Mercuria deal boosts merchant trader clout
By Jeffrey Ryser
March 24, 2014 - The Swiss-based merchant trading firm Mercuria has agreed to pay $3.5 billion for the physical commodities trading operations that JP Morgan Chase has built up via two acquisitions over the past six years, speeding up the withdrawal of US banks from energy commodity trading and increasing the clout of the merchant traders.
In the run-up to the sale, JP Morgan's mergers and acquisition unit, which handled the sale, put the overall value of the physical commodity trading unit at $3.3 billion. It valued the oil portion of the physical commodity unit at $1.7 billion, the natural gas trading portion at $800 million, and the metals warehousing operations at $500 million. The remaining $300 million was the value of the bank's power trading operations.
For just $200 million over book value the Mercuria affiliateMercuria Energy Group is effectively to absorb JP Morgan's physical commodities trading business and its approximately 400 to 500 employees working in London, New York, Houston and Singapore. Mercuria has approximately 1,200 employees working principally out of Geneva, Singapore, Shanghai, Greenwich, Connecticut, Chicago and Houston.
The sale, which has been in the works since July when the big US bank decided to exit just the physical commodities business, includes crude oil storage leases in the Canadian oil sands, an oil trading book with a supply and offtake contract with Philadelphia Energy Solution's 300,000 barrel/day refinery, the Henry Bath & Sons metal warehouse operation in Liverpool, England, and natural gas and electricity trading contracts and trading books for both Europe and North America.
Analysis continues below...
Request a complimentary issue of: Energy Economist
Every month Energy Economist combines incisive judgments and detailed data sets that deliver ideas you can profit by. It includes coverage of:
- Political and economic risk
- Supply and demand
- Policy and regulation
- Liberalization and market design
- Supply security
The sale does not include JP Morgan's interests in three power plants with combined capacity of 850 MW in the US, though a spokesman on Wednesday said the bank is "in the process of selling them separate from this deal." JP Morgan is among the largest US wholesale power sellers (see table), according to Platts' quarterly rankings.
The bank's commodity division has an equity interest in the 545- MW Kinder Jackson facility in Michigan, the 230-MW Brandywine plant in Maryland, and in a 75-MW biomass plant in Florida. In the second quarter 2013, JP Morgan Chase Bank Affiliates was the eighth ranked wholesale power seller in the US, according to Platts Megawatt Daily.
In the fourth quarter of 2013, JP Morgan was among the 10 largest wholesale gas marketers in North America (see table) with volumes of 5.2 Bcf/d, according to Platts' quarterly rankings.
With the buyout Mercuria will enhance an existing presence in power trading, but will take on natural gas trading operations in the US where it has had no previous presence.
Mercuria, which was unavailable for comment on Wednesday, was founded by two Swiss nationals in 2004 and is headquartered in Geneva. It had "turnover" in 2012 of $98 billion and a profit of $343 million. In 2013 its turnover topped $100 billion.
As a merchant trading firm Mercuria operates in the same category as Vitol, Glencore, Trafigura, and Gunvor. These are all firms that were created by individual groups of traders from such countries as Holland and Russia, who eventually set up global operations in Switzerland and have essentially followed the business model started by famed oil trader March Rich. Mercuria is one of the smaller of the five merchant traders. Vitol, for instance, claims an annual commodities turnover in the neighborhood of $300 billion annually.
The closely held Mercuria describes itself as "a world leader in trading of physical energy products and dry bulk commodities." Its founders Marco Dunand and Daniel Jaeggi are reported to each own approximately 15% of the company. Both have said publicly that they are looking for a strategic investor in the firm, preferably in Asia.
The merchant firm trades mainly crude oil, and says it traded 182 million metric tons of oil or oil equivalent in 2012. It trades fuel oil, middle distillates, gasoline, naphtha and biofuels. It trades natural gas and LNG, as well as power, coal, dry bulk, hard and soft commodities and base metals.
Mercuria is already one of the main commodity traders in European crude oil markets. In the Nother Sea its activity is focused on Forties crude oil, but also sometimes sweeter grades like Ekofisk. It is very active in North Sea crude paper instruments, such as Cash BFOE contracts and CFDs. The company is also involved in the Mediterranean, Russian, and West African crude markets.
On the products side, Mercuria is active in all three middle distillate products in Europe -- diesel, gasoil and jet fuel. They have jet fuel off-take contracts with some Mediterranean refiners and have been seen bringing cargoes to Northwest Europe in recent months. In diesel, they are significant transatlantic arbitrage players and have diesel/gasoil sale agreements into France and other European countries.
JP Morgan said in its 2013 annual report filed with the Securities and Exchange Commission February 20, 2014, that its "trading revenue by risk exposure" for its commodities unit was $2.073 billion in 2013. That compared with $2.363 billion in 2012 and $2.823 billion in 2011.
The bank says the revenue numbers include realized gains and losses and unrealized losses on physical commodities inventories that are generally carried at the lower of cost or value. It noted as well that commodity derivatives "are frequently used to manage the firm's risk exposure to its physical commodities inventories." It said that losses related to fair value hedges were $819 million for the year 2013, $1.4 billion for 2012 and $1.1 billion for 2011.
Next page: Banks turn away from commodity trading