Is commercial growth the next EE or the real thing? How can something that is not a reported segment be a growth segment? Is this just one of those things we talk about externally and then have to unwind? Is real value being created for our assets and in addition to our assets? Are there examples of true value creation?
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@3fk yep and understood on your first paragraph. This is the way it has been for a while and how if should remain if KM and ML have any wits about them. PSX is far from equipped to spin a yarn to the capital markets on an ongoing basis about differentiated trading performance, and won’t be in this decade.
On your second paragraph - I assume you are just speaking to folks on 100pct direct trader bonus plans and not originators, charterers, certain operators etc et al - many of these folks are historically considered as part of trading teams and are co-located within the benches, as the rest of the industry does. Many historically are also compensated commercially in alternative ways even if not on trader bonus plans-they have to be for recruiting and retention purposes. It’s just what the market does.
Because even before you add that all in PSX definitely looks bloated vs MPC and VLO in particular - it’s true peers. Do MPC and VLO even have 100 traders between themselves in aggregate?
Maybe PSX doesn’t look bloated vs the BPs, Shell’s and Total’s of the world, sure - but as much as the head of IR and KM may wish it so (to hide the lack of performance vs MPC and VLO) - that’s not PSX’s peer group relative to very much (and certainly not relative to refining, marketing & midstream).
Definitely agree with you on the KM kingdom building though and his bloating out of associated mid and back office staff (for control purposes - what BS) that never should have been shifted to him in the first place.
Crude and Feedstock trading earnings roll up to Refining segment, Products earnings roll up to Marketing. They are publicly reported but the earnings are bucketed into those segments.
The trading group has maybe 100 traders globally and 2-3 support staff per trader on avg. that’s under the industry avg. the glut of finance people is because KM and his cronies building bad systems and offshoring all our talent not cause commercial.
@y8, they’re not only bloated but the have as one of their leaders a person that didn’t do very well at all when she was in L & D.
@y8 agreed. They aren’t more than half PSX’s trading allocated overhead, IMO. If that. And in MPC’s case that’s after a stated growth program and additional positions created in the last 2 years.
@xx I agree that they will not report the earnings separately but the issue is what the story tells: a bloated trading organization that is creating relatively small contributions given the scale and pay. Does MPC and VLO have hundreds of traders and more than 100 finance and risk employees supporting their orgs? I doubt it.
@d3 well said. 3 points to add:
1) This is one of the places that Shell and BP as examples (when running larger refining organizations than they do now) stumbled over relative to reporting Commercial/Trading earnings for years. You can get twisted relative to saying “it’s a company differentiator in the market” re: physical trading earnings that others supposedly don’t capture - while the numbers don’t add up across refining performance (primarily) and marketing (to a lesser extent).
It gets tricky to explain and report - because it’s effectively some element of double counting (at best). Or being perceived as taking margin OUT of the assets - then calling it trading (at worst) . It’s one of the reasons that Heads of Refining are inherently distrustful of Trading in many cases. Which is why if you are an asset heavy entity it makes a lot more sense to call Commercial a significant optimisation to your Refining and Marketing operations. It also helps keep the peace internally across functions (but not always).
Shell, BP and a couple of others (independent traders - Vitol, Trafigura, Gunvor et al) in particular also have massive derivatives/paper trading books that in good years bring in well in excess of $1Bn in gross earnings consistently (and have been known in some years to produce low multiples of that). Very sensitive and secretive operations. They require massive rolling exposures managed literally at the very height of the industry. When you carry that much size in the derivatives markets, it requires doing things from a regulatory and margining (cash management) perspective at times that keep you in a spotlight - it can be seen as adversarial from certain corners (particularly the regulatory piece). Ruthlessness is at times the rule to defend one’s position in the market. Hence many of these players staying private / trader owned.
IMO, PSX never gets close to this point, particularly given its present Legal (regulatory) and Finance (cash management) conservatism. Your compliance, risk and credit functions have to resemble those of the traders I mentioned earlier (i.e. commercially oriented) which will never happen at PSX. Not only is it not in the companies DNA to take this sort of risk - they truly don’t the stones for it. I don't even think that Elliott welcomes going that far, as much as they wanted a more aggressive trading operation.
2) Calling yourself a significant pure trader vs the market earnings wise makes your multiple even harder to land on/determine (which as we all know PSX has enough issues with given its gone from calling itself a “peer of one” to being an quasi - integrated super major in the blink of an eye (at least in the opinion of IR and the CFO).
Massive pure speculative trading earnings for publicly reported entities are seen as deserving a relatively low multiple (look at bulge bracket banks with large trading operations) because they are rightly seen as non - ratable and non - repeatable on a consistent basis. The market always gives you easy money in good years, and let’s face it, when a whole book is raided by external players, earnings at the raided entity usually suffer for a while - massive cash destruction is literally just a headhunter call away.
Which is also another reason that many large spec shops on the equities side as well stay privately held and relatively quiet.
It’s really hard to make speculative trading money in the commodities space consistently without assets to work with. The market recognises this, and discounts the equity valuation accordingly.
Which is another reason to keep yourself looking at least significantly asset backed.
3) Also - in going back to the first point - PSX also has the significant issue of VLO and MPC lurking out there with significantly higher quality earnings (consistently) on a rolled up basis than PSX produces - and both producing that with a massively smaller Commercial footprint than PSX has. Much, much smaller. And openly stating to the Analyst community that “it’s about having premium assets that are ruthlessly upgraded and optimised.”. It’s why the story stays alive of “why have a massive trading operation unless you commit to being another Shell or BP”.
I can’t see any good reason whatsoever for PSX to highlight these operations significantly externally until the story of why PSX’s Commercially related earnings are higher quality and differentiated against at the very least MPC and VLO is bulletproof and consistent……..”peer of one” or not.
The only emerging energy is the merging of energy, as in merging with another company.
@OP easiest way to prove the naysayers wrong is to report it separately. The reason they don’t is that it is not real—or at least not what they represent it to be. Next time a number is cited, deduct that from the market crack and then run your refining margin. Both numbers can’t be true.
Simply stated: no. Until they can deliver margins above the peers it is a nice soundtrack for Go Go.