February 3, 2015 [Wall Street Journal] - The collapse of the oil market has dragged down prices across the energy sector. One exception is the price Morgan Stanley is seeking for its oil-trading and storage business, which could profit from the recent slide.
The New York bank, whose deal to sell the division to Russian energy firm OAO Rosneft for several hundred million dollars was scuttled last month, is seeking a similar price for the business this time around, according to people familiar with the matter.
Australian bank Macquarie Group Ltd. and private-equity firm KKR & Co. have emerged as early contenders to acquire the unit, the people said.
Oil-storage facilities are among the collection of assets Morgan Stanley is looking to sell as it scales back its commodities business. Prices for storage have been surging amid the steep decline in the commodity itself, as traders hoard crude at currently cheap rates and stash it away for sale when the market eventually recovers.
Analysts say the amount of oil stored in such trades has jumped to millions of barrels, and traders who deal in physical oil markets say prices for land storage have been on the rise, roughly doubling since last fall.
“Anyone who owns storage potentially has a license to print money,” said Stephen Schork, president of oil research consultancy Schork Group in Villanova, Pa. “If you have those assets in this market structure you’re in a very advantageous position, and it gives you a lot of leverage in your negotiations.”
The sale process remains at an early stage, and a deal isn’t imminent. Other would-be buyers have also expressed interest in the unit, the people said.
Morgan Stanley’s agreement with Rosneft—which fell apart amid political tensions between U.S. and Russian authorities—had included Morgan Stanley’s oil-storage business, agreements covering the sale, purchase and supply of oil, an inventory of the commodity and various other investments. Morgan Stanley had also planned to transfer its 49% stake in Heidmar Holdings LLC, an operator of oil tankers, as part of the deal.
When Morgan Stanley was forced to unwind the Rosneft deal after failing to win the U.S. government’s approval, Macquarie emerged quickly as a potential replacement. By Dec. 22, or two days after Morgan Stanley’s contract with Rosneft expired, the bank had conveyed its interest, The Wall Street Journal reported last month.
Since then, Morgan Stanley named new leadership to run its commodities division after one co-head, Simon Greenshields, quit the firm and another moved to take an advisory role.
Wall Street banks, including Morgan Stanley and J.P. Morgan Chase& Co., have moved to shed businesses that store or transport commodities amid pressure from U.S. regulators and politicians. Concerned the assets may pose dangers to the markets or the banks themselves, the Federal Reserve is weighing whether to restrict these activities. Last year, a Senate subcommittee published a report critical of Wall Street’s biggest commodities traders, including Morgan Stanley.
Macquarie is a commodity-focused bank with offices in the U.S. and 27 other countries. Its energy-trading group operates from cities including Houston, New York and Singapore, and it already has a footprint in physical markets for oil, natural gas, power and coal.
KKR has shown interest in commodity assets before. In 2013, it was part of a joint bid for the physical commodity trading assets being sold by J.P. Morgan. Last month, one of its subsidiaries announced a plan to launch a joint venture that will pump capital into the commodities industry.
J.P. Morgan ultimately reached a deal to sell the assets to Mercuria Energy Group Ltd.
Morgan Stanley executives have stuck with plans to shed the division despite the Rosneft deal’s collapse. “We remain committed to selling our oil-merchanting business,” James Gorman , the firm’s chairman and chief executive, said during a Jan. 20 conference call with analysts.
Indeed, the sale remains on the list of actions Morgan Stanley said will help lift returns to at least 10%, a milestone in Mr. Gorman’s turnaround plan. Last year, the firm’s board included the deal among the “strategic objectives” used to evaluate Mr. Gorman’s performance and set his annual pay.
On the call with analysts, Morgan Stanley finance chief Ruth Porat said she didn’t believe the sharp drop in oil prices—which contributed to weaker fourth-quarter results by the firm’s commodities-trading arm—would affect the sale of the physical business.
In fact, people familiar with the matter said, the collapse in oil prices has boosted the value of the unit’s storage capacity since Morgan Stanley struck a deal with Rosneft. The same storage leases that were producing losses for the firm when prices were high have turned profitable now that more traders are looking to store oil until the market recovers.
“We have excess storage capacity, so that actually sets the business up well,” Ms. Porat said.