Energy Risk Oil & Products House of the Year 2011: JP Morgan

Innovative financing deals with refiners and state-owned enterprises, including the Egyptian General Petroleum Corporation, as well as a significant expansion of its physical oil capabilities through the purchase of RBS Sempra Commodities, won JP Morgan our 2011 Oil & Products House of the Year award.

Oil houses had a challenging year last year with crude oil prices range bound and economic uncertainty weighing on demand. Many traditional hedgers and investors took a 'wait-and-see' approach, with a resultant slow down in flow business. In this environment, JP Morgan drove through some large tailored transactions to meet the needs of its clients.

"I would say last year was more characterised by large structured transactions that were driven by balance-sheet needs, working capital needs and capex requirements, that drove activity in the marketplace to a great extent," says Roy Salame, head of global oil marketing at JP Morgan.

One example of this was a transaction with the Egyptian General Petroleum Corporation (EGPC) in July 2010. EGPC chose JP Morgan and the National Bank of Egypt to jointly arrange and underwrite a $2.0 billion syndicated pre-export credit facility, backed by crude and naptha cargoes pledged by the borrower through a forward sales agreement.

JP Morgan executed a hedge for the total volumes, a condition for the syndicated loan.

"We provided a hedge that floored the downside, to protect the value of these molecules over time, which obviously gave the lenders great comfort around their worth," says Salame. "This allowed for a much tighter coverage ratio on the volume of molecules pledged, for the pre-export financing facility that was being extended. The ratio was kept around 1:1, much tighter than traditional unhedged coverage ratios, which are usually around 1:3–1:4," Salame says.

JP Morgan also acted as the physical off-taker, which further enhanced the credit of EGPC in the deal.

The bank substantially increased its physical abilities through the acquisition of RBS Sempra Commodities's assets in July 2010.

"We can now take title, transport, store and deliver oil and refined products, metals, natural gas, LNG [liquefied natural gas] and coal physically and financially on a much larger scale than before," says Salame. "So our ability to tie a structured commodity finance solution with a physical underlying, and provide financing that links the two with an embedded risk solution and a hedge, is unprecedented."

This dovetails with the oil team's experience in inventory management. The bank maintains the strategic stock obligations of both refineries and state-owned enterprises, transferring stocks onto its books and taking on the price risk to protect their value for the client.

Having "more skin in the game" of physical markets has also given the bank a deeper understanding of supply/demand and price dynamics, according to the oil team, allowing it to more closely tailor hedges for its clients. This is especially useful for customers with exposures to illiquid regional oil price indices.

While the RBS Sempra acquisition let JP Morgan offer more services to existing clients, it also gave it new ones. The oil and products business has novated over 170 clients to its books from RBS Sempra, and now has over 1,100 clients worldwide, from industrials to national oil companies, of which 300 are physical oil clients.
The desk has especially strong relationships with corporate hedgers. According to a poll of 309 global corporations by Greenwich Associates in late 2010, JP Morgan has greater over-the-counter energy derivatives market penetration with corporates than any other dealer.

"Particularly over the last three years, it is fair to say that our share of the wallet overall, in terms of flow and structured transactions, has grown dramatically. I think there isn't a meaningful transaction or opportunity out there that we're not participating in or competing for, in the oil and refined products space," says Salame.