Energy Risk Awards 2016
Despite its relatively short history in oil trading – it only entered the business in 2003 – Macquarie is a rising player in physical and financial crude markets. The Australian bank now trades oil in Asia, Europe and North America, and it is increasingly providing hedges to producers, airlines and refiners.
Nicholas O'Kane, Macquarie's Houston-based global head of energy, says the bank offers clients broad solutions spanning working capital management, physical logistics and hedging. "It has been an evolution for us," he says. "We feel like we have a comprehensive product offering that combines the ability to deploy capital, offer logistics services and offer risk management services, which is unique. The ability to combine all of those things is helping us grow as the market presents opportunities."
One factor that has helped Macquarie is its US regulatory status. As the US Federal Reserve Board has moved to impose new rules on the physical commodity trading activities of bank-holding companies (BHCs), the business model of some traditional heavy hitters in the oil space, such as Goldman Sachs and Morgan Stanley, has come into question. But Macquarie, which is not a BHC, would not be covered by the Fed's forthcoming rules. That has helped it remain active in physical crude markets even as other banks have pulled back.
Among the clients that have benefited from Macquarie's physical and financial oil capabilities is a small Canadian oil firm that produces about 4,000 barrels per day (bpd).
During the second half of 2014, the producer was struggling to get its crude to market. Due to tight capacity at oil pipelines and terminals in Alberta and British Columbia, it was transporting crude by truck. That meant sending trucks on road journeys up to seven hours long; upon arriving at the terminal, the trucks would wait up to 15 hours waiting to unload their oil. All this was costing the firm at least C$10 ($7.60) per barrel (/bbl) on trucking alone.
Enter Macquarie, which helped the firm optimise its logistics. "Macquarie helped us with the analysis in terms of understanding the best spots to get our oil [delivered] to maximise our netback and at times helped us from getting shut in due to no terminal access," says the producer's Calgary-based chief executive officer (CEO). "When things are tight, they understand the physical pipeline system, and they can help us to move and produce our oil."
Last year, after oil prices had crashed, Macquarie wrote the producer a hedge to protect it from further price drops. The producer hedged 1,500bpd of its 2016 output, using Western Canadian Select and West Texas Intermediate (WTI) derivatives denominated in Canadian dollars, locking in a price of around C$57/bbl – which proved handy when WTI hit bottom in January and February. "The hedges allowed us to have the assurance of having positive cashflow, even when oil prices were down at below $30/bbl," the CEO says.
Macquarie's oil team stands out for its attentiveness to client needs, he adds. "If you walk into a car dealership, there are one of two types of salesmen: one will want to sell you a car only to get a commission, the other will try to understand your needs before selling it to you," the CEO says. "That is how I feel about Macquarie. It is not just a big sales pitch."
Structuring is another area in which Macquarie is stepping up its game. Last year, the bank executed an innovative intermediation transaction for a North American crude marketer that had been spun off from its parent company. Amid the low oil prices, the marketer was struggling to demonstrate its creditworthiness to third-party suppliers.
Macquarie structured a deal that would allow the marketer to continue to fulfil its obligations under a 65,000bpd supply agreement with a refinery. The bank sleeved the credit by purchasing the crude from third-party suppliers, assuming payment obligations, then sold the product to the marketer, which remained responsible for logistics services. Macquarie also provided the marketer with working capital financing for in-transit crude. Once the crude had been delivered, the bank repurchased the crude from the marketer to provide similar credit support to the offtaking refinery.
The main reason why Macquarie could provide the credit was the fact that it had the ability to sell the crude itself, if either side of the transaction was unable to fulfill payment obligations.
"That is the differentiating factor: that transaction was unique because we had the knowledge to sell the crude," explains O'Kane. "We could actually intermediate this product, and I'm not sure many competitors could offer that."
The week in Risk.net, May 19-25 2017Receive this by email