Trading houses get more physical

05 March 2018
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Some of the big trading houses have been taking increasing stakes in physical assets – including some far downstream from their traditional spheres of activity74

Trading houses have continued in their pursuit to buy physical assets in oil supply chains in a move to capture greater value far from the algorithm-affected world of propriety derivatives trade. There have been comments from the industry in recent years suggesting that the trading of paper oil has been distorted by the growing presence of increasingly powerful automated trading systems. It should therefore come as no surprise that trading houses are increasing holdings in physical assets. The ownership of – for instance – a storage terminal and retail distribution network gives the operator access to physical trade optionalities, compensating for diminishing returns from pure paper trading.

Downstream

The biggest talking points in the asset space right now are rumours of upcoming capital raisings, the most high-profile of which is the imminent IPO of European refiner and service station operator Varo Energy. Varo, a joint venture formed by Vitol, Carlyle Group and private Dutch investor Reggeborgh in 2012, owns the 68,000 b/d Cressier refinery in Switzerland and 45pc of the Bayernoil plant in Germany. Its storage, distribution and retail network features around 3mn m3 of storage capacity and a fleet of service stations across Germany and the Netherlands. The IPO, which is expected to take place on the Amsterdam stock exchange in the coming weeks, is a big move for the company, which has so far avoided public capital markets. Vitol, which is never a business to do things by halves, has also indicated potential plans for an IPO in excess of $2bn of the Viva Energy business it bought from Royal Dutch Shell in Australia four years ago.

Another example of a future liquidity event can be seen in Puma Energy, the midstream and downstream arm of Trafigura. The company, which features Angolan state oil firm Sonangol and Cochan Holdings as junior equity partners, operates in 49 countries and showed record sales of 22.8mn m3 in 2017. Puma, which expanded last year by taking a stake in a fuel retail network in Pakistan and operations at eight new airports including Johannesburg in South Africa, has been discussing an IPO for some time. While an IPO is not expected to take place in the short term, last year Trafigura CEO Christophe Salmon indicated that the company is likely to go public over the next five years.

Glencore, which in 2011 was the first of its kind to make an IPO, has signalled its intent to use surplus capital to build its asset portfolio when opportunities arise. Glencore’s oil business has recently been involved in several high-profile acquisition bids in Africa. The most notable target has been Chevron’s South African and Botswana assets, which boast a 110,000 b/d refinery in Cape Town, a lubricants plant in Durban and more than 800 service stations. It also includes storage facilities and more than 200 convenience stores across South Africa and Botswana. Glencore has also locked horns with Vitol and several other trading houses in bidding for a stake in the 20,000 b/d Indeni Petroleum Refinery, Zambia’s only fuel processing plant.

Trading houses taking bigger positions in midstream and downstream oil markets makes perfect sense if we consider that in any market one of three factors are needed to make a profit – proprietary information, proprietary clients or proprietary assets.

Supply

Big trading houses’ moves deeper into physical assets can also be seen in Vitol’s plans to secure long-term supply arrangements with Middle East crude producers. The company is reportedly in talks to create either joint-venture or term offtake deals with producing countries including Abu Dhabi, Bahrain and Kuwait. Ian Taylor, who has stepped aside from his role as Vitol’s CEO to become company chairman, recently told reporters that he will soon be traveling in the Middle East and Africa to promote Vitol and to make “structured deals”. Taylor has also indicated that Vitol plans to take a physical position in the growing US crude export market. The company has already agreed to explore the development of a crude oil terminal in the Port of Corpus Christi on the US Gulf coast with Harvest Pipeline Company.

This growing involvement in US midstream and export infrastructure on the part of the big trading houses is expected to continue. Trafigura was the biggest exporter of US crude and condensate in 2017, and the company will continue to increase its export capacity to take advantage of rising US production.

Talent demand

Trading houses taking bigger positions in midstream and downstream oil markets makes perfect sense if we consider that in any market one of three factors are needed to make a profit – proprietary information, proprietary clients or proprietary assets. If proprietary information has all but disappeared with the spread of high-tech analytical data vendors and clients are faced with more choice amid ample supply, the forward-looking company moves into physical assets.

This continuing shift will drive demand for specific kinds of talent at the trading houses. When looked at alongside the three proprietary factors mentioned above, we can see how the demand trends are most likely to run. The need for information will drive greater demand for analysts with an understanding of artificial intelligence that makes it possible for them to process the vast amount of data now available to the market. The need for proprietary clients will drive competition for business development/origination professionals, perhaps with specific regional experience. Last but by no means least, the spreading move into physical assets will increase demand for investment talent, notably for those with experience of both trading companies and infrastructure funds.

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