Hedging advisory firm of the year: Aegis Energy Risk

Energy Risk Awards 2020: Proprietary tools and incisive hedging advice supports clients through tough market conditions

Patrick McCrann

Aegis Energy Risk’s client base was well positioned going into the unprecedented oil price rout in April 2020, when West Texas Intermediate (WTI) futures breached negative territory for the first time ever. Hedging strategies put in place last year and bolstered by access to Aegis’s cutting-edge technology supported clients through this market volatility, according to the firm.

“Our clients are protected for the remainder of this year, with 72% of forecasted production hedged at an average of $57 per barrel (bbl) for the floor,” says Patrick McCrann, director at Houston-based Aegis Energy Risk. He adds that proved developed producing reserves are “well above” forecasts. “In terms of structure, percentage of portfolio and price, we really knocked it out of the park for our clients in 2019, which is when we put those hedges on.”

Much of this came down to seizing opportunities when they presented themselves. For example, on September 14, 2019, news of a drone attack on Saudi Aramco oil infrastructure sent Brent and WTI futures soaring by $7.17 and $8.34 bbl, respectively, the sharpest single-day price surge in a decade. Aegis immediately started working with clients to safeguard their portfolios and to take advantage of this market shift.

“A lot of our clients had hedges for 12 to 24 months out, but there were opportunities to increase and to address any ‘holes’ [in their strategies],” McCrann says. “For the next 12 to 24 months out, there were some great opportunities to [hedge at] good prices to bring in an appropriate rate of return for our client base.”

The spike was relatively short-lived, with prices stabilising after Saudi officials reassured the market about the timeline for repairing the damaged infrastructure. Aegis’s ability to identify and act during this short window of opportunity was crucial for its clients, says Aegis president Chris Croom. “We are always watching the markets for opportunities to further de-risk and we made sure our clients saw the same sense of urgency,” he says.

The hedges transacted on behalf of Aegis’s clients during that spike have subsequently saved some firms from bankruptcy in the current market environment, according to McCrann. “Many of these hedge portfolios became one of our clients’ most valuable assets during a very trying time,” he says, referring to the precipitous drop in oil prices in March and April 2020.

Croom adds: “Tail risk is always part of our thought process when developing strategy with clients, but obviously we hope to never experience it. Fortunately, our client base was hedged at a very high price [after the Saudi Arabia infrastructure attacks] and we are now working with them to add further protection in this challenging market, so there is always ongoing hedge portfolio discussion.”

In addition to offering clients access to timely research as such situations unfold via its analytics platform, View, Aegis has been developing its technology offering to provide clients with other ways to strategise and trade more efficiently. Flow, its back-office technology offering, has evolved from a reporting module to become a tool to automate much of the trade process.

“The early stages of Flow were simply taking clients’ mark-to-market data and hedge percentage data and showing it visually on the platform,” says McCrann. “However, we’ve continued to develop this module into a comprehensive tool. For example, we offer a modelling tool to determine how a prospective trade or series of trades would impact the portfolio from a percentage-hedged perspective.”

Chris Croom

Aegis has also created a ‘hedge marketplace’ on its strategy and execution platform, Engage. This is designed to streamline trade processing, digitalising some of the manual processes involved. Engage users can provide their own counterparties with access to the system so they can see information about any transactions they had with that Engage user. This enables more efficient communication, price discovery, bid ranking and trade execution, says McCrann.

“[The hedge marketplace] ensures all counterparties see every trade [they are involved in], if they wish,” Croom continues. “And everything is managed in a single centralised location, with feedback given to counterparties on where they stand in the process so they can gain insight and improve their process to win more business.”

The module has been tested with client counterparties, including “some of the largest trading desks out there”, Croom says, and is expected to be fully up and running later this year.

Thanks in part to the strides taken in developing its technology offering in recent years, Aegis has continued to add new clients in the current market environment, for example, private equity companies that need to get a handle on the aggregate risk profiles of large oil and gas portfolios. “Other advisory companies might have a dashboard or some sort of technology component, but it’s not as all-encompassing as our full-service hedging platform,” says McCrann. “No-one [in this space] leverages technology in the way we do.”