A Real-World Illustration of Correlated Risk Lurking Beneath the Surface
Correlated risks that aren’t apparent at first glance can be some of the most dangerous risks to your business or investment portfolio because you haven’t adequately prepared for something to go wrong. That is why I so often mention correlated risk so that you don’t think you’re more diversified than you are in reality.
This afternoon, I was reading through the disclosures of one of my holdings and in the tiny print detailing the various subsidiaries, it mentions the Mad Dog (Green Canyon 782) Offshore Deepware Gulf of Mexico Oil & Gas project.
It is operated by BP but 23.9% is owned by BHP Billiton, 60.5% by BP, and 15.6% by Chevron. It produces 100 Mbbl/d oil and 60 MMcf/d gas. It’s located at 27°12’24” N 90°16’58” W.
That’s an example of what I mean. If you owned BHP Billiton, BP, and Chevron, that’s not diversification in an absolute sense. Yes, it’s better than nothing. But you need to be aware of the intersections between your investments so you are aware of the vulnerabilities or the things against which you need to defend.
Then, there is another correlated risk at Genesis Green Canyon 205 – BHP Billiton owns 4.95%, Chevron owns 56.67%, and ExxonMobil 38.38%. There are many more just like that.
Perhaps there are better examples out there as all these firms are otherwise correlated due to commodity prices, but it should give you an idea of one of the types of situations of which you should be cognizant. It’s like Nestlé owning a massive stake in cosmetics giant L’Oréal. You can’t invest in both firms and think it’s diversification. It’s not. They have similar exposures.
At this particular moment, I have a few correlated risks I am seeking to minimize. They aren’t enormous, but they are enough to give me pause, so they are on the “correction” list for this on-going six-month project that runs between October 15th, 2013 and April 15th, 2014.