Daily Management Review

Global Energy Dealers At The Top Face A Multibillion Dollar Financial Crunch


Global Energy Dealers At The Top Face A Multibillion Dollar Financial Crunch
The world's leading energy trading houses are facing an increasingly pressing issue as they get ready for the largest annual industry gathering this week in London: what to do with their cash.
The majority of trading houses, which are run by their workers and privately held, don't share a lot of information regarding their dividends, equity, or cash position.
However, even after paying out record dividends, Vitol, Trafigura, Mercuria, and Gunvor are reportedly sitting on billions of dollars combined, according to calculations by Reuters and more than ten banking and trading sources.
"We borrow much less from banks and are waiting for good investment opportunities. But those are slim, especially in loss-making green energy," said an executive at one of the top trading houses, who declined to be named.
Large portions of the global oil, gas, and electricity markets are already controlled by trading firms, who are having trouble expanding. Investors have also become irritated with the low returns on wind, solar, and hydrogen assets in recent years.
As merchants congregate for International Energy Week receptions and parties in London pubs and ballrooms, the cash dilemma is probably going to be on the agenda.
The largest trader in the world, Vitol, has raised its total equity to $26 billion even after giving $5 billion in record dividends on earnings of $15 billion in 2022, according to its confidential financial sheet, which was seen by the media.
And if Vitol continues to allocate a sizeable portion of retained earnings to stock, its equity would likely increase by close to $30 billion based on its 2023 results, according to two banking sources familiar with the company's performance.
According to people acquainted with their financial statements, Mercuria and Gunvor have each amassed almost $6 billion in retained earnings and equity in recent years, as reported by Reuters.
The equity numbers for Gunvor, Vitol, and Mercuria have not yet been made public. Each of the three businesses declined to comment.
Rival Trafigura revealed in its most recent report that over the previous four years, its equity increased by over 2.5 times, to $16.5 billion.

Based on their most recent disclosures, the equity of the main trading companies is still far smaller than that of oil majors like BP ($85 billion) and Shell ($188 billion).
Ten years ago, the majority of traders wanted to keep cash positions, minimal equity, and few assets, and to distribute the majority of their profits as dividends to their employee shareholders.

Glencore was an anomaly, having started as Marc Rich in the 1970s and progressively accumulating holdings in coal and metals. 2011 saw it go public, raising $11 billion.
The key to figuring out a company's value is its total equity, which is computed as the difference between its assets (including retained earnings) and liabilities.
Using profits and bank loans, trading companies have acquired a variety of assets during the last ten years, including wind farms, metals mines, and oil refineries, all while maintaining modest cash reserves.
That all changed in 2022 when Western sanctions meant to punish Moscow for its invasion of Ukraine caused gas prices to skyrocket following a reduction in Russian gas supplies to Europe.

Traders frequently use derivatives to hedge their holdings; they typically borrow 90% of the cost to purchase the derivatives and use their own funds to cover the remaining amount.

Exchanges ask traders to make larger cash contributions in what are known as "margin calls" if prices surge.
"We all faced margin calls and rushed to borrow from banks. This is when we decided it was prudent to put aside more cash," a second trading house executive said.
Traders like Trafigura have access to up to $50 billion in credit lines and collaborate with as many as 150 banks.
When the margin call problem was at its worst, traders completely utilised the lines, and some banks declined to increase lending while advising traders to look for other options.  The majority of traders choose to keep their profits as equity.
According to a third trading executive, "we beefed up our equity and as a result more of our trade became self financed."
Banks cannot expand their lending to other clients if they maintain sizable credit lines open and are not used when traders borrow less since they lose out on interest income.
"Banks didn't like going above credit limits in 2022. But they equally disliked it when traders barely used the lines in 2023," said a banker at a top U.S. bank active in the sector.
One of the three trading executives predicted that bank borrowing would increase once more when interest rates dropped and traders increased their investment spending. However, that had not yet occurred.
According to a fourth trading executive, "traders sometimes just borrow money and put it back on a deposit with the same or different bank so it pays interest."