By Alex Nussbaum and Andy Hoffman
“In the U.S., there’s a certain tightening of liquidity provided to upstream producers,” Dunand said. “If we can come in and find a way to measure the risk differently, because we may be able to transport some of that commodity, then we are prepared to allocate more time and resources to the industry.”
Small and midsized drillers have seen financing wither this year, as investors grow weary of a sector that’s struggled to generate cash returns. In the U.S., loans to sub-investment grade energy companies fell by a third in the first half of 2019, compared with the same period last year. Equity offerings were down by two-thirds and bonds by half. Shareholder pressure on larger explorers, meanwhile, has damped interest in acquisitions.
Mercuria isn’t a bank, and has no desire to become one, Dunand said. Still, its own access to capital and market experience allow it to offer debt, equity, structured finance, hedging and other “complementary services,” according to Brian Falik, chief investment officer for the company’s North American division. And the trader has a history of extending a hand where it sees opportunity.
In 2017, Mercuria made $400 million in short-term loans to struggling rival Noble Group Ltd., and later won a bidding war for Noble’s North American power and gas business. In April, Mercuria gained control of bankrupt bunker fuel distributor Aegean Marine Petroleum Network Inc., after earlier extending it $1 billion in financing.
‘Bit More Financial’
“We have an angle which is a bit more financial than a typical commodity trading house,” said Dunand, who founded the firm with a fellow Goldman Sachs Group Inc. executive in 2004. “When it seems to us that financial know-how is needed somewhere, we try to see where we have a competitive advantage that we can apply.”
For Evergreen, Mercuria provided debt and took an equity stake that helped the driller close a $79 million purchase of natural gas wells and infrastructure in Colorado from Pioneer Natural Resources Co. It also offered credit to back pipeline contracts, Falik said. Mercuria declined to provide specific numbers, and Evergreen didn’t respond to requests for comment.
Tapping into surging U.S. oil and gas production would help feed a Mercuria supply chain that stretches across the globe. Last year, the trader was said to invest in the refinery system of China’s biggest chemical company, positioning it to supply more energy to one of the world’s fastest-growing markets.
Providing financial backing to producers is not a new concept for trading houses, but it’s traditionally been done by way of structured loans known as “pre-pay finance deals,” in which traders advance producers cash in return for future oil, gas or metals production.
Meanwhile, there’s another potential plus for Mercuria. Financing can offer another revenue stream at a time traders are seeing weaker earnings from crude and other commodities. “All the trading houses are looking to expand their options,” said Ross Gregory, a director at New York recruiting firm Proco Commodities.