On the surface, few businesses would seem more left for dead than energy trading. Yet some of the world's biggest investment banks, including Goldman Sachs, Merrill Lynch, Bank of America and Deutsche Bank, have recently taken steps to strengthen their electricity and natural gas trading operations, injecting new life into an area that had been pummeled by the 2001 collapse of Enron and California's electricity crisis.
Some of the banks have departed from the Enron-esque strategy of trying to be a "virtual" energy company and are backing up their trading operations with investments in hard assets, such as generators that supply electricity to cities like New York, figuring now is a good time to acquire such operations cheaply.
All the activity is producing a rush on Houston by elite banks. Just last week, Lazard Freres announced it was opening an office here to focus on advising clients involved in large energy-related deals, hiring away a former managing director at Credit Suisse First Boston to head the operation.
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Joining the banks in the acquisition spree are other financial institutions, including the American International Group, one of the world's biggest insurers, and Warren Buffett's Berkshire Hathaway.
The financial concerns are pursuing a variety of energy strategies. Merrill Lynch said last week that it had formed a small natural gas and oil trading group, returning to energy trading after selling its Global Energy Markets unit to Allegheny Energy of Hagerston, Maryland, in March 2001. Goldman Sachs has adopted a multipronged approach involving energy trading and the acquisitions of hard assets. Berkshire Hathaway has made a more narrowly defined foray, snubbing trading in favor of loans to distressed energy companies and purchases of cash-generating gas pipelines.
Plenty of assets
Of course, the renewed interest in energy at the investment banks comes after several large Wall Street firms helped finance the industry's expansion in the 1990s, efforts that resulted in some instances in large losses for investors, some energy companies and the banks themselves.
There are plenty of assets to choose from now, as some of the large merchant energy companies seek to reduce their billions of dollars in debt.
"The attraction now is that there are several good quality assets hitting the market," said Richard Ruzika, cohead of global commodities at Goldman Sachs. "This is a reversal from just a year ago when some of the assets didn't have the return characteristics we were interested in."
Goldman raised eyebrows in April when it announced a US$456 million deal to buy the El Paso Corp's controlling stake in East Coast Power, which owns a Linden, New Jersey, gas-fired power plant that provides electricity to customers in New York City.
Owning the plant and its excess energy along with the plant's pre-existing contracts to sell electricity to companies like Con Edison and ConocoPhilips will allow Goldman to expand its electricity trading operations, Ruzika said.
Most of Goldman's energy trading is currently done from operations in New York and London.