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 It ended up with a group of banks, including several names
little-known in commodity circles until recently. Ohio-based KeyCorp
<KEY.N> led the lenders and was also among the banks providing
hedging.
Traditionally, Wall Street's big banks were the go-to providers of
such services, but since the financial crisis and the introduction
of tougher regulations, they have been pulling back.
At the same time, regional banks, more used to serving consumers and
small and medium-sized businesses in the communities they serve,
have been growing their energy and commodity lending and hedging
businesses. Soaring U.S. oil and gas production resulting from the
use of fracking technology in states such as North Dakota has
encouraged the regional banks.
"In the past, you didn't have those banks in there and they are
definitely beginning to fill the void left by some of the big guys
that are beginning to pull in some of their tentacles," said Bill
Cassidy, Bonanza Creek's chief financial officer. "The more
competition you have, the better it is for someone like myself," he
added.
The measured expansion of these regional banks, which has not been
previously reported, highlights the emergence of new competition in
the commodities markets. Other new rivals offering to lend and hedge
include Australian bank Macquarie to the risk management arms
of agribusiness giant Cargill and oil major BP.
Last year, the top ten regional banks active in the space together
held an average of $23 billion in commodity derivatives contracts on
their books, up nearly 50 percent from their holdings in 2009,
according to a Reuters analysis of quarterly regulatory data from
Thomson Reuters Bank Insight.
This is still miniscule relative to the $3.9 trillion in commodity
derivatives that the top six Wall Street banks still controlled,
according to the data, though that sum has barely risen over four
years.
Bonanza Creek, which drills for oil and gas in Colorado and
Arkansas, has a credit line with the KeyCorp-led group of 10 banks,
which also include Wall Street giants JPMorgan Chase & Co and
Wells Fargo, as well as other regional institutions such as
IBERIABANK Corp. and Cadence Bank. It has hedging arrangements with
five banks.
Even modest inroads can be meaningful for regional banks expanding
in the sector, as it allows them to "pop out and create some
incremental revenue growth," said Marty Mosby, banking analyst at
Guggenheim Partners.
Indeed, the proportion of KeyCorp's new derivatives business that is
commodities-related is now about 25 percent, up from nothing in 2006
when the business started, said Matthew Milcetich, its head of
derivatives
"It is a meaningful percentage of our new business volumes," he
said.
CHIPPING AWAY
New techniques for drilling wells have made it possible to extract
more crude and natural gas from shale formations in North Dakota,
Texas, Pennsylvania and a handful of other energy-rich states.
The boom has also fed the need for more loans and risk management
for energy producers, who use derivatives to protect themselves from
swings in commodity prices.
As of December 2013, 24 banks reported having at least some
commodity derivatives exposure on their books, according to the
Reuters analysis of "commodity and other" derivatives holdings
reported to the Federal Reserve by bank holding companies.
Of those 24, seven are global megabanks, such as Morgan Stanley and
Goldman Sachs. The rest range from Midwest regional banks to the
domestic arms of Israeli and Dutch groups.
The list isn't exhaustive, as it excludes some foreign banks that
are not subject to Fed supervision, like Sydney-based Macquarie, and
some smaller banks don't file holding company data.
The only regional bank on the list that was active a decade ago is
BOK Financial Corp. <BOKF.O>, parent company of the Bank of
Oklahoma, long known as "the oil bank of America" thanks to its
roots in the state's oil industry.
"We live, eat and breathe this business, and we've been doing it
since 1910," said Bob Lehman, senior vice president at Bank of
Oklahoma.
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BOKF offers a "high-touch service" that attracts many small oil
producers, who want something "much more relationship-driven than
one of the Wall Street banks, where they'll just be another number,"
he said. Nine of the 50 employees in its energy division are
petroleum engineers, he added.
Still, even BOKF's commodities derivatives book - $2.7 billion at
the end of 2013 - is tiny next to a rival like Morgan Stanley, which
reported $545 billion.
Other companies are growing in the sector through their lending
businesses.
Fifth Third Bancorp, another Ohio bank, began building up a team to
provide commodities hedging services in 2006, but expanded into
energy lending in 2012 by hiring seven bankers from Lloyds Banking
Group, a British bank which was refocusing its strategy around
UK-linked clients.
"Energy's been on the drawing board for the last eight or nine
years," said Kevin Lavender, Fifth Third's managing director of
corporate banking.
Today, Fifth Third's energy banking team manages $2 billion in
capital commitments across all segments of the energy sector,
according to energy banking group head Richard Butler.
LET'S NOT GET PHYSICAL?
Like KeyCorp and BOKF, Fifth Third does not trade physical
commodities, relying on purely financial commodities trading for its
hedging services.
That doesn't bother folks like Jim Finley, who runs an eponymous
Texas-based oil and gas company that has a $500 million credit
facility with eight, mostly regional banks, including Fifth Third.
"We have never traded physicals with any bank," he said. "Regionals
know the space really well."
The ability to deal in barrels of crude oil or piped natural gas was
once a big selling point for Wall Street's giants. But several major
banks, including JPMorgan, have announced they are quitting the
business due to sliding margins, and tougher regulation, including
from the Federal Reserve.
Wall Street rivals have often run physical trading desks or owned
storage terminals, warehouses and other infrastructure assets. These
businesses are supposed to help them gain market heft and
intelligence that help them trade profitably and provide other kinds
of services to customers. But if the little guys can provide the
same services without running such empires, they could start to
change the structure of the business.
Wall Street banks, including Goldman Sachs, and some consumers of
commodities have warned that limiting banks' ability to take or make
delivery of raw materials would make it harder for them to properly
serve their clients.
For example, the treasurer of oil refiner PBF Energy <PBF.N>, John
Luke, recently wrote a comment letter to the Fed claiming that
limiting banks' ability to trade in physical commodity markets would
"make it very difficult for end-users of physical commodities to
efficiently transact in these markets and effectuate hedging
strategies."
The question is whether such physical trading is an absolute
requirement - or simply a way to maximize earnings from such deals.
"There is a pocket of smaller financial institutions who are clearly
providing their clients these types of services and yet they are not
playing big in the physical market," said Saule Omarova, a law
professor at the University of North Carolina at Chapel Hill.
http://bit.ly/1iRMvZb
(Reporting By Cezary Podkul and Anna Louie Sussman; Editing by
Martin Howell)
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