Texas Blackout Boosts Macquarie Bank By Up To $270 Million

The deep freeze that plunged millions of Texans into darkness is rippling through energy markets in unexpected ways, producing a financial windfall for Macquarie bank and severe pain for other companies caught up in the disruption.

The extreme weather froze wind turbines and oil-and-gas wells, closed oil refiners and prompted power stations to trip offline, sending a jolt through energy markets. Wholesale power prices rocketed, as did spot prices for natural gas in Texas, Oklahoma, Kansas and Arkansas.

The turbulence led to a bonanza for commodity traders at Macquarie Group Ltd., whose ability to funnel gas and electricity around the country enabled them to capitalise on soaring demand and prices in states such as Texas.

The bank bumped up its guidance Monday for earnings in the year through March to reflect the windfall. It said that net profit after tax would be 5% to 10% higher than in the 2020 fiscal year. That equates to an increase of up to $273.1 million. In its previous guidance, issued Feb. 9, Macquarie said it expected profits to be slightly down on 2020.

“Extreme winter weather conditions in North America have significantly increased short-term client demand for Macquarie’s capabilities in maintaining critical physical supply across the commodity complex, and particularly in relation to gas and power,” the bank said.

Macquarie’s windfall shows how big profits can be made wagering on relative scarcity of natural gas in a country awash in the fuel.

The U.S. shale-drilling boom unleashed so much gas over the past decade that prices have been depressed to the point that producers with gushers have gone bankrupt. Yet gas buyers, such as power plants and manufacturers, are routinely left paying surging prices when demand peaks during winter storms.

Behind such instances of energy feast and famine is a gas infrastructure system that has failed to keep up with all the drilling. Pipelines laid decades before the shale boom are often in the wrong places, or too small to meet today’s demand. Having space reserved on certain pipelines can become incredibly lucrative when uncharacteristic weather causes swells in demand.

Scarcity in Texas and the Great Plains was amplified last week when temperatures dropped low enough to freeze shut many of the region’s gas wells and other energy infrastructure. Capacity on pipelines into the region became precious. Traders and energy firms that had paid in advance for the right to use these supply routes were suddenly in position to rake in huge profits as utilities vied for fuel deliveries.

Macquarie describes itself as the second-largest marketer of physical gas in North America behind BP PLC, with a team in Houston and access to 80% of pipelines spanning the U.S., according to a person familiar with the matter. The business, which Macquarie has built out for over a decade, received a boost from the acquisition of Cargill Inc.’s North America power and gas division in 2017.

The bank rents access to natural-gas pipelines and electricity networks across the U.S., enabling it to profit when prices in some regions are significantly higher than in others and when consumers are in urgent need of fuel or power. That was the case last week, when frozen energy infrastructure and the closure of oil-and-gas wells set off a race for natural gas among Texas power plants and other consumers.

Macquarie sent large volumes of gas from the north of the U.S. to the south, where the cold weather sent prices soaring last week, the person familiar with the matter said. It supplied electricity in Texas as well as gas to generate electrical power.

At one point, natural gas changed hands for more than $900 per million British thermal units at the ONEOK Gas Transportation hub in Oklahoma, according to commodities data provider S&P Global Platts. By Friday, prices at the hub had fallen back to about $14 per million British thermal units. That was still comparatively high: Benchmark futures for U.S. natural gas, which are tied to delivery at Henry Hub in Louisiana, have generally cost between $2.50 and $3.50 per million British thermal units in recent months.

Shares of Macquarie rose 3.4% on Monday after the company raised its profit outlook. They are now down 2.8% over the past 12 months.

Millions were left without power and heat in Texas last week as the lowest temperatures in decades wreaked havoc on the state’s utilities. Frozen water lines burst and left big residents in cities without safe drinking water. Stores closed because they had no power, which made food and water even more scarce.

Roughly 70 deaths, mostly in Texas, have been attributed to the cold weather, according to the Associated Press. Some are believed to have frozen to death in their homes.

Macquarie last year provided an undisclosed amount of investment capital to upstart Houston-based utility Griddy Energy LLC, whose business model is to pass variable wholesale electricity prices through to customers. Griddy customers complained of paying lofty sums when power prices shot up to thousands of dollars per megawatt hour last week, according to local Texas media reports.

One customer told the Dallas Morning News that his electric bill for five days stood at US$5000, the amount he would normally pay for several years of power. Another told the Dallas-Fort Worth NBC affiliate that he had been charged more than US$16000 for February.

A Griddy spokeswoman said an order by the state utility agency to the operator of the electricity grid to make market prices reflect the scarcity of power pushed up prices for its customers. On Feb. 12, the company started emailing and texting customers to say they might be better off switching providers for a short time to avoid exposure to wholesale prices, she said.

Corporate casualties from the freeze are also starting to emerge. Just Energy Group Inc., a Canada-based energy supplier, on Monday said it faced a financial hit of about US$250 million, in part from buying electricity at sky-high prices in Texas during the cold blast. The company, which said the blow could stop it from continuing as a going concern, saw its shares slump 31%.

In another instance, shares of Atmos Energy Corp. fell 4.4% Monday after the Dallas-based gas supplier said it would have to pay between US$2.5 billion and US$3.5 billion for gas it bought at elevated prices in Texas, Colorado and Kansas. Atmos may issue stock or raise debt to help to pay for the purchases, it said Friday.

German energy company RWE AG said its 2021 earnings would be hit by outages at the company’s wind turbines, as well as from high prices for electricity.

Wall Street’s hottest trade has gone ice cold.

For years, it paid off to buy stocks that were rising in price—and bet against struggling shares. The momentum trade was especially profitable this year, as investors piled into hot stocks including Micron Technology, Nvidia, Advanced Micro Devices and other artificial-intelligence darlings while wagering against those likely to be hurt by the embrace of AI.

The S&P 500 Momentum Index soared 44% in the second quarter, its best quarterly performance on record, and it surged 133% over the past five years, nearly double the broad market’s performance.

Mega funds and rookie investors alike piled into the trade, some using leverage and options contracts in an effort to amplify their returns, propelling the underlying shares higher.

“It is a self-fulfilling prophecy,” said Matthew Tym, managing director at Cantor Fitzgerald, of the trade.

Suddenly, the trade is a loser. The momentum index has tumbled more than 9% since July 1, lagging behind the S&P 500’s 2.8% gain. The index—which tracks stocks in the S&P 500 based on a “momentum score”—is on track for the biggest quarterly underperformance in 25 years. July was the second-worst month for the momentum trade in around 40 years, according to Bank of America estimates; the only month worse was April 2009, in the teeth of the global financial crisis.

Hedge funds that bought momentum shares while shorting low-momentum stocks suffered even more. At the same time, a basket of the most popular stocks held by hedge funds tracked by Goldman Sachs recorded its biggest one-month underperformance in July relative to the S&P 500 in more than 20 years, according to the bank’s analysts.

Momentum trading is based on a rather simple observation: Investments that go up tend to keep outperforming; those that underperform often remain laggards. This kind of trading might seem too simple a stock-picking strategy to work. Yet it often has.

“For decades, it didn’t take a lot of sophistication to run a momentum strategy and make a decent living at it,” says Agustin Lebron, senior researcher at EquiLibre, a trading firm.

Part of the reason: It takes a while for corporate and other information to spread to various investors, so they slowly build positions, producing buying momentum.

“A huge pension fund can’t flip around its positions in a day,” says Lebron. “Behavioral biases also account for some of the effect, as well—people tend to sell their winners too early and hold losers too long.”

Fans of the strategy point to the human tendency to extrapolate from past results—and chase investment returns—noting that momentum patterns have been evident in markets for decades, even centuries. They also say that some of the worst months for momentum strategies are during longer periods of outperformance.

Some have been doing the trade by buying the strongest investments in a sector while shorting the weakest; others lean in to rising markets or asset classes. Still others use a quantitative approach or turn to banks or others who sell ways to make distinct wagers on momentum as a “tradable factor” or a “thematic basket.”

The fans remain believers. “Any strategy has disappointing periods,” says Antti Ilmanen, global co-head of the portfolio solutions group at AQR Capital Management.

The surge in Moderna and other biotech stocks helped crush the momentum trade. These shares were among the most heavily shorted in recent years, but positive news on a cancer vaccine from Moderna and Merck sent those stocks flying, crushing some quant and other hedge funds. Moderna is up around 150% so far this month.

These traders had an especially rough day on Aug. 19, which Goldman Sachs told its clients was the worst day for “systematic long-short managers” in more than two years. About half of the losses were because of momentum trades, the bank said.

Some traders have begun to short, or bet against, the very stocks that propelled the momentum trade earlier this year. Net short positions in futures tied to the Nasdaq-100 index among speculators recently climbed to some of the highest levels of the past two decades, according to data from the Commodity Futures Trading Commission.

The about-face is a sign of how markets have become more treacherous for investors, even as indexes keep climbing. Part of the issue: the recent meltdown of Situational Awareness, a hedge fund that had piled into some of the most popular momentum shares, including chip stocks. After a period of market tumult, Nvidia shares rocketed almost 9% after its earnings, showing how quickly sentiment can shift.

Some investors say the run-up in share prices driving tech stocks higher reminds them at times of the dot-com frenzy decades ago.

Mike Ogborne, the founder of San Francisco-based Ogborne Capital Management, said he has grown more cautious on technology stocks and is keeping more of his portfolio in cash than he typically does.

And he is nervous about the surge in spending by technology giants and quarterly capital expenditures that keep rising.

“It is a little bit like Cinderella and the clock striking midnight. You don’t know when midnight is going to come around,” Ogborne said. “They don’t send a memo around telling you when the capex cycle is over.”

Texas Blackout Boosts Macquarie Bank By Up To $270 Million

Macquarie shares up as a result of Texan deep freeze.

Wall Street’s hottest momentum trade has reversed sharply, as former winners tumble and heavily shorted stocks surge.