Morgan Stanley (MS) has submitted its plans for setting up a compressed natural gas (CNG) export facility near Freeport, TX to the U.S. Department of Energy’s Office of Fossil Energy, as per Reuters. The proposal to construct an operating facility with an annual shipping capacity of 60 billion cubic feet was made in May.
Interestingly, this move has come amid the recent initiatives by many big banks to shed their physical commodities businesses. Due to drawbacks like higher capital requirements and lower profitability, JPMorgan Chase & Co. (JPM), Bank of America Corporation, Barclays PLC and Deutsche Bank AG, among other Wall Street Biggies, have been moving away from physical commodities businesses.
In Jul 2014, Morgan Stanley completed the divestiture of its 100% ownership in TransMontaigne Inc. – an oil storage, marketing and transportation company to Tulsa, OK-based NGL Energy Partners LP (NGL). (Read more: Morgan Stanley Completes Sale of TransMontaigne Stake.)
In Dec 2013, Morgan Stanley inked an agreement to vend its Global Oil Merchanting unit to Russia-based Rosneft Oil Company’s wholly owned subsidiary. Considering the current backdrop, Morgan Stanley’s proposal indicates its rekindled interest in the physical commodities markets.
Notably, Morgan Stanley and The Goldman Sachs Group, Inc. (GS) are the only two Wall Street banks which enjoy the ‘grandfather’ status for any commodities activities engaged in before 1997, courtesy of the Gramm-Leach-Bliley Act. Empowered with this status, these banks can own and run infrastructure for the manufacture, storage and operation of raw materials. Availing this opportunity, Morgan Stanley will export cheap domestic CNG to countries such as Dominican Republic, Panama, Guatemala, El Salvador, Honduras and Costa Rica, with which U.S. has free trade agreements.
Importantly, excess production of natural gas in the U.S. has lowered the prices to $4.02 per million British thermal units. Further, the U.S. Energy Information Administration expects this low price to prevail. Hence, the comparatively low-cost domestic CNG could be a cheaper alternative for many countries. Moreover, building up a CNG plant requires lower investment compared to a liquefied natural gas facility. All these advantages might have prompted Morgan Stanley to reframe its physical commodities business plans.
Nevertheless, the permission process for the project is lengthy with many proposals in the queue. Also, there are logistics hurdles to be crossed. All said and done, we believe that successful realization of the proposed project will tempt many other banks to reconsider their physical commodities business strategies.
Currently, Morgan Stanley carries a Zacks Rank #3 (Hold).
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