By Jonathan Leff
NEW YORK Feb 19 An investor bid to break up
Hess Corp's sprawling energy empire has drawn unwelcome
attention to one of the commodity trading world's lesser-known
players, a venture that has stumbled in recent years after a
decade of success.
Hess Energy Trading Company, the New York-based joint
venture known commonly as Hetco, is one of a handful of Hess
Corp units unrelated to the production of oil and gas that
activist shareholder Elliott Management says should be
"reassessed," advocating the firm's split-up.
While Hetco is only a tiny piece of the Hess puzzle, it
could prove problematic to spin out, despite the Goldman Sachs
pedigree of founders Stephen Hendel, 61, and Stephen
Semlitz, 60, long-time collaborators known as "the two Steves."
They each own 25 percent of the company, while Hess Corp owns
the other 50 percent, an unusual arrangement.
One problem: Investor demand for exposure to the commodity
trading industry, hot in recent years, may be waning. Those with
the means to finance the business is also diminishing.
From the public listing of industry heavyweight Glencore
in 2011 to the private equity buy-in to Louis
Dreyfus-Highbridge last summer, a flurry of deal-making has
already transformed the once little-noticed sector. The near 30
percent slide in Glencore's share price since its float two
years ago also speaks to diminishing expectations.
Wall Street banks, once the obvious candidates for buying
their way into the industry, are in retreat, shedding staff like
Deutsche Bank or even looking to hive off their
operations like Morgan Stanley.
Hetco's recent results may vex as well: After a decade-long
streak of modest profitability after its founding in 1997, Hess
Corp's trading activities - which it says are largely confined
to the Hetco unit - have become a drag on earnings, according to
company filings. In the UK, Hetco has lost money in three of the
past four years, previously unreported filings show.
One major unknown: How much of Hetco's business is dependent
on its links with Hess, which provides unassailable credit?
(According to Hetco's own websites, it is "fully guaranteed" by
"It can be almost impossibly hard to value these things,"
said one senior industry executive. "But one thing is for sure -
it would be hard to get a similar deal today, splitting the
profits 50-50 while Hess provides the balance sheet."
While the likes of Glencore, Mercuria and others appear
regularly in the media as they seek to enhance their profiles or
prestige or raise capital, the Steves have never spoken publicly
about their business. Through spokespeople and senior Hetco
employees, they have declined repeated requests for interviews.
Hendel's only major appearance in print was in a 2010 New
York Times profile focused on his unlikely role as a major
producer - together with his wife - of the Broadway musical
"Fela," based on the music of an Afrobeat artist.
A HOUSE, NOT A FUND
In its prospectus for reassessing Hess Corp, Elliott terms
Hetco a "hedge fund," which isn't quite correct.
Hetco doesn't collect fees or bonuses for managing outside
investor money. Nor does it restrict itself to trading in the
most liquid futures markets, as most funds do. (It does,
however, dabble in some equities trading, sources say.)
Instead, an estimated 100-plus Hetco traders in seven
offices from New York to London to Singapore generally focus on
profiting from price discrepancies and trading gaps in the
physical market for crude oil, refined fuels and natural gas,
using fundamental analysis to spot arbitrage opportunities and
big trades, according to industry executives who know the
company and have traded with it for years.
Yet like many of its peers, Hetco has also engaged at times
in traditional investment banking client activity, such as
managing hedging programs. One of its biggest customers was
Algeria's state-owned Sonatrach, according to its website.
For Elliott, Hetco is just one of a handful of businesses
that are diverting capital and preventing Hess Corp's management
from focusing on its Bakken shale oil reserves in North Dakota.
"Shareholders recognize it as a distraction and another
example of a business that should not be at Hess," says Quentin
Koffey, a portfolio manager at Elliott, founded by hedge fund
pioneer Paul Singer. Elliott also trades in commodity markets.
Hendel, a lawyer, and Semlitz, who got an MBA from Cornell,
are among a dozen or so commodity executives that are often
credited with giving birth to the modern trading industry.
They joined Goldman Sachs at the end of the 1970s, just
before Wall Street's biggest bank bought J Aron, the storied
commodity trading firm that would become its main vehicle for
delving deeper into proprietary trading.
Hendel and Semlitz are credited with helping J Aron expand
into the energy sphere, making it one of the leading players.
They both became Goldman partners in the vintage class of
1988, alongside current Chief Executive Lloyd Blankfein, who was
then head of currency trading at J Aron, as well as former
Merrill Lynch chief John Thain and current Commodity Futures
Trading Commission chief Gary Gensler.
While Goldman was famed as a "Wall Street refiner," a bank
so large that it traded as much "paper" oil as a real refinery,
the Steves saw more of a future in the physical market. They
built a condensate splitter - converting an ultra-light form of
crude oil into jet fuel and naphtha - in Rotterdam in 1994.
But Goldman was going another direction. An initial public
offering was right around the corner, and the focus was shifting
toward derivatives trading. Gary Cohn, now the bank's president,
was brought back from London to run the commodities business.
The splitter was sold off just a few years later.
In some ways the Steves were ahead of their time.
Over the past few years, it has become common to see many of
Wall Street's gutsiest traders take off to start hedge funds or
join merchants, often prompted by banks' trading restrictions or
curtailed bonuses. It was far more unusual 15 years ago, with
most trading talent flowing the other direction.
Things started out well. Leon Hess, Hess Corp's founder and
chairman until 1995, had long conducted his own trading through
Goldman Sachs; he also knew Hendel's father, who had run a fuel
supply business in the Northeast.
In the first 10 years after founding Hetco, Hess Corp
recorded after-tax trading profits - including its 50 percent
share of the trading firm - of $276 million, posting an unbroken
streak of profitability, according to the company's SEC filings.
While Hess Corp conducts some trading on its own account, it
also states that its "trading activities are conducted
principally through" Hetco, according to the 2011 annual report.
In the four years through 2011, Hetco says it has lost a
total of $32 million on trading, with only one profitable year.
It showed a $5 million loss in the first three quarters of 2012.
Results from the main London-based firm Hess Energy Trading
Company Ltd, filed annually with the UK Companies House, show a
similar trajectory: modest, growing profits through 2007, then
sizeable losses in three out of the last four years, enough to
wipe out half the previous decade's profits.
Hetco is by no means alone. Energy markets have proven
particularly treacherous for veteran traders in recent years,
with prices whipsawed by a European debt crisis and other
factors far beyond supply and demand fundamentals.
It is far from clear that Hetco will ever be put up for
sale. Chief Executive John Hess's attachment to the unit runs
deep, according to industry executives who know the company.
But Hess Corp has begun to shed some of its non-upstream
assets, announcing plans last month to shutter its lone refinery
in New Jersey and sell its terminals business.
That is unlikely to affect Hetco directly, since it has long
traded with Hess Corp at arm's length, industry sources say.
Indeed, in the early days of Hetco's operations, Hess Corp's own
traders were reluctant to deal with the venture at all,
preferring to trade directly with end-users rather than
middlemen, sources say.
Hetco has rarely imported fuel to the U.S. East Coast, where
most of Hess Corp's facilities are located, according to
government data. For the past few years the trader has imported
gasoline blending components from the Hovensa refinery in the
Virgin Islands, a joint venture between Hess Corp and
Venezuela's PDVSA. But the volume of its business was no larger
than rivals Vitol and Trafigura, who have no affiliation with
the refinery's owners, the data show. The plant shut a year ago.
The question of capital is more disquieting. If a buyer is
to be found, it may well come from much further afield. The
sovereign wealth funds of Singapore, China and Qatar have all
taken stakes in commodity traders in recent years.
"We are seeing folks in developing parts of the world who
want to get into trading," says Michael Denton, a partner at
consulting firm Oliver Wyman who advises companies on commodity
"Entities who have not traditionally been in the business
are looking at it ... trying to enhance margins and optimize