By Sarah Kent
LONDON--Some of the world's biggest energy companies are finding
healthy profits amid the oil-price collapse in a little-publicized
corner of their business empires: their trading divisions.
The world's biggest oil companies came out better than many
analysts had expected in the first quarter, cushioned somewhat by
refining operations and cost-cutting despite a big drop in the
price of oils from the same quarter a year before. But some of
them, including BP PLC, Royal Dutch Shell PLC and Total SA, also
got a lift from their trading divisions, vast operations focused on
buying and selling oil and its financial derivatives.
With Brent crude, the global benchmark, trading at about 40% of
its 2014 peak, and even lower for much of the year's first three
months, traders were able to take advantage of large spreads
between the current price of crude and the higher price of futures
contracts.
It isn't a subject the companies often talk about. None reveal
their trading profits and say their trades are primarily done to
get the most profit out of every drop of oil they produce.
Brian Gilvary, BP's chief financial officer and former head of
the U.K. oil giant's trading arm, declined last week when asked to
talk about the company's trading profits beyond a disclosure that
it had outperformed by $300 to $400 million in the first quarter.
Overall, the company's net profit fell by 40%.
"In terms of the oil trading result, I mean, of course I can't
tell you, " Mr. Gilvary said in a call with analysts.
Shell was equally reticent. The company said oil trading helped
cushion the blow of low prices but didn't disclose how much. Its
equivalent of net profit rose 7% in the first quarter.
Shell's CFO Simon Henry said the trading business was about
"adding value" to its oil-and-gas production.
"It's not Wall Street trading a la Goldman Sachs," Mr. Henry
said during a media call last week.
It is an important distinction, as oil trading comes under
greater scrutiny in Washington and Brussels. Because of their size
in the derivatives market, units of Shell and BP are registered
swaps dealers in the U.S. alongside banks and financial
institutions as part of sweeping regulatory changes brought in
under the Dodd Frank Act in the wake of the financial crisis. The
companies are also facing potential new trading regulations in
Europe.
The most significant oil traders are based in Europe, with
Shell, BP and Total leading the pack, backed by their substantial
production volumes. American oil companies like Exxon Mobil Corp.
and Chevron Corp. are also active selling the oil they produce, but
haven't developed their trading arms to the same extent.
When oil prices are low, or extremely volatile, trading
divisions can really prove their worth, analysts say.
Before the oil market began its decline last summer, prices had
been remarkably high and stable for years, limiting opportunities
to trade on price disparities. With the oil market's recent
volatility, the chance to make money with smart market moves has
increased.
Trading companies like the oil majors with access to crude
storage have also benefited in recent months from a market
structure known as contango, which occurs when current prices are
cheaper than those in the future. That allows companies to purchase
oil now at the cheaper rates, store it and strike sales agreements
at a higher price in the future, locking in profit.
"Our trading activities have generated a strong results and we
benefited from product market volatility and crude oil contango
structure," said Patrick de la Chevardière, the chief financial
officer of Total on a conference call last week announcing
quarterly earnings that were down 20% compared with a year ago, but
still better than expected by most analysts.
Most big oil companies consider trading part of their downstream
sector, lumping it in with profits from refineries and retail gas
stations. As the companies' oil extraction and exploration
business, or upstream, takes a hit in a downturn, "the trading
business is not necessarily affected and by that it provides a
certain hedge against lower oil prices," said Roland Rechtsteiner,
global head of oil and gas at consultancy Oliver Wyman.
BP's Mr. Gilvary said the company had $1.4 billion of working
capital tied up in these kind of storage plays in the first quarter
and that those will unwind throughout the year. Shell's traders
have an "open credit line at the moment" to take advantage of the
opportunities in the market, said Mr. Henry. Over the last six
months they have used up to $2 billion of that, he added.
Trading conditions could change as the oil price continues a
slow recovery, breaking above $69 a barrel on Wednesday in London
trading. The contango spread has also narrowed
Conditions are still better than they have been in years though,
profiting not just the oil majors' trading arms, but also
independent trading houses like Trafigura Beheer B.V. and Glencore
PLC. Remarkably high and stable crude prices squeezed oil trading
margins in recent years. With the return of volatility, that has
changed.
Write to Sarah Kent at sarah.kent@wsj.com
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