There’s Just Not Enough Energy | Harris Kupperman & Porter Collins

Episode Summary

Executive Summary: Porter Collins and Harris Kupperman make a bullish case for energy through a macro, geopolitical, and supply-constrained lens. Kupperman prefers offshore drillers, OSVs, futures, and far-dated call options over U.S. E&Ps because he sees policy risk, replacement-cost scarcity, backwardated oil curves, and low-cost inflation protection as the best way to express the view.

Main Topics: Why energy over equities (Priority: 5/5): Kupperman explains why he avoids many U.S. oil and gas stocks, citing policy hostility, windfall taxes, lease cancellations, pipeline risks, and even nationalization concerns. He prefers instruments that reduce direct operating and political exposure. Offshore drilling and replacement cost (Priority: 5/5): He is especially bullish on offshore drillers and service assets like Valaris and Tidewater, arguing that drill ships are scarce, expensive to replace, and supported by rising dayrates and constrained supply. Oil futures and options as inflation hedges (Priority: 5/5): Kupperman favors far-dated call options on WTI and Brent futures because they offer cheap convex exposure to inflation and higher oil prices with limited capital at risk. Backwardation, roll yield, and curve dynamics (Priority: 4/5): The discussion emphasizes oil’s backwardated curve, which makes futures-based vehicles more attractive than in contango. He argues the curve still underprices long-term inflation and supply constraints. Global supply growth and geopolitical demand (Priority: 4/5): He notes that future offshore growth is coming from countries such as Guyana, Suriname, Namibia, and Brazil—regions less constrained by Western climate politics and more focused on securing supply. Taxation and policy risk (Priority: 4/5): The speakers discuss how governments may target oil and banks with windfall taxes, making energy equities less appealing even when free cash flow is strong.

Key Arguments: Oil producers are exposed to policy and geopolitical intervention, so futures/options can be a cleaner way to express a bullish oil view. Offshore drilling assets are scarce, hard to replace, and likely to benefit from replacement-cost inflation and higher utilization. Dayrates and cash flows in offshore drilling are rising sharply, suggesting significant upside for companies like Valaris. Far-dated call options provide inexpensive inflation protection and upside convexity relative to the notional exposure. Oil is a global commodity, so Brent exposure via BNO is preferable because it cannot be easily controlled by U.S. price caps or export restrictions. Backwardation means rolling exposure can generate positive carry/roll yield, making oil-linked ETFs more attractive now than during contango regimes. The current oil curve still reflects too little inflation and too low a long-term price, implying producers may under-earn future returns if they hedge at current levels. Regulatory and tax risk in Europe and the U.S. can materially reduce the attractiveness of oil equities even when operating fundamentals are strong.

Data Points: WTI call option strike: $100 strike - Kupperman says he bought December 2025 WTI calls at the 100 strike. WTI call option premium: about $2 - He says he paid roughly $2 per contract for the far-dated calls. Option notional cost: ~2% of notional - He characterizes the call options as cheap inflation protection relative to underlying exposure. Offshore drilling dayrates (current forward curve): $450,000 to almost $500,000 per day - He says the forward part of the curve for drill ship rates has risen sharply. Offshore drilling dayrates (prior year): $150,000 to $200,000 per day - He compares current forward rates with levels from about a year earlier. Offshore drilling peak in 2008: roughly $600,000 to $700,000 per day - He says a million/day would exceed the 2008 peak in the next cycle. Projected drill ship rates: $1 million per day - He predicts rates could reach this level within a year. Valaris valuation: less than 1x cash flow - He claims Valaris trades at below one times cash flow. Cash flow yield view on European oil stock: 50% reduced to 30% free cash flow yield - He says a new European windfall tax changed Vermilion’s economics materially. BNO structure: 1x or 2x Brent oil contracts - Porter explains BNO holds Brent futures exposure, unlike stock ownership. Oil futures pricing example: 2025 futures around $50–$60 while spot is about $90 - Used to illustrate backwardation and the market’s long-dated discounting. Roll yield: 2.5% to almost 3% per month - Kupperman cites positive carry from holding BNO in the current curve structure.

Pivotal Quotes: "I have to think that you have a lot of inflation and then energy prices go higher." — Harris Kupperman: Explaining why he uses energy-linked instruments as inflation protection. "I just think I get more bang for the buck with my call options." — Harris Kupperman: Why he prefers far-dated options over owning energy equities outright. "I think I win that way too, as the estimates roll up, as the curve comes up to respondents." — Harris Kupperman: On how long-dated oil futures and equity estimates may rise with the commodity curve.

Implications: Listeners should see this as a thesis for owning energy via convex, liquid, and less policy-sensitive instruments. The argument implies a structurally tight oil market, rising inflation risk, and continued upside in offshore drilling and futures-linked exposure.