Oil & products house of the year: Macquarie Group

Energy Risk Awards 2021: Bank's physical presence and wide connections enable array of bespoke deals across oil markets

Daniel Vizel

Macquarie Group’s edge in the oil and products markets comes from industry-specific expertise that goes beyond traditional energy and even commodity markets. This was particularly apparent during the market turbulence of 2020 and is also key to the bank’s low-carbon activities as it looks ahead to the energy transition.

“We offer bespoke hedging to a wide variety of clients and not just your typical energy clients,” says Daniel Vizel, head of global oil trading at Macquarie Group. Using the example of a food producer that needs to manage packaging costs, he adds: “We can support hedging in highly illiquid markets including those linked to plastic packaging, which requires a lot of industry expertise.” And if these feedstocks do not have liquid swaps markets, Macquarie’s connections to the refiners that produce them, as well as its ability to own the physical molecules, enables the team to develop risk management solutions.

As a result, Macquarie provided capital solutions to clients such as refineries throughout the tough conditions of 2020. “We were able to utilise our own team’s knowledge of global storage assets and product expertise, particularly during a year in which many companies had liquidity issues because there wasn’t a lot of demand for oil products,” says David Hochberg, global head of Macquarie Commodities Trading, the firm’s physical oil trading business.

Macquarie was able to provide refineries with much-needed upfront capital by buying oil in refinery clients’ tanks. It then also shared some of the margin from selling it further out along the curve, where prices were higher due to expectations of an economic recovery.

“Some of this activity involved non-finished grade products that didn’t have a reference swap or futures contract for the client to monetise their storage themselves,” says Vizel. This contributed to a particularly busy first third of the year for Macquarie, with three times more physical oil solutions executed for clients than during the same period in 2019.

As funding grew more expensive last year, Macquarie looked for opportunities throughout the oil and products markets to provide supply-chain solutions so clients did not have to borrow from their working capital facilities.

In the renewable gas space, Macquarie financed two production facilities and refinanced a third last year. The use of renewable gas as a transportation fuel, particularly for heavy-duty vehicles, has been driven by policy such as the Renewable Fuel Standard (RFS) and Low Carbon Fuel Standard (LCFS) programmes in the US. As such, the team’s understanding of these environmental compliance markets adds another dimension to its offering in this market, says Ozzie Pagan, head of commodity financing Americas at Macquarie Group.

“The revenue value for the producer comes from turning waste gas into pipeline-quality natural gas and [accessing] downstream value in the transportation fuel supply chain,” he explains.

In the US this creates an opportunity to capture value from the RFS and LCFS programmes, which in turn encourages investment, says Pagan. “Macquarie’s understanding of compliance markets enables us to provide structures that ascribe value to the revenue components that are difficult to hedge.”

For example, in March 2021, Macquarie executed a diesel supply deal that incorporated a client’s need for RFS compliance credits, or renewable identification numbers (Rins). The team developed a structure whereby a refinery provided diesel supply in return for the Rins it needed for compliance.

“Rather than our client buying the Rins and holding them until they needed them, we bought and held them on our balance sheet. The Rins were required towards the end of the deal, so the client delivered diesel to us and received the Rins in exchange, as payment,” explains Vizel. “It effectively provided the client with an off-balance sheet Rins financing. We were able to market the diesel to our other clients and we offered payment terms on the back of that diesel position to those that needed financing.”

Macquarie also played a role in delivering what is thought to be the world’s first shipment of carbon-neutral oil in January 2021. Working with long-term client Occidental Petroleum, Macquarie arranged and structured the deal, bringing together a package of solutions to market and move the energy company’s oil, as well as offsetting its emissions from production to combustion.

As Hochberg explains, these kinds of deals – which can take months to complete – are not just based on innovative structures, but also on a firm commitment to clients and to developing an understanding of the markets. “Vanilla deals are easy, these transactions are much more bespoke; although hopefully some will become more standard over time. It takes significant commitment from the desk, as well as the organisation, to get these deals done.”