By Dmitry Zhdannikov and Julia Payne
LONDON, Feb 26 (Reuters) – As the luminaries of the energy trading world gear up for their annual gathering in London, a weighty issue looms – what to do with their overflowing cash coffers.
These secretive trading powerhouses, closely held and managed by their staff, offer scant details about their cash reserves, equity stakes, or dividend outflows.
Across the board, Vitol, Trafigura, Mercuria, and Gunvor collectively hold hefty cash piles running into the billions, even after lavishing shareholders with record dividend distributions, based on insights from numerous industry insiders and Reuters’ own calculations.
“We’ve been shy with bank loans, holding out for juicy investment prospects. But those are scant, particularly in the red-tinged realm of renewable energy,” confessed an unnamed executive from a top trading emporium.
These trading titans, reigning over vast swaths of the global oil, gas, and power markets, are grappling with stunted growth trajectories, aggravated by lackluster returns from wind, solar, and hydrogen ventures that have left some stakeholders disgruntled.
The quandary of excessive cash is likely to be a hot topic as traders convene for soirées and social mingling at prestigious London venues during International Energy Week.
Behemoth Vitol, the globe’s preeminent trader, has seen its total equity swell to $26 billion, even after doling out a record-breaking $5 billion in dividends, following a $15 billion windfall in 2022, as revealed by a confidential balance sheet viewed by Reuters.
If Vitol proceeds with transferring a hefty chunk of retained earnings to equity, as per sources intimately familiar with the firm, its equity might approach the $30 billion mark based on its 2023 performance.
Meanwhile, Mercuria and Gunvor are reported to have raked in approximately $6 billion each in equity and retained earnings over recent years, according to sources in the know. The equity figures for Vitol, Mercuria, and Gunvor have not been previously disclosed, with all three companies opting to stay mum on the matter.
Outshining its peers, rival Trafigura unveiled in its latest report a growth surge, with equity skyrocketing nearly 2.5 times to $16.5 billion over the past four years.
Yet, the equity troves of these trading giants remain dwarfed by the towering figures boasted by oil majors like Shell and BP, whose latest balance sheets flaunt equity stakes of $188 billion and $85 billion, respectively.
Heightened Financial Strain
A decade ago, most traders favored a lean operational model, few assets, and meager equity or cash holdings, with the lion’s share of profits funneled into dividends for employee shareholders.
An outlier in this regard was Glencore, which, under its former moniker Marc Rich in the 1970s, gradually amassed coal and metals assets before going public in 2011, raising an impressive $11 billion.
Total equity, a key metric in determining corporate valuation, is derived as the variance between assets (including retained earnings) and liabilities.
Over the past decade, trading behemoths have been on a buying spree, acquiring assets ranging from oil refineries to wind farms and metal mines, leveraging profits and bank financing while maintaining slender cash reserves.
This dynamic shifted in 2022 when gas prices surged following a decline in Russian gas supplies to Europe due to Western sanctions aimed at penalizing Moscow for its incursion into Ukraine.
Traders frequently hedge their bets with derivatives, typically financing 90% of these transactions through borrowing, while covering the remaining 10% with their proprietary funds.
In times of price hikes, exchanges require traders to inject more personal funds in the form of margin calls.
“We all encountered margin calls and rushed to tap into bank funding. That’s when we realized the prudence of beefing up our cash reserves,” remarked a senior executive from another trading colossus.
Empowered by Self-Financing
Players like Trafigura maintain ties with up to 150 banks and boast credit facilities totaling up to $50 billion.
During the peak of the margin call turmoil, traders maxed out these credit lines, prompting some banks to shy away from increasing lending while nudging traders to explore alternative financing avenues.
For the most part, traders opted to retain earnings as equity.
“We bolstered our equity, resulting in a larger portion of our trading activities being self-financed,” relayed a third executive from the trading realm.
By curbing borrowing, banks witness dwindling interest revenues and find it harder to extend credit to other clients if significant credit lines remain untouched.
“In 2022, banks were averse to exceeding credit limits. However, in 2023, they were equally disenchanted when traders underutilized their credit lines,” remarked a banker from a prestigious U.S. financial institution with a strong presence in the sector.
Anticipated escalation in bank borrowing would likely materialize with declining interest rates and increased investment outlays by traders, according to one of the three trading executives. However, this shift had not yet come to fruition.
“Sometimes, traders simply borrow funds and park them in deposits, reaping interest either with the same or different banks,” added a fourth executive from the trading fraternity.
(Writing by Dmitry Zhdannikov; Editing by Alexander Smith)
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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