Heightened Federal Reserve scrutiny over physical commodity business led Morgan Stanley MS to divest its compressed natural gas (“CNG”) export operation to Pentagon Energy LLC. This was first reported by Reuters.
Specifically, Pentagon Energy would be acquiring interests in Wentworth Compression LLC, Wentworth Gas Marketing LLC and Wentworth Holdings LLC from Morgan Stanley’s subsidiary, MSDW Power Development Corp. However, financial terms of the transaction were not revealed.
Further, two of Morgan Stanley’s managers, Alberto Chiesara and Ryan Comerford, who were involved with Wentworth, will be joining Pentagon Energy.
Pentagon Energy, a newly formed commodity trading company, is based in Coral Gables, FL. The firm plans to take advantage of lower CNG prices in the U.S. and export it to Central America, Caribbean nations, Mexico and Canada.
The permission for Wentworth, a CNG export facility, was received by Morgan Stanley in Oct 2014. Built near Port Freeport, TX, the facility has a capacity to ship 60 billion cubic feet of CNG annually.
Regulators have been exerting increased pressure on banks to make them exit physical commodity trading. In Nov 2014, a Senate subcommittee came out with a report that specifically mentioned Morgan Stanley, along with JPMorgan Chase & Co. JPM and The Goldman Sachs Group, Inc. GS, as the companies which amassed huge stakes in commodity market (read more: Senate Probe: Banks Exploit Commodity Market).
Notably, Morgan Stanley’s CNG facility drew attention from the Fed, which had been scrutinizing physical commodity businesses of banks. Following this heightened inquiry, the company decided to divest this operation.
Morgan Stanley, lately, has been trying hard to move away from physical commodity businesses. However, its deal to vend the Global Oil Merchanting Unit to Russia-based Rosneft Oil Company’s wholly owned subsidiary was terminated owing to failure to get regulatory approvals. The company is now seeking buyers for this unit.
We believe that the aforementioned deal marks a step in the right direction. Many Wall Street banks — including JPMorgan, Goldman and Bank of America Corp. BAC — are doing away with commodity businesses for similar reasons.
Currently, Morgan Stanley carries a Zacks Rank #3 (Hold).
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