Wrong-Way Gas Bet Costs Goldman -- WSJ
August 19 2017 - 3:02AM
Dow Jones News
By Liz Hoffman
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (August 19, 2017).
Goldman Sachs Group Inc. lost more than $100 million in a
wrong-way bet on regional natural-gas prices this spring, a setback
that played a large role in the New York bank's subpar
second-quarter trading performance.
Goldman wagered that gas prices in the Marcellus Shale in Ohio
and Pennsylvania would rise with the construction of new pipelines
to carry gas out of the region, said people familiar with the
matter. Instead, prices there fell sharply in May and June as a key
pipeline ran into problems.
Goldman said in July that the quarter ended June 30 was the
worst ever for its commodities unit, which has been one of the
firm's most consistent profit centers and a training ground for
many of its top executives, including Chief Executive Lloyd
Blankfein.
The setback extended a broader trading slump at a company once
known as Wall Street's savviest gambler. Goldman shares fell 2.6%
on the day of the report despite a stronger-than-expected
bottom-line profit.
The loss highlights the trade-offs Goldman made in sticking with
the risky commodities-trading business, even as other large banks
retreated following the financial crisis. Trading oil, metals and
other physical commodities is increasingly dominated by
less-regulated firms such as Glencore PLC and Gunvor Group Ltd.
Goldman is the seventh-biggest marketer of natural gas in North
America, up from 13th in 2011, according to Natural Gas
Intelligence -- bigger than U.S. energy giants such as Exxon Mobil
Corp. and Chesapeake Energy Corp. It has been the only U.S. bank in
the top 20 since 2013, when J.P. Morgan Chase & Co. left the
business.
Goldman's key miscalculation last quarter was betting that
natural-gas prices in the Marcellus Shale would rise relative to
the national benchmark price in Louisiana known as the Henry Hub,
the people familiar with the matter said.
Essentially, it was a bet on the timely completion of pipelines
under construction to ferry a glut of gas out of the region.
But one of those pipelines ran into trouble this spring: the
713-mile Rover, which would transport gas from the Marcellus to the
Midwest and beyond.
Its developer, Energy Transfer Partners, in February bulldozed a
historic Ohio home without notifying regulators, and scrambled to
finish clearing trees before the roosting season for a protected
bat species. In May, federal regulators barred Energy Transfer from
drilling on some segments of the route after a series of fluid
spills.
The first leg of the pipeline, which had been set to come online
in July, isn't expected until at least September. Energy Transfer
said it has "been working efficiently and nonstop to remediate"
problems and expects to have the entire pipeline operational in
January.
The delays in one case quadrupled the market discount on
Marcellus gas prices. At one Pittsburgh-area hub, the Dominion
South, the Marcellus discount increased from 29 cents per million
British thermal units at the end of March to $1.16 on June 16.
Prices moved similarly for futures contracts guaranteeing fall
deliveries.
Goldman was in part likely catering to gas producers in the
region that wanted to lock in steadier revenue through swaps and
other contracts. Many Marcellus drillers reported big gains in the
value of their derivatives portfolios in the second quarter --
meaning their trading partners lost money in that period, at least
on paper.
It isn't clear to what extent Goldman attempted to hedge against
possible losses. Hedging is an imperfect science in the best of
circumstances, influenced by factors such as weather and trading
volatility. It often gets harder and more expensive further into
the future.
While the 2010 Volcker rule prevents banks from betting their
own money on changes in asset prices, they are allowed to
facilitate trades for clients looking to buy or sell. Such
"market-makers" play a key role, helping to keep markets fluid and
avoid rapid price spirals and panic.
Whether a particular trade complies with the Volcker rule
depends on many factors, including who initiated it and how long
the bank intends to hold the position.
Goldman has been on the right side of large trades as well. Last
year it booked $100 million in gains when one of its credit traders
bought beaten-down corporate bonds before prices recovered.
Commodities hold a special place at Goldman. The division, which
still operates as J. Aron, a coffee and metals trader that Goldman
bought in 1981, gave Mr. Blankfein, President Harvey Schwartz and
Chief Financial Officer R. Martin Chavez their starts at the
company. J. Aron's $10 billion in pretax profit between 2006 and
2011 accounted for 15% of Goldman's total profit over that
period.
"Clients want to buy, so we sell. They want to sell, so we buy,"
Mr. Chavez said on a July conference call with investors. He added
that Goldman "remains committed in every way to help our clients
manage their commodity risk."
Write to Liz Hoffman at liz.hoffman@wsj.com
(END) Dow Jones Newswires
August 19, 2017 02:47 ET (06:47 GMT)
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