Morgan Stanley oil business sold for $1bn

Castleton Commodities International, the energy trader backed by hedge fund luminaries, has sealed a $1bn-plus purchase of Morgan Stanley's giant physical oil merchant business, in a transaction aimed at elevating the company to the upper ranks of global oil dealers.

The deal comes as investment banks on both sides of the Atlantic have been trying to scale back or exit commodities trading because of dwindling returns and increased regulatory scrutiny - ceding ground to specialist trading houses and commercial companies.

Morgan Stanley's disposal marks the end of a storied chapter in Wall Street's controversial involvement in physical oil trading. Last year, a US Senate sub committee report criticised the banks' trading activities for posing risks to the stability of the financial system.

Morgan Stanley had the biggest physical oil trading operation among US investment banks and became known as a "Wall Street refiner", alongside rival Goldman Sachs. It had agreed to sell the business to Russian state-owned oil company Rosneft, but that deal fell apart amid tensions over the Ukraine conflict.

"This transaction fits perfectly for us," said William Reed, Castleton chief executive. "It's transformational. I think it catapults us into the top tier of commodity merchants worldwide."

About 300 Morgan Stanley employees will move to Castleton. Tom Simpson and Fabrizio Zichichi, both Morgan Stanley executives, will lead its global physical crude and products merchant business. But Heidmar, the oil tanker operator in which Morgan Stanley has a minority stake, is not included in the sale. Morgan Stanley will continue trading oil in physical and financial markets for its clients.

Castleton was founded in 2012 when a group of investors including hedge fund managers Glenn Dubin, Paul Tudor Jones and Paul Fribourg, the head of Continental Grain, bought the North American natural gas and power trader known as Louis Dreyfus Highbridge Energy. It has since expanded into seaborne petroleum and metals trading.

Mr Reed said the acquisition, which still requires regulatory approval, would help give Castleton the scale required to succeed in the global oil market.

"I think top three private independent commodity merchant is definitely within our reach," Mr Reed said.

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After launching in the 1980s, the scope of Morgan Stanley's oil merchant business grew to include supplying jet fuel to airlines and crude to refineries. While it is smaller now than in its heyday, Morgan Stanley still handles about 2m barrels per day, or 2 per cent of global demand, and has 45 leases totalling about 30m barrels of tank capacity.

By comparison, Vitol, the world's largest independent oil trader, delivered about 5.5m barrels per day of crude and oil products in 2013, according to the latest data on its website and FT calculations. Trafigura, a rival, traded about 2.4m b/d of oil and oil products in 2014, according to its annual report.

The transaction is being funded from Castleton's own reserves and a "significant" amount of fresh capital Castleton raised from its existing shareholders in just a "day and a half", according to Mr Reed. Other investors in Castleton include hedge fund manager Tim Barakett as well as the Oppenheimer and Belfer families.

To support the working capital requirements of the enlarged business, Castleton has increased the size of its committed credit facility with BNP Paribas from $1.6bn to $3.5bn.

Executives said Castleton had no plans to seek a stock market flotation.

"Many of the investors, myself included, think of it as a multi-generational investment," said Mr Dubin, who serves as non-executive chairman. "The idea of there being an exit strategy near term or even intermediate term is not something we discuss."

Pressures including new capital requirements and, until recently, listless markets have forced many Wall Street banks to pare or kill off their commodities operations. The Federal Reserve, which has overseen Morgan Stanley since it became a bank holding company during the financial crisis, is considering new rules restricting banks' involvement with physical commodities.

Last year JPMorgan Chase sold a large part of its physical commodities business to Mercuria, the privately held Swiss oil and metals dealer, for $800m in a sale process that had also attracted interest from Castleton.

Mr Reed said this trend represented a "reversion back to what were the traditional specialities of our respective businesses: the banks are still heavily involved in the flow and the financing side of the business, with us more handling the physical commodity risk side of the business," Mr Reed said. "Which I think makes a tremendous amount of sense. I don't see commodity houses as systematically important to the financial system."

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