Sempra Trading Business Looking for a Partner, Not a Sale, NGI Reports

While it has been reported that the Royal Bank of Scotland (RBS) wants to get a piece of Sempra Energy’s successful energy trading business, a report by Natural Gas Intelligence (NGI) points out that Sempra appears more interested in a big bucks back-up than a sale.

The energy trading business is very, very expensive, given the extent of credit necessary to do it right. But, given the continuing volatility in the energy market, it also can be very profitable; witness the number of large financial institutions that have gotten into the game.

A West Coast financial analyst who watches San Diego-based Sempra very closely was not aware of the latest report about the Scottish bank’s interest, but not surprised by it — given that company executives have said for some time that the trading business in the long run would get too big for the company. “Sempra is currently supporting trading exclusively in terms of capital infusion and liquidity,” the analyst told NGI. “In that context, it is not entirely a surprise. They’ve said they might be looking at partnering with a financial institution.

“Who would be most attracted to taking a stake in Sempra Commodities? It would likely be some bank that does not already have a major presence,” the analyst said, rather than companies like Goldman Sachs or Morgan Stanley, which already run major trading operations. “Certainly the Royal Bank of Scotland is not a major presence in the U.S., but there are others, too, in the United States that don’t have such a big presence.”

Sempra’s trading operation includes metals, based on some acquisitions it made several years ago of European companies, and that part of Sempra Commodities is based in London. Generally its energy trading, based in Stamford, CT, operates widely throughout the United States, Canada, Europe and Asia. According to NGI’s ranking of Top North American Natural Gas Marketers for 4Q2006 and 1Q2007, Sempra Energy was the fourth largest, moving 9.4 Bcf/d and 9.1 Bcf/d, respectively (see http://intelligencepress.com/features/rankings/gas/). It has a 10-year record of consistently increasing profits, topping off at a half-billion dollars last year, and producing returns averaging about 20% annually, according to Sempra President Neal Schmale, speaking May 31 at the Deutsche Bank Energy & Utilities Conference.

Schmale and other senior executives have told analysts in meetings this year that to continue growing the trading operations might begin to impinge on the capital needs of Sempra’s other businesses, and therefore, now is the time to bring in a partner.

In response to questions on its capital spending strategy at the May 31 conference, Schmale said Sempra is focusing on “making sure its capital structure will support the volatility of the trading business. We have done a lot of planning the last two years and realize this trading business is pretty large for a company like Sempra, so we are looking at a number of possibilities to make sure things are appropriate.

“We would consider taking a partner, or we would continue to do-what-we-do, which carries the implicit consideration that we would have to ration capital from time to time, or finally, we have said we would consider pursuing a stand-alone credit rating for the trading operations. And that is really all I can elaborate on.”

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