Castleton joins oil trade titans with Morgan Stanley deal

By Jonathan Leff

NEW YORK (Reuters) - Castleton Commodities International will buy Morgan Stanley's physical oil business, the largest and oldest on Wall Street, vaulting the Connecticut-based merchant into the big leagues of global crude and fuel traders.

In a long-awaited deal that appears to mark the end of the Wall Street bank's more than three-decade history as a major player in physical oil markets, Castleton will gain several dozen oil tank storage leases, physical oil supply and purchase contracts, and a team of about a hundred traders.

Neither Morgan Stanley nor Castleton released terms of the transaction, but analysts estimated the deal to be valued at slightly more than $1 billion. This principally represents the value of oil inventories in storage or transit. The deal will not be material for Morgan Stanley, the bank said.

Castleton, a Connecticut-based trading group now owned by a private equity group of hedge fund and trading veterans, will have more scale and scope to compete in the massive global oil market.

The deal "aligns well with our goal of becoming a top-tier, global multi-commodity merchant," said CCI's Chief Executive and President William C. Reed II, a former Enron and hedge fund trader who has been running the firm since 2008.

Morgan's Global Oil Merchanting unit has traded around 2 million barrels per day (bpd) of crude and oil products over the past five years, and has 45 oil storage leases for some 30 million barrels, mainly in the United States and Europe, CCI said.

About a hundred front-office staff, including traders and shippers, are expected to move to CCI with the transaction, according to a person familiar with the deal. In total, as many as 200 employees may transfer to CCI, a second person said. The bank's Tom Simpson and Fabrizio Zichichi will lead CCI's global oil trading business, the firm said.

While Morgan Stanley will maintain its client-facing oil trading business, including both physical and paper transactions, the sale concludes the bank's years-long effort to divest a physical trading division that had come under intense regulatory scrutiny and suffered waning profitability.

The bank still plans to sell its stake in oil tanker group Heidmar, which was not part of the deal, a source said.

GOING BIG ON OIL

For Castleton oil has been a weaker spot relative to the group's large books in power, natural gas and gas liquids markets. Its predecessor firm sold a portfolio of midstream gas liquid assets for $2 billion.

Castleton, which was originally founded nearly two decades ago as the energy trading division of French commodities merchant Louis Dreyfus, has already doubled in size to more than 650 staff since it was bought in 2012 by a private equity group including famed hedge fund managers Glenn Dubin and Paul Tudor Jones, as well as Paul Fribourg, the head of Continental Grain.

With the Morgan Stanley team, the group's global headcount is expected to top 900, according to a person familiar with the company. While still small compared to rivals like Vitol and Trafigura, which employ thousands of people to run large infrastructure subsidiaries or projects, it is a sizeable sum for a relatively asset-light company, rivals say.

END OF AN ERA

Assuming the deal clears regulatory approval, which is expected in the second half of the year, it will be the third time lucky for Morgan Stanley, which has been trying to sell the division for years as the Federal Reserve stepped up pressure on Wall Street to get out of the physical commodities business.

Early talks with Qatar failed to clinch a deal, while a preliminary agreement in late 2013 to sell to Russian oil giant Rosneft fell apart as Washington stepped up sanctions on Moscow.

Wall Street's largest and most enduring oil trading desk rose to fame in the early 1990s as a trader named Olav Refvik secured a host of leases on storage tanks at a key import hub, earning him the moniker "King of New York Harbor." Refvik and several other senior founding executives left several years ago.

A Senate investigations report published last year revealed that while Morgan Stanley used to charter about 100 oil tankers a month, by 2014 the number had declined to 10-15 a month. Net revenues from its oil desk had declined from a peak of around $1.3 billion in 2008 to $676 million in 2012, it showed.

Still, the bank has not completely turned its back on commodities. It said commodities revenues rose 2 percent in the first quarter even after its "strong performance" a year earlier, when cold weather spurred massive volatility.