Explaining the continued stability and success of Morgan Stanley's energy and commodities platform, Boris Shrayer, managing director and global head of marketing for the commodities division, points to its "significant presence" in underlying physical commodities markets. He believes this allows the business to anticipate new market trends and remain on its toes when it comes to addressing the needs of both new and existing clients.
For example, he says: “The current energy revolution in the US shale gas and oil [sectors] has provided new opportunities for us to transact with producers and the midstream companies. This also clearly impacts chemical companies and other consumers such as utilities, who want to switch from coal to natural gas.”
In response to this revolution, Morgan Stanley’s energy and commodities business has hired more people to cover the producers who need capital and risk management services to pursue these new plays. “The producers have the acreage but require capital to drill and may also seek to hedge their price exposure. While the current price environment can yield attractive investment returns, if prices were to collapse, the story would clearly change,” Shrayer points out. “So, we work with clients that require capital and risk management solutions, and we can provide physical offtake as well.”
Major shifts in the US refinery sector such as closures and ownership changes have also provided opportunities for the business. For example, US refiner PBF Energy entered into an offtake agreement with Morgan Stanley, commencing in 2011 with recurring product offtakes of 270,000 barrels per day. Under the deal, Morgan Stanley provides PBF Energy with working capital and risk management solutions for its three oil refineries, as well as market-based crude oil supply at its 170,000-barrel per day Toledo, Ohio, refinery.
In 2011, Morgan Stanley was also able to use similar structures in emerging markets such as West Africa – a region that played a role in the growth of its commodities business last year, according to Shrayer. He says: “Oil production is growing substantially in Africa and there is a great need for transportation infrastructure [as a result]. Production of oil and demand for gasoline may be growing but refining capacity has not kept up. This provides physical and risk management opportunities.”
Our strength lies in the ability to structure very customised transactions
This method of targeting new markets or regions is indicative of Morgan Stanley’s attitude to growth last year, in that it concentrated on organic expansion rather than major acquisitions. A good example is the weather derivatives business Morgan Stanley started in 2011. Shrayer says the business has completed a number of deals already and has proved to be an “interesting bolt-on for our physical footprint in particular”. For example, Morgan Stanley has provided hydro producers with weather-contingent physical delivery contracts, under which the producer receives liquefied natural gas (LNG) in the event of adverse weather conditions.
“To provide this, you really need to be a physical trader of LNG or diesel and be able to deliver that, as well as managing the weather risk,” Shrayer says. “We saw a need for those types of products.” Morgan Stanley’s weather business has also provided risk management solutions to eastern US natural gas utilities. One such transaction was structured as a strangle on heating degree days for a term of November 2011 to March 2012, protecting the client from earnings variability due to either an extremely cold or warm winter season.
Again, such deals are made possible by Morgan Stanley’s large physical footprint, which continues to be key to its offering in the energy and commodities space, according to Shrayer. “We execute a combination of physical and paper business to find solutions for clients,” he adds. “Our strength lies in the ability to structure very customised transactions that solve the client’s needs in terms of physical delivery, financing, or derivatives and risk management.”