One of the nation's largest banks, Wachovia Corp., is offering a new twist on the "Big Bank Moves in on NatGas Market" story, teaming with a Tulsa, OK, E&P company, Resolute Holdings, parent of Resolute Natural Resources, to offer its customers, both producers and gas users, what they've asked for: some stability around their physical gas sales and purchases.
The joint venture, Odyssey Energy Services LLC, has been formed to offer "a more complete solution, with some certainty around price and physical delivery," said John Roncevich, head of Commodity Derivatives at Wachovia. The new company, which should be open for business next month, is Wachovia's response to its derivatives customers, who want back-up in the physical market. This is contrary to the strategy of other banks, which have moved into natural gas, but only on the paper or financial side.
"The way the industry's changed, we found there's a dearth of companies managing physical product out there, Roncevich told NGI. In conversations with clients he has learned that some of the medium-sized E&Ps and industrials are uneasy with the large trading firms, which they see as primarily speculators. "They run large books and are centered on their [profit and loss] statements," which causes the customers to wonder whether the trading is being done in their best interests.
Odyssey Energy Services will be run by Jim Kincaid, a veteran energy marketer and co-founder of Resolute Holdings. Resolute, which operates 300 wells in the Paradox Basin of southeastern Utah, was formed by former senior officers of Denver-based HS Resources Inc., which was sold to Kerr-McGee four years ago in a $1.7 billion deal (see NGI, May 21, 2001).
"Our clients are seeking solutions for physical delivery, trading and derivatives from firms that are not focused primarily on speculating on energy prices," Kincaid said. The energy services firm initially will focus on natural gas markets in the central and western United States, expanding over time geographically and into crude oil and refined products.
"Basically, we're setting up an old-fashioned (circa 1989) natural gas marketing company, concentrating on buying and selling hydrocarbons, and not for the purpose a feeding a derivative book," he continued. "Both Resolute and Wachovia are very customer-oriented. We have a common view, and we've listened to our customers and designed a product they need." Kincaid, who previously started two marketing and trading firms, said Odyssey would be run "by or for physical trading. Physical traders won't be "second class citizens" as they are in the financially-oriented companies.
Ultimately, Wachovia, which holds 60% of the venture, has a large derivatives business to marry with Resolute's expertise on the production side, Roncevich said. "We think this is an efficient way to harness both capabilities." Wachovia will offer credit support for counterparties that trade with Odyssey on a customer by customer basis.
"The number of credit-quality parties is extremely small," Kincaid said, calling it an "under-served" market. "Companies can't find credit diversity in their counterparties. We want credit with us to be a given; we don't want it to be an obstacle to trading. We'll just post [letters of credit] for transactions." The company has six traders right now and expects to have two dozen by the end of the year.
Following on the middle-market bust there's a lot of talent available in Tulsa, and "we have access to people with extraordinary skills and experience." Kincaid extolled the virtues of Tulsa living, where commuting is 10 minutes and cheaper prices for everything means those paid market wages "can live like kings."
He said the joint venture came about because Wachovia was Resolute's lead bank. He and Roncevich became friends and their joint interest in marketing and "an extraordinary degree of trust" resulted in Odyssey Energy Services.
The natural progression from natural gas is into other hydrocarbons, Kincaid believes. He suggested those following the electricity path, including hedge funds, are doing so because of the very large bid-ask spreads and volatile trading.
Wachovia is the fourth largest bank holding company in the United States based on $507 billion in assets, and the third largest U.S. full-service brokerage firm based on client assets. The company entered the energy derivatives market early last year (see NGI, March 1, 2004).
A number of major banks trade in natural gas and electricity market financials and two, JP Morgan Chase and Bank of America, recently have filed with the Federal Energy Regulatory Commission to do physical trading of electricity. Credit Suisse First Boston had sought to set up an energy marketing firm for gas and electricity with TXU Energy but that venture was called off (see NGI, Oct. 4, 2004).
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