The Predictability Premium with Christian Lins (Part 1)

Podcast Briefing: an Edited Q&A

The following Q&A has been adapted from the HC Commodities Podcast and edited for clarity and length.

The Boardroom Case Against Trading

Paul Chapman: You’ve been in the boardroom when energy companies and other asset-backed organisations are debating whether to scale their trading arms. What is actually on the table when that conversation comes up, and why do many boards get to the answer no?

Christian Lins: The conundrum is that trading ties up capital, can be difficult for many asset-backed participants to oversee, and can cost a lot of money and trust.

Under certain circumstances, however, the market can pay a premium for enhanced commercial operations, especially when they are linked to de-risking. Since the pandemic, we have observed that the market can pay a measurable premium for steady cash flows. Some players successfully use their trading capabilities to improve cash-flow predictability, while others are not there yet or choose not to do so.

Boards have also realised that doing nothing, such as simply selling FOB, is not necessarily risk-free. It can affect market share and limit the counterparties willing to buy. There is a growing recognition that commercial sophistication is important and warrants investment.

The Four Roles of Trading

Paul Chapman: What role can trading play within an asset-backed organisation?

Christian Lins: It can be understood through four areas: value capture, value insurance, information and timing.

Value capture includes the optionality within the portfolio. Insurance means having portfolio-wide and asset-backed plans B and C. Information comes from knowing where the physical market is, while timing includes managing when cash flows are realised and addressing mismatches between physical and financial activities.

Capital, Talent and Trust

Paul Chapman: Tying up the company’s money is clearly a legitimate concern. Within an asset-backed organisation, you are using the company’s balance sheet. Can you lean into that a little more?

Christian Lins: The parent company’s balance sheet is a competitive advantage, but it is also carefully guarded. Boards worry about reported earnings, working-capital requirements, credit losses and the challenge of recruiting the talent needed to establish an effective second line of defence.

Trading companies, independents and hedge funds have historically offered aggressive compensation, so not every executive wants to enter that talent war. Technology and processes can be built and designed, but trust cannot. Having and developing the right people is therefore critical.

Why European Majors Moved First

Paul Chapman: Some participants, particularly the European majors, have had these capabilities for some time. Why did they build them?

Christian Lins: The European majors built these capabilities because they needed to. The collapse of the concession system in the 1970s left some companies with substantial reductions in supply while they still had obligations to fulfil.

In broad terms, European majors built trading operations because they were short and needed to optimise. US majors later developed them because they needed to become better at placing volumes.

The Shift After 2020

Paul Chapman: What happened in 2020, and what did you start seeing in the way companies and investors thought about trading?

Christian Lins: After the pandemic, there was greater recognition, particularly among hydrocarbon majors, that trading could contribute to stable and consistent cash flows.

Investors recognised that the energy sector had experienced underinvestment and that energy, especially refined products, had become a major driver of inflation. One way to hedge against that, at least in part, was to hold cash-generating enterprises.

We also analysed how often trading and volatility management were discussed in quarterly reports, 10-Ks and 10-Qs. References to trading have increased across the board. European majors spoke particularly frequently about it in 2021 and 2022, while US supermajors have increasingly discussed it as they have developed their capabilities.

Defining the Predictability Premium

Paul Chapman: Does Wall Street now place a value on organisations with these capabilities, particularly since the new wave of volatility began?

Christian Lins: Our analysis shows a strong relationship between the dividend yield at which some majors trade and their quarter-on-quarter cash-flow volatility. The lower the cash-flow volatility, the lower the dividend yield.

We focused on dividend yield because it is something management can influence. Other valuation measures, such as enterprise value to EBITDA, can be difficult to compare across companies and fiscal regimes.

Depending on the company, managing cash-flow volatility more deliberately could potentially represent a double-digit-billion-dollar increase in market capitalisation. Trading is part of that decision-making framework. When it is done well, sophisticated trading capabilities can help manage volatility and contribute to more predictable cash flows.

Correlation, Causation and Investor Recognition

Paul Chapman: Are analysts explicitly saying that they value the fact that a company has built this capability and achieved more stable cash flow? Are we seeing a causal link, or is it currently an association?

Christian Lins: It is a difficult causal link to establish. However, some analysts recognise that trading can provide a floor when crude prices are low and disproportionate upside during periods of high volatility.

There is also greater consensus among boards that trading can support volatility management and resilience, rather than serving purely as a growth story.

Growing Within a Risk-Management Mandate

Paul Chapman: Can a trading organisation grow while still strengthening its risk-management mandate?

Christian Lins: You can grow a trading organisation while doubling down on its risk-management mandate. It can contribute to relatively more stable cash flow by providing the finance function with the appropriate guardrails and steering levers.

Within that framework, the CEO of the trading company can still have a mandate to grow. That mandate comes with a working-capital budget, risk-management limits and defined triggers.

What is relatively new is the recognition that investor preferences can be so influential that simply maximising trading profits is not necessarily the right objective. The trading operation must pursue growth in the context of the wider enterprise.

Increasing Complexity in Physical Markets

Paul Chapman: Are investors, analysts and boards becoming more sophisticated in how they understand trading, accounting and physical-market exposure?

Christian Lins: The volatility of recent years has created significant learning across the industry. Companies have realised that they cannot simply close their eyes or withdraw. They need to manage their positions.

Crude markets have become more regionalised, while freight has become a dominant consideration. Looking only at paper spreads can be misleading if freight is not properly accounted for. Companies can also no longer assume that running a tender will automatically deliver the best price.

Navigating that complexity requires a relatively mature operating model.

Oil, Metals and Mining

Paul Chapman: Is the predictability premium just an oil phenomenon, or can we see it in mining, utilities and other markets?

Christian Lins: Statistically, the relationship is strongest in oil and gas and somewhat weaker among downstream pure plays.

Historically, metals and mining companies have largely passed commodity-price volatility through to shareholders, effectively opting out of the predictability premium. However, that could change as they mature, control more of the value chain, become more integrated and seek to attract more institutional investors.

Utilities, Renewables and AI

Paul Chapman: How does this apply to utilities and renewable companies?

Christian Lins: Utilities and renewable companies need to be considered differently, including how they were viewed before the growth of AI and how they are viewed now.

There is a discernible relationship within wires and midstream businesses. However, some utilities have repositioned themselves as part of the AI ecosystem. Their story is increasingly about participating in that potential upside, introducing elements of a technology-style growth narrative into how they think about dividends and valuation.

Capturing and Communicating the Premium

Paul Chapman: What conditions need to be present for a company to capture the predictability premium, and how should commercial leaders communicate their contribution?

Christian Lins: First, there needs to be a payout promise the company is willing to defend, alongside visible differentiation between peers and a management team capable of delivering against expectations.

Communication is equally important. Trading, finance and risk management must give executives the confidence to guide the market and explain how commercial activities support more predictable cash flows.

The message is not simply, “Look how much money we made.” It is about showing how the trading operation managed volatility and created value for the wider enterprise.