Sept. 19 (Bloomberg) -- Gunvor Group Ltd. Chief Executive Officer Torbjorn Tornqvist is scouting for oil assets as a drop in valuations spurs the Swedish entrepreneur to add exploration and production to his multibillion-dollar trading business.
“The whole perception of the industry is quite gloomy at the moment and you can acquire assets at what we feel are a fraction of the book values,” Tornqvist said in an interview at Gunvor’s offices in Geneva. “That is a good time, exactly when you should invest.”
Faced with falling profit margins and stiffer competition, commodity traders such as Gunvor, Vitol SA and Trafigura Beheer BV are diversifying through acquisitions. While energy traders have traditionally preferred to invest in processing operations such as refineries and terminals, slowing demand for crude and higher supply from new discoveries have cut prices for fields, making production assets more attractive, Tornqvist said.
Valuations for small and mid-sized oil producers have fallen to a level where Gunvor sees opportunities, according to the 59-year-old billionaire. “That is where we come in. It is still interesting for us,” he said Sept. 17.
Gunvor became the largest shareholder in Sweden’s PA Resources AB in June, raising its equity stake to 49.9 percent from 9.9 percent by underwriting an 891 million-krona ($141 million) stock sale. PA, operating in West and North Africa as well as Europe, has slumped almost 80 percent this year in Stockholm trading after abandoning its Azurite oilfield in the Republic of Congo. It pumped 4,200 barrels a day in August.
The investment marks the first foray into oil production assets for Nicosia, Cyprus-based Gunvor, which has its main trading operations in Geneva.
Founded in 2000 by Tornqvist and fellow billionaire Gennady Timchenko, Gunvor’s initial focus was trading Russian oil. Timchenko’s relationships with Russian government officials and Tornqvist’s trading experience helped the closely held company become a powerful force among trading houses selling crude from the country.
At its peak, Gunvor handled about a third of seaborne shipments of Russian oil. While its dominance has declined as competitors including Vitol, Glencore Xstrata Plc and Trafigura have moved in, Gunvor remains a key player in Russia, according to Tornqvist. “We are not walking away; we are doing less in Russia than we used to do and we are quite happy with that.”
Before taking up PA Resources’ rights issue, Gunvor had provided financing to the Stockholm-based company in exchange for a contract to sell its crude. The trading firm doesn’t expect to operate any of the production assets it invests in.
“This is a completely different type of business,” Tornqvist said. “I don’t believe Gunvor should try and mix its daily business in trading with this business.”
Likewise, Tornqvist isn’t interested in making large investments in early-stage exploration projects, saying “it would be far-fetched to develop oilfields just for trading.”
Gunvor also owns 30 percent of the Lagansky exploration block in the Russian part of the Caspian Sea. It purchased the stake for $30 million in 2009 and expects to sell it sometime this year, according to a bond prospectus.
PA Resources, suffering “short-term cash-flow tightness,” now has a “strong owner, someone with a decent part of the shares who knows what they are talking about from the oil industry,” Tornqvist said. The Swedish company should focus on its least risky projects to boost profit, he said.
It’s not just the small production companies on the block. Major oil producers such as Royal Dutch Shell Plc and Chevron Corp. are also splitting off some of their mature assets to weather commodity-market stagnation.
Gunvor previously sought to acquire assets in Nigeria from companies including Shell, and lost out to higher bidders. The trader still sees investment opportunities for production and exploration assets in the country, where “most of the oil is still to be pulled out of the ground,” according to the CEO.
“There is more of that coming,” Tornqvist said. “They are going to divest and I think there will be a limited amount of companies willing to look at this today.”
Vitol, based in Geneva, may be among them. It has already snapped up exploration and production assets in West Africa, including in Nigeria. The company, whose operated production totals about 10,000 barrels a day, is seeking to expand in the region, according to its website.
Once responsible for 97 percent of Nigeria’s oil output, major international energy producers will pump just 60 percent of the country’s oil in five years, Ecobank Research said this month, citing unrest, violence and crude theft in the Niger River delta as reasons for their withdrawal.
Already active in Africa through its trading operations, Gunvor may be able to help ease strained community relations that have plagued some foreign producers, Tornqvist said.
“A company like us would be able to deal with that in a better way,” he said. “If you are a small company you can work with local communities and make it work.”
--Editors: Amanda Jordan, Will Kennedy