Sunday, October 6, 2013

Commodities: Private equity takes over where banks leave off

(Originally published on
Just as the US oil industry starts to get really interesting, banks are being forced to leave it.
New regulations and over-zealous government, nervous over the presence of banks in physical oil and commodities markets, are pushing the banks to shed their assets—and making room for other moneyed institutions to jump in.
Profitable opportunities are visible, with production soaring as the US winkles out tight oil and gas. E&P beckons investors, as do infrastructure plays such as rail terminals and blending facilities.
But banks are wary of making new investments and are seriously considering sloughing off the ones that they already have.
The US Senate Banking, Housing and Urban Affairs Committee is looking into whether large merchant banks, such as JP Morgan, should be allowed to own or operate oil terminals, pipelines, or warehouses that hold vast amounts of aluminum and other businesses that deal in global commodities.
JPMorgan Chase is selling or spinning off its entire physical commodity trading operations, as a Platts Oilgram News story reported. The bank emerged over the past few years as a major commodities trader, along with other US banks as Morgan Stanley, Goldman Sachs, Citigroup and Bank of America Merrill Lynch.
So, as the banks begin to shed their trading and physical assets, private equity firms are quietly sneaking in to take their place, and one of them at least is on the verge of an IPO in London.
Riverstone Holdings, an American private equity fund with over $24 billion committed to E&P, midstream and power investments, is planning an initial public offering for Riverstone Energy Ltd. The company will launch in late October on the London Stock Exchange, and is expected to raise up to £1.5 billion ($2.4 billion).
Riverstone has already gone where banks (now) fear to tread, taking ownership in refining maverick Tom O’Malley’s PBF, UK shale gas company Cuadrilla, and US deepwater E&P company Cobalt, among many others.
Perhaps Riverstone’s founders, both from Goldman Sachs, had inklings that commodities would be yanked away from investment banks once they became Fed-controlled “real banks.” After all, banks owning oil storage, and refineries — and trading the oil — when the market was rising was never going to look altruistic.
But from a private equity firm, no one expects altruism.   
Riverstone is just one of many that are investing heavily in energy assets. Denham Capital, which flies under the oil industry radar, has $7 billion under management in oil, gas, power and renewable funds. Billionaire Mikhail Fridman’s L1 Energy Fund will invest $20 billion (that his Alfa Group made from the TNK-BP sale in March this year) in oil and gas projects. And these are just the tip of the private-equity-in-energy iceberg.
According to Forbes, private equity accounted for 10% of 2012 energy buyout deal value worldwide. And 83% of energy-related buyout deal value was for oil and gas properties—nearly half of them in North America. (This included 2012’s biggest buyout, Riverstone Holdings and Apollo Global Management’s $7.2 billion acquisition of EP Energy, Forbes said.)
So, is this a new trend or one that is destined to become dull and mainstream? Is this a case of the bandwagon having sailed past already?
According to fund management firm Hamilton, in an article in Pensions & Investments magazine, limited partners are beginning to question if there is too much private equity capital chasing the energy sector.
“The simple answer is: No,” it said. “The size of the market, the long-term growth prospects and the complex nature of the energy value chain will continue to present investment opportunity. The massive capital spending requirements to meet expected global demand dwarf the amount of private equity capital available today.”       

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