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Trafigura goes upstream

The trading house expands its E&P footprint, but does not want to go down the ‘mini-major’ route

Commodity trading houses have had their traditional middleman model squeezed in recent years due to increased focus from majors and other IOCs on pursuing a portfolio player approach. The NOCs are going more heavily into trading, and natural buyers also moving beyond simply being price-takers. Unsurprisingly, these most commercially savvy market operators are evolving to the new paradigm. 

A shift to greater involvement in the upstream sector—be it debt financing in exchange for barrels, partnerships, including equity stakes, in producers, or even taking stakes in fields themselves—has been one of the key planks in this shift. 

Since the start of the year, Singapore-based trader Trafigura has announced two moves in this upstream direction. It will take a 6pc interest in Argentinian-focused producer President Energy and it signed a non-binding memorandum of understanding with African producer ADM Energy to develop investment opportunities in the African sector. 

But, as the firm’s head of upstream finance Matthieu Milandri and its head of structured and trade finance Stephan Jansma tell Petroleum Economist, there is a clear vision of what Trafigura will and will not do.   

Tell us a bit more about the logic underlying the President deal. 

Milandri: We did a debt financing for President back in the summer [of 2019]. Then Peter Levine, the CEO, asked if we would want to make the cooperation longer-term and go beyond the pre-pay [deals for funding in return for future deliveries]. 

Argentina is a country where we have a large presence, including owning a refinery. It is not a large transaction, but we felt it was the right message to send to other E&P players, that we can not only do prepays but go beyond them. 

For President, we like the assets, we like the management and we like the other shareholders—for example the IFC and Peter as the largest shareholder as well as CEO. That was the genesis of it. 

And you have also struck an agreement with ADM. Is Africa another focus area? 

Milandri: Africa generally, and Nigeria in particular, has been a typical focus for companies such as Trafigura, both in terms of pure trading and extending finance. We are looking at a pretty decent number of projects there. 

We knew the ADM management previously, so when they approached us asking if we would want to do something at the cooperation level, as opposed to them tendering their barrels or talking to traders for financing, we said, “why not?” It is a well-managed company and it is listed in London, which is very rare for an African player, so we will see if it leads to something. 

They had to announce [the MoU] because it is a publicly listed company. But there is no Trafigura financing per se just now, it is an agreement to look at future opportunities. The deal they announced [in late February], we did not help them with, they will raise $1mn on their own. But there are other acquisitions they are looking at. If they materialise, which they may not, we will see if we can support them. 

Is this the model we should expect going forward, Trafigura investing in management teams that it knows? 

Milandri: Having the right management team and trusting them may not be the number one criterion, but it is pretty close to it, particularly in emerging markets. Even if you have good assets but a bad management team, things tend to end badly. So, we would rather have a very good management team even with an average asset. At least then we know that they will get the best out of the asset. So that will always be a pre-requisite. 

But, at the same time, we are not going to be a private equity-like shop that sponsors management teams and pays for things like G&A. What we will do with teams is see if we can finance debt transactions. But get involved before we even know that there will be a deal? No, we will not do that. 

While the President and ADM deals involve equity, they are really the tip of the iceberg. Most of the deals we look at are relatively straight debt products. Because they may not be with publicly listed companies, you just do not hear about them. 

We are not going to become a big equity shop for oil and gas. We want to be a decent-sized debt player and debt provider to oil and gas companies. We are not going to start deploying hundreds of millions of dollars of equity into E&P. 

“Africa generally, and Nigeria in particular, has been a typical focus for companies such as Trafigura” Milandri

Jansma: A year-and-a-half ago, Trafigura was not active in the upstream market. We were more active with NOCs and with metals companies, but not in the upstream niche. We saw a lot of opportunities there, given a lot of our competitors were in this market. Many of the majors were divesting some of the larger assets. So that is when we started to build a team under Matthieu to serve that market of small to medium-sized producers.    

Can you give a flavour of other markets in which you are already active or are looking at? 

Milandri: It is a long list. If you start from the west, in Latin America, it is pretty much all those markets—Mexico, Colombia, Brazil, Argentina. And potentially now in the US, because the financing landscape locally is changing dramatically. Speaking to US banks, they barely recognise the E&P industry compared to where we were four or five years ago, and it is even very, very different from just a year ago. 

In Europe, the North Sea is not the easiest playground for independent traders. But we could do something, for example in Norway. Eastern Europe is a more typical model. We have not done much there yet, but we do trade gas, in particular, in eastern Europe. 

Africa, including North Africa, definitely has potential. From Egypt and Tunisia to the entire west African coast—Ghana, Nigeria, Gabon, Angola—all of that is of interest. The rest of Africa is more difficult: southern Africa is more exploration [focused] and that is not our target activity. In the east, there are the massive gas projects, where it is very difficult to make an impact without deploying hundreds of millions. 

“We want to be a decent-sized debt player and debt provider to oil and gas companies” Milandri

In southeast Asia, where we can we would get involved, for example in Malaysia. The rest of southeast Asia is not easy, as it is dominated by national oil companies. And, in many countries, you have heavy restrictions on exports, making the independent traders very uncompetitive compared to the local incumbents. 

Australia and New Zealand are very far away and a lot of assets are not particularly strong as they are often late-life. ExxonMobil was looking to sell some assets in Australia but had to stop the process because the bids were at negative values, which illustrates the problem. 

With the shift in investor perception around US shale that you mentioned, do you see renewed interest to deploy capital offshore, both in the US and globally? 

Milandri: There are more projects than before in the [US] offshore. But I think that it is still difficult for them to find funding. It is probably high time that people go back to the offshore and I think investors will realise that. [The US offshore and shale patch] are in the same country but they are very different. Of course, the offshore has a bigger cost per well, but, at the same time, the decline curve for offshore is nothing like the sharp drop of the continental US. 

6mn bl/d - Trafigura oil trade volume

For Trafigura, though, we are still more focused on the shale plays, because the structures are there—access to pipelines, etc. So, we are really focusing our efforts in the US on the Permian and the Eagle Ford, to see if we can do something.

And on a global basis? 

Milandri: There is definitely more of a buzz, even if we have yet to see the US firms come back to the emerging markets. Some of the big US players are still retrenching, but I think it may be partly due to inertia and partly because they think this is what their shareholders want. But, at the same time, US share price valuations are tanking in the US; equity investors do not like what they see. There is no new capital available and it is very difficult for companies to even maintain production. So, it would make sense that even some US players could come back to the global offshore. 

You mentioned that some of your competitors have moved earlier into the upstream. With a blurring of traditional sellers and natural buyers towards the portfolio player model, other trading houses have moved to asset-heavier strategies that have seen them dubbed ‘mini-majors’. Is this also Trafigura’s vision?    

Milandri: No, we want to support and partner with E&P companies, but we do not want to become one. Do we want to own significant direct stakes in oil and gas assets? Maybe one day, but we are not there yet. 

We do own mines on the metals side. But in oil and gas, it is a significant change compared to extending debt financing to an E&P company. It is very different in terms of liabilities, management, resources, etc. 

And, I do not think we need to. We can achieve what we are looking to do while being much leaner and nimbler. Some of our competitors have been active for a long time in the space to various degrees and with, for some of them, questionable results. 

I feel they may be coming back to a more traditional model of providing capital, albeit mezzanine or other forms. People are realising that becoming an E&P company is a different business. 

In essence, you are looking to leverage your core skills—the strength of your balance sheet and your ability to take the volumes and add value at that stage? 

Milandri: That is right. And because we are in the middle of the chain, we tend to know pretty much all the players. So, deals are coming relatively naturally, particularly in a world where access to equity and even bank debt is constrained. People know where to find us. 

Our business is physical commodity trading and logistics. And structuring debt financing in exchange for barrels can be complicated, but it is a well-known path. 

It is more familiar to us than owning a working interest in an oil field and taking on the associated liabilities, having to attend operator and management committee meetings, having to buy insurance, etc. 

Jansma: We trade 6mn bl/d of oil. So, the added value that we offer our clients needs to continue to be optimising, to facilitate, from a logistical point of view, arbitrage opportunities in terms of different physical grades, and to hedge. 

Finance is another added value that we can offer. In turn, our upstream finance capabilities give us another edge as a trading company through being able to source more barrels for our trading portfolio. That product was missing and is no longer missing. 

Does the change in investor atmosphere, particularly in Europe, but even in North America and elsewhere, where an increased ESG focus has reduced the appetite to lend to oil and gas firms offer an opportunity for a player like Trafigura? 

Milandri: For sure it does. But it does not mean that we have to lower our standards compared to the banks, and we do not. But for many of them, the first criterion, beyond KYC, which is of course important, is size. They need big deals; anything less than, depending on the bank, $100mn is of no interest to them. But, for us, $100mn is a pretty sizable deal. And while banks do not necessarily have particularly stricter lending criteria, the boxes they need to tick to get a deal over the line are becoming more and more difficult to tick. They have also left a lot of countries, sometimes just because they do not have a local presence anymore. 

So, yes, the number of banks is far less than there used to be in certain countries—not all, but certain countries. There are deals that we can do today that we could not have done three, four or five years ago. 

A lot of banks seem to have retrenched to the North Sea. There, you have a lot of bank appetite, relatively cheap pricing, very large underwriting and transactions, that is just not for us. Whereas, in emerging markets you have fewer banks than before, for sure.  

Jansma: Time to market is important to close a deal and that is something that Trafigura is good at. 

While reduced lending appetite is an opportunity for Trafigura, as a firm it also needs to access capital. So, as a commodity trader, has it experienced any challenges from the cooling of investors towards energy? 

Jansma: On the lending side, not only in terms of banks, but also the insurance market and non-banking financial institutions, there has been a flight to quality. There has been a flight to deals that they like, and also to counterparties that they like and understand, to counterparties that are there to see things through. 

Definitely, in today's market, there are issues and there will continue to be issues. And they are looking for a partner who is there to stay and to help them solve those problems. We have been here for 27 years and we are all set to be here for another 27 years at least. 

“We want to support and partner with E&P companies, but we do not want to become one” Milandri

We will work through problems with clients, we have proven that time after time. And that is why we get a lot of support from the capacity still out there—which I agree has reduced. But there is still appetite to find liquidity for deals. 

In terms both of your own financing and also the things that you are doing, is there a different investor sentiment dependent on whether the asset is oil or gas? 

Milandri: On the E&P side, there are two conflicting developments. The first is gas prices being where they are. People are saying that you must be insane to finance anything gas related. 

But, on the flipside, there are a number of countries where you do have people that actually want to finance gas. This is true in west Africa for instance, in Nigeria in particular, where gas flaring has historically been an issue. So, any gas utilisation project is going to be welcome, and rightly so.

From an ESG or a solely environmental perspective, gas projects are better perceived than oil projects. That is the certainly the belief of the IFC—they can they can no longer do oil, but they can still do gas. 

But, from an economic perspective, it is very hard to spend money on gas projects today—unless you have gas projects where the prices are actually tied to oil, which still exist.

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