YWR: The Secret Hedgehog

A leading US natural gas producer is quietly becoming great.

It was a busy week. Korean retail traders getting margin called en masse, the Fed’s non-hike, and then Leopold getting scalped by Citadel. Epic.

So you might have missed a certain headline on Monday.

It was one of those quiet, subtle headlines no one pays attention to during a busy week, but years later we look back on it and realise it was the most money making headline of the week.

Expand Energy acquires Twin Eagle

Expand Energy, the largest natural gas producer in the US, acquired a gas marketing business called Twin Eagle for $1.25 billion. Twin Eagle is a leader in buying gas from producers, moving it around the US and selling it to industrial customers.

The transaction makes Expand (renamed after merger of Chesapeake and Southwestern) not only the largest producer (7.5 bcf/day), but also the largest marketer of natural gas (14 bcf/day) .

As a gas marketer Twin Peak has built a huge network of storage facilities around the US with 44 bcf of capacity. Twin Eagle also controls 2 Bcf/day of transportation rights on US pipelines. They can move gas anywhere.

Source: Expand Energy

So why do I think this is such an important transaction?

Especially, since EXE didn’t move on the announcement.

Because it tells us Expand is a hedge hog.

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Back in May I went to a two day AI-Energy conference.

The idea was that with AI and the datacenter build out it was important for the energy sector and the tech sector to start talking to each other more.

The conference was exciting and full of private equity funds, datacenter developers, utilities, pipeline companies, gas turbine manufacturers, and hyperscalers. Everyone breathlessly announcing how much demand they were seeing.

Except there was one company no one really seemed to care much about. Even though they were a main sponsor of the conference.

They hosted an early fireside chat on the morning of the second day. Many of the previous day’s attendees seem to have had trouble getting out of bed. So attendance was a little slim.

But I was there in the front row with my coffee.

Because it was a fireside chat with Mike Wichterich, the CEO of Expand Energy.

And it was the best presentation of the entire conference.

Mike had two main messages.

#1 The US natural gas market is undergoing an unprecedented confluence of demand drivers. These demand drivers could lead to 30 bcf/day of incremental demand in a 100 bcf/day market. That’s massive.

Source: Expand Energy

It’s three trends coming together.

It’s the growth of LNG terminals in the Gulf Coast which is now super charged by the disruptions in Qatar.

It’s the demand from all the datacenters once they are running.

And it’s the growth of new factories in the US like the $100bn of investment TSMC is making in Phoenix.

I loved Mike’s pitch because it confirmed my sneaky suspicion that natural gas is the contrarian backdoor way to play AI. The same way iron ore was the best way to play China. Everyone wants to invest in the datacenter capex plays, but what happens after the datacenters are built? What’s the play for the next twenty years? Natural Gas.

For years natural gas was all about the growth of fracking and growth of supply. Now natural gas is a story about demand. We wrote about this in The Final Bottleneck.

But that’s all thematic.

The second thing that caught my attention was Mike’s view that Expand needed to get better at monetising volatility. Natural gas is the most volatile commodity. It can move 300% in a week on an unexpected cold snap. Nothing else moves like that.

Mike said rather than always trying to smooth out gas price volatility, Expand needed to accept the volatility and get better at making money from it. The firm needed to be opportunistic; sit on gas when prices were depressed, and sell it when they were spiking. But to do this they needed to get better at gas trading. And they needed more capacity to store gas when prices were low.

Which is why it makes perfect sense that Expand is acquiring Twin Eagle. It brings the gas trading skills and 9x’s their storage capacity.

But again, ‘So what?’ you might say.

A natural gas company bought a gas marketing company.

Who cares?

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Investing in Hedgehogs

In 2001 Jim Collins wrote Good to Great.

He wanted to know what made companies ‘great’.

He had examined 1,435 companies over a 40 year period. He then identified the 11 best performers of the 1,435 and intensively examined why they had outperformed so dramatically over decades. He went over strategy, competition, financial statements, and meetings with management.

What was the secret to success?

What did the successful companies of the time, like Walgreens, Wells Fargo and Kimberly Clark, all have in common?

The great companies were all Hedgehogs.

Collins compares hedge hogs with foxes. Foxes are clever and know something about everything. They hop around chasing one opportunity after another. A Hedge Hog knows one big thing, never budges and focuses on it relentlessly.

A Hedge Hog company identifies the key business where they can be great. They compete where they can be great and cut the businesses where they are just another competitor.

“You’ll know that you’re getting closer to your Hedgehog Concept when you align three intersecting circles that represent three pivotal questions: What can we be the best in the world at? (And equally important—what can we not be the best at?) What is the economic denominator that best drives our economic engine (profit or cash flow per “x”)? And what are our core people deeply passionate about? Answer those three questions honestly, facing the brutal facts without blinking, and you’ll begin to see your Hedgehog Concept emerge.”

The Hedgehog strategy is long-term, low profile and not glamorous. It’s how surprisingly great companies emerge out of unexpected industries.

And it’s why I was so interested in the Twin Eagle acquisition. Because it looks like Mike Wichterich is executing a hedge hog strategy. He is quietly building Expand Energy into a Great US natural gas company. Expand is already the largest producer, but Mike wants make Expand the most profitable producer through better marketing and trading. He wants to improve profit/molecule.

And notice despite all the AI hype he’s not trying to ‘vertically integrate’ and build a data centre, which some gas producers are trying to do. No, he wants to stick to his knitting and be the best at US natural gas. Even if it’s not sexy and the market doesn’t care. For now.

And that’s why I say Expand buying Twin Eagle was the money making headline of the week.

Have a good weekend.

Erik