deal seemed a natural gas play, but Mobius analytics showed that the higher volatility of NGLs and crude markets, along with the physical location of the assets, meant the firm’s revenues and capital plans would be most impacted by NGLs and crude.

The M-Risk tool allowed the firm to view its portfolio in some non-conventional ways. It also revealed that using Henry Hub to hedge its Waha gas exposure was effective only up to a certain point, beyond which the futures contracts were actually adding risk.

One challenge many E&P firms have is that lenders and other project stakeholders often set hedging limits, which tend to be based on volumes. Mobius frequently engages with stakeholders to challenge any limits that might impede the efficiency of a firm’s hedging programme.

“Historically people concentrated on volumetric production because that’s easy to understand,” says Melvin. “But the energy space has some of the highest implied volatilities in the market. That historic thinking needs to evolve.”

With the energy transition and decarbonisation plans moving centre stage, energy markets are likely to become more volatile and even less suited to tools such as VAR, which supposes normal distribution, notes Melvin.

“I think the new normal is decidedly leptokurtic markets,” he says. “There is going to be greater volatility across all commodities and that means we need tools that don’t rely on volatilities and correlations being constant.”

Mobius’s innovative analytics are supported by the firm’s extensive and diverse data sets. As well as traditional market data, Mobius gathers clients’ transactional data, their operating metrics and other unique data from places like bilateral contracts that have embedded optionality. It is able to do this because it transacts on behalf of clients at their direction to implement their hedging strategies in a wide range of physical and financial markets, including power, oil and gas, ferrous and non-ferrous metals, carbon markets and environmental markets such as landfill gas. The firm placed roughly $30 billion in notional trades for clients in 2020.

“Transactional insights and data, married with operational data, as well as market data, really gives us this data lake that provides a unique platform to then layer in important things like the biometric sensitivity that our clients have around pricing,” says Melvin. “You don’t see that elsewhere.”

Additionally, members of the Mobius team sit on various corporate and operational risk committees and this, coupled with close relationships with clients fostered over years, give the firm a full understanding of its client’s operating metrics and how these are impacted by market changes.

As a firm that holds client data, Mobius is “violent about client confidentiality”, says Melvin. “We don’t resell our clients’ data or trade against their positions,” he says. Certain data is strictly permissioned so only specific people in Mobius can access it. 

In a world of existential risk for fossil fuel firms, narrowing the distribution of outcomes for capital plans is essential. “To increase the good outcomes and reduce adverse outcomes and to do that cost effectively, that’s a successful programme,” says Melvin. “That’s really the essence of what we’re trying to get clients to think about.”