As Fed looms, Morgan Stanley sets sale of US oil terminal business
Dec 11, 2013 06:54 PM EST
Dec 11, 2013 06:54 PM EST
Morgan Stanley has launched a formal effort to sell its controlling stake in U.S. oil terminal and transport business TransMontaigne, four sources said on Wednesday, following other Wall Street powerhouses in yielding to intense regulatory pressure to get out of commodity investments.
The bank has started circulating preliminary information about the assets it could sell, which include the general partner of master limited partnership (MLP) TransMontaigne Partners LP, the sources said. One source said the offer also included a handful of assets outside the MLP.
The sale process appears to be Morgan Stanley's first definitive step toward disassembling its vast energy trading group, after a more than year-long informal effort failed to find a buyer or partner for the whole operation.
The move comes amid intensified regulatory pressure to dump contentious commodity investments, particularly those that pose a liability risk. Morgan Stanley and Goldman Sachs have argued, seemingly in vain, that a 1999 legal exemption allows them to continue owning oil tankers and pipelines.
They "see the handwriting on the wall", said Craig Pirrong, a finance professor at the University of Houston.
"And oil logistics is something that gives the Fed major concern. 'What if there's an oil spill at a bank-owned storage facility or from a bank-chartered tanker?' is the favorite doomsday scenario used to suggest that banks shouldn't be in physical commodities," he said.
Morgan Stanley declined to comment on the sale process. Financial details about the deal were not available, and the bank provided no estimate on a value or timeline.
While the eventual sale of TransMontaigne had been widely expected by many industry executives given mounting regulatory pressure on Wall Street's commodity traders, the abrupt shift to a formal process was unexpected.
"Internally it has been very clear that they didn't want to sell," said one person familiar with discussions related to the business. "The attitude was 'We'll only sell once the Fed forces us to sell, why would we do it any earlier?' Something has happened in the past few months to change that."
The Fed's tougher stance has been apparent elsewhere. Goldman Sachs, whose executives have proudly defended the bank's J. Aron commodity division, has recently renewed talks to sell its metals warehouses and uranium desk.
One senior executive at a rival firm suggested that Morgan Stanley may now be planning to cut out the physical trading operations of its commodity desk -- the largest liquid oil trading team on Wall Street -- while retaining the derivatives business, as JPMorgan Chase & Co is doing.
In addition to the general partner, Morgan Stanley owns around 19 percent of the TransMontaigne MLP's units. It is unclear what the bank plans to do with this holding. The bank's trading division also accounts for about 60 percent of the MLP's revenues due to long-term contracts to use its terminals. The teaser suggested some of these contracts could also be sold as part of the package, one source said.
LONG TIME COMING
Although Morgan Stanley is renowned as one of the first and biggest banks to enter physical energy trading decades ago, its investment in Denver-based TransMontaigne is far more recent.It bought the firm for $630 million in 2006, using it to extend the bank's trading options that also included millions of barrels of fuel storage in New York Harbor and a deal to supply jet fuel to a major U.S. airline.
The TransMontaigne MLP includes some 48 fuel terminals with nearly 24 million barrels of storage capacity on the Gulf Coast, in Florida, the Midwest and across the Southeast, including along the strategically important Colonial Pipeline that ships gasoline and diesel from the Gulf to the East Coast.
With the U.S. oil market in upheaval due to the shale oil production boom, TransMontaigne is the bank's "crown jewel", said Pirrong.Morgan Stanley executives have said since last year that they are exploring "different structures" for the commodity trading business, which has recently suffered some of its worst quarters in decades. Rising capital requirements and falling market volatility have cut earnings across Wall Street.
Chief Financial Officer Ruth Porat said in October the bank wanted "to be smart about what we do" regarding commodities, a division that brought in an estimated $3 billion at its peak in 2008. That fell to around $1 billion last year, according to Reuters estimates based on filings.
Although a number of potential buyers including Qatar, a Chinese oil major and Russia's Rosneft have been mooted over the past year, until now it had been unclear whether Morgan Stanley would strike a deal or wait for the Federal Reserve to publish new rules that could force it out of the business.
The Federal Reserve is expected next year to make clear the results of a sweeping review of regulations governing how banks can trade in physical commodity markets. While most observes now believe that the Fed will make it all but impossible to continue owning infrastructure assets, many do not expect major new limits on trading raw materials.
Potential buyers are likely to include the MLP subsidiaries of major refiners or midstream companies.
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