Oil Origination

Does anyone have information on origination in bulk commodities, ideally oil? How much of it is "straightforward" buying/selling stuff to/from existing customers you already have on plain vanilla terms and how much of it is actually more creative and analytical finding of new profitable business with bespoke pricing, contracts, financing (thinking outside the box basically). Also, assuming you don't do this forever, where do you go with the skillset gained from this?
And am I right in thinking that this is an underappreciated job? Everyone wants to be a physical trader, but as an originator, you're making deals and building profitable new business, potentially on a large scale yet it doesn't seem to be as coveted or well-paid as a trader. What am i missing here?

 

I am currently interning under the origination team of the trading arm of one of the supermajor, so I think I should be able to answer this question.

Most of the time originators try to explore and pursue some new opportunities that fit with the company's strategy and try to execute it, the process will involve traders at some stage since they are the one that are going to trade the trade flows originated by us, projects originated can come in many way, such as offtake agreement with financing conditions attached, risk management expertise offered to non-trading companies, JV in certain projects/equity stake in some exploration or refinery. You definitely need some creativity to offer somethings that is not available in the market, that said most of the time the value you can offer are often constrained by your company's resources.

Basically origination is just a fancy word for business development, if you decided to switch career, you can join other company internal M&A division or join some PE houses that focus on natural resources sector. However most stay on their role as this is quite a cushy job, most people from my team have investment banking background and they usually cite the better lifestyle as the reason for career switch, plus I don't think they are taking much of a pay cut anyway. Origination usually don't hire fresh graduates as you don't have any contacts and network that can bring to the company, so usually originators are usually the more senior person.

One downside or upside depending on how you look at it is you wouldn't see the result of your work constantly, unlike trader where their PnL is always visible and is somehow representative of their performance, origination of some projects or deals can often take years to complete as it need to go through a very length negotiation and feasibility study process, this is a downside for people who like to have their result measured constantly however it's a upside for people who want more job stability as the company wouldn't fire an originator easily else they will lose the entire efforts did by this guy in previous time.

Chemically speaking, alcohol is a solution.
 
GoodBread:

Sounds like all paths lead to Rome but not a lot of people make it. I don't know if this is representative but I've seen posting for gas originators at Noble requiring M&A experience for juniors and physical marketing/operations/trading experience for senior guys. Meanwhile I'm doing equity research for a tiny HF, I need to figure something out.

thats a very good model and works... we did that at the bank I was at.

 

The Originators in my firm came from a operations/marketing analyst background at a few of the majors. Origination seems like a hard place to get into as a young guy, as it seems all the old timers never leave.

 

Thanks for the comments. @"monty09" My opinion on the lack of appreciation is based on my impression of what originators get paid relative to traders. Given that they are bringing in valuable business and expanding the company's reach, shouldn't they be compensated as well or better than traders? I don't even think that it's standard for them to get paid a % of PnL. Additionally, it seems like those who end up running trading companies are more often former star traders rather than star originators, if the concept of a star originator even exists. @"LongAlpha" PE and M&A sound quite different from origination, or what I think originators do at least. When I think of PE and M&A, I think more about structuring deals with physical assets whereas origination is more about structuring deals with commodities. You can leverage physical assets to make a structured commodity deal profitable but my impression isn't that M&A or PE shops are interested in having leading people on their team have a strong background in doing structured commodity deals (assuming no prior M&A experience). Origination sounds like a great complement to M&A and PE but the nature of the job seems different. I don't see how coming from a purely origination background, a PE or M&A shop would find you more appealing than another M&A guy. Am I totally off base?

 
quester:

Thanks for the comments. @monty09 My opinion on the lack of appreciation is based on my impression of what originators get paid relative to traders. Given that they are bringing in valuable business and expanding the company's reach, shouldn't they be compensated as well or better than traders? I don't even think that it's standard for them to get paid a % of PnL. Additionally, it seems like those who end up running trading companies are more often former star traders rather than star originators, if the concept of a star originator even exists.
@LongAlpha PE and M&A sound quite different from origination, or what I think originators do at least. When I think of PE and M&A, I think more about structuring deals with physical assets whereas origination is more about structuring deals with commodities. You can leverage physical assets to make a structured commodity deal profitable but my impression isn't that M&A or PE shops are interested in having leading people on their team have a strong background in doing structured commodity deals (assuming no prior M&A experience). Origination sounds like a great complement to M&A and PE but the nature of the job seems different. I don't see how coming from a purely origination background, a PE or M&A shop would find you more appealing than another M&A guy. Am I totally off base?

If you are very good you will be paid a ton - star originators do exist. One bank recently let one go after his contract expired cause he did too well - they have to pay him a pile of money. He declined to join every other bank and retired

 

@"monty09" I don't doubt that this has happened. My question for you then is, if you take the typical sub-par, average , above average and highly successful trader and compare him/her to the corresponding trader in each category, do you think there is an insignificant difference in compensation for the level of performance?

 

An off-take agreement isn't all that different from looking to buy an asset, you are essentially "renting it." Same goes with chartering ships long-term. Natural resource assets are a pretty different animal from the typical PE target. Mining deals have to take major cyclical considerations into account and ags/energy have their own idiosyncrasies.

I might be wrong on this but I suspect the head guys at big trading firms have roles closer to origination than trading. I doubt Alex Beard's stake in Glencore is simply a reflection of his day-to-day P&L but more a reward for the business he's built. The Vitol/Glencore deal with Rosneft is probably at the extreme end of these kind of deals and you Glasenberg and Taylor involved. Same goes for acquiring mining assets. It can happen because counterparties had agreed to give up their asset if they couldn't hold up their end of the bargain.

 
GoodBread:

an off-take agreement isn't all that different from looking to buy an asset, you are essentially "renting it."

Not entirely true.

GoodBread:

I might be wrong on this but I suspect the head guys at big trading firms have roles closer to origination than trading

True.

 

Yeah I realize I was overstating that in terms of how similar buying an asset is to structuring an off-take arrangement but I wanted to emphasise that the two are more similar than a simple PE/commodity trading dichotomy would suggest. The chartering example seems valid in that you are indeed renting an asset although having logistics assets is more part and parcel of your typical trading operation than buying actual production assets.

 

@"GoodBread" I would agree that there is some overlap between oil PE/M&A and origination. However I'd be surprised that the overlap is enough for you to be a viable candidate over an engineer/scientist or pure M&A professional. If you did join one of those shops after being an originator I would imagine that it would be as an advisor on a specialized area of a deal with limited upside/leverage at the firm. It's still an environment where understanding of geology/science and creative financial modelling (DCF, understanding financial statements etc.) is the driver behind the decisions and I fail to see how an originator would play a major role in that environment.

Regarding the big shots at Glencore, Vitol etc. having an origination job to a certain degree, I definitely agree with you that that's probably the case. What I will say is that generally, at that level of management, everyone is pretty much an originator to some extent, whether in finance, trading, credit etc. albeit in different ways. But if we're talking strictly about the core trading operation, those given access to these top jobs where you are involved in the big origination deals that the Taylors and Glasenbergs of this world are involved in are more often successful former traders than pure originators. Essentially I'm saying that for an equal level of success in his job, a trader will get more money and better career opportunities than an originator. At least that's what I'd expect.

 

What are you basing this on? Traders may have the benefit of more easily imputable P&L in certain cases but without the optionality that origination opens, you have to take on VaR and end up being a fancy hedge fund.

Besides Glencore, Trafi and Vitol don't have separate trader or originator roles as far as I know, it's really two sides of the same coin. "Pure originator" roles are a pretty recent thing to be honest. The idea of having one guy dedicated solely to structuring long-term deals to open up optionality for traders probably seemed like overkill 20 years ago.

And as far engineering or M&A backgrounds, let's be real. Most dudes going into PE have 2 years of investment banking analyst, it's not exactly rocket science. What matters is having a book of relationships and knowing how natural resource deals go down, something you are much more likely to pick up structuring deals for a trading firm. And as far as engineering goes, it might help to get a foot in the door but I suspect most originators can look at a spec sheet and have a good idea of what something's worth. And if you need to do deeper due diligence, there are specialists for that.

 

Traders might get paid more esp if they are making % of book. But one thing you have to consider is in Origination, your contacts and relationships are what make you valuable. Having a bad year as a trader might get you kicked out the door while as a originator you just pick up your rolodex and move elsewhere.

Another thing you have to consider is I would think there are way more Traders in the world than Originators, so while traders might make more on average, the median might be higher as a originator.

 

I'd be surprised that building a network where you can constantly bring in profitable deals is that easy. Even once that is done, the deals you can do regardless of your network will depend on your company's risk appetite, financial strength and in-house expertise. So just like the trader who gets kicked out after a bad year, I don't think you're guaranteed to land on your feet more easily than a trader. It'll be easier if you have a good network, just like it'll be easier as a trader if you have built up a good reputation in the business over the years despite your bad year. Additionally it sounds like origination jobs are not that easy to come across.

As for compensation, maybe a larger number of traders than pure originators is the reason why we hear of more outliers as you pointed out. However, I'm not sure that originators get paid a percentage of "P&L" like traders, which would limit upside if the compensation structure is indeed different.

 

@"fluffhead" good to know. What would you do as a junior originator given the lack of network? And how do you build your own network in that role? Is it a matter of getting introduced to contacts by the senior originators? If so, does that imply that your success in the early years depends on the people you can get put in contact with be your firm, which limits the amount of control you have in becoming a good originator in the short/medium term?

 

Again depends on the shop. But the skill set required is similar to what is developed in an IB/PE stint. Juniors are typically involved the complete deal process: pitching, structuring, internal approval, execution, and portfolio mgmt. Some shops will break these responsibilities across desks, but as junior originator you will want to be involved in the complete process. Along the way, you are getting an understanding of the products and developing your network. And yes, at first, your network and deal flow will be largely dependent on the seniors.

 

Any idea how it works sourcing deals in general? I imagine that if you're a big trader, people may come to you asking whether you can help them achieve a certain business goal and you go about trying to structure something that makes sense and money. However, assuming people don't come asking for help, how do you source a new deal? Is it a matter of cold calling new potential partners and people in your network to see what their needs are and seeing whether you can take the other side of whatever deal they're looking to do?

 

Basically yes. Let's take natty as an example.

Suppose you are a trader with no production assets. You can get in touch with producers to sign off-take agreements, guaranteeing you with supply. Sometime you might just be getting some initial paperwork signed so you can establish certain producers as counter parties, giving you optionality so you can buy gas other than that which you get from your base of off-take agreements if its advantageous.

On the other side, you'd be looking for people who will buy gas from you. Sometimes it might be long-term, structured deals, other times it might just be getting a small gas/power consumer to sign to be a gas trading counterparty with you. There are small gas trading firms who focus on having 100s of small counter parties which gives optionality in terms of counter parties although they can't take much volume individually.

The small guys you would probably start with cold-calling.

 

Regarding cold-calling, any idea how it goes down? Is it basically "Hi, my name is X, I work for company Y where we do Z and was wondering whether you have any financing/supply/offtake/risk management projects that we can assist you with"?

 

Is anyone on here familiar with how origination works in Australia? Obviously, Australia is a production center for many major commodities but I get the sense that most trading houses only have small presences there and that deals are conducted from hubs elsewhere. Is this accurate? How many originator roles are there in Australia and who would they be with? Thanks in advance to anyone who has info.

 

I missed this thread. To begin with, this is not a junior job whatsoever and any of the so-called junior guys in my opinion are just truly structuring and excel monkeys.

Next, you ask why originators are not that respected. Couple reasons, it is one of the most cushy jobs known to man. They do not make direct P&L, they do not fully consider costs, do not see through some of their deals. It is very hard to find and keep onto top originators, because similar to the dude in "Liars Poker" they need to have the sales skills to keep good relationships but also understand the product and marketplace. Most originators truly are not good and simply live off some relationship they had from back in the day, and keep that 1 or 2 customers they know, good ol boys style. A good one is absolute gold and truly can see the big picture and execute.

How to become one? Majority are former traders (who were not good at the whole risk thing), logistical experts, marketing experts, worked for a utility/producer/pipeline/etc (know the rules of the game) types.

Lastly, personally I do not bankers make the best originators the best one are logistical experts so if you are truly interested in this path starting out in banking/research does not make as much sense to me, go get your hands dirty instead.

 
marcellus_wallace:

I missed this thread. To begin with, this is not a junior job whatsoever and any of the so-called junior guys in my opinion are just truly structuring and excel monkeys.

Next, you ask why originators are not that respected. Couple reasons, it is one of the most cushy jobs known to man. They do not make direct P&L, they do not fully consider costs, do not see through some of their deals. It is very hard to find and keep onto top originators, because similar to the dude in "Liars Poker" they need to have the sales skills to keep good relationships but also understand the product and marketplace. Most originators truly are not good and simply live off some relationship they had from back in the day, and keep that 1 or 2 customers they know, good ol boys style. A good one is absolute gold and truly can see the big picture and execute.

How to become one? Majority are former traders (who were not good at the whole risk thing), logistical experts, marketing experts, worked for a utility/producer/pipeline/etc (know the rules of the game) types.

Lastly, personally I do not bankers make the best originators the best one are logistical experts so if you are truly interested in this path starting out in banking/research does not make as much sense to me, go get your hands dirty instead.

@"marcellus_wallace" what does being a "structuring and excel monkey" and wouldn't that be a desirable entry level role? I'm not too sure what to make of your negative view of originators. Are you basically saying that most originators are not good at risk management and the little details in deals? Aren't deals vetted by others in a given firm before being concluded (e.g. risk, logistics, trade finance) so that you have a number of opinions on the profitability of a deal? Can having a background as a risk management analyst help get you directly into a junior role in origination with having to become a trader first?
 
Best Response

Stumbled across this a bit late. 4-year originator in a supermajor dealing with gas. Our deliverable is structuring and negotiating deals which embed optionality, both in and out of the money, for traders to monetize in the short term. Most of our deals are 5 to 15 years and deliver NPV of 100m to 1b. So do the math whether the work is valued by the organization. My former boss closed a 2.5b NPV deal and earned enough bonus they put him on a 4 year payout scheme so he wouldn't easily jump ship. Me? I saw a fraction of that, but still more money that I've ever earned in my O&G career, plus very generous perks eg. unlimited expense accounts and frequent J class intercon travel. Will it stick in this oil price environment? Ask me in 6 months. Buy me a drink while you're in any of the trading hubs and we can talk more about the market

 

@"punchypots" Thanks for this good piece of info. SB for you. Can you explain how yours and your team's skill set and understanding of nat gas trading differs from that of your nat gas traders? Any idea how common it is to close a deal like the $2.5bn one which your boss boss? Trying to get a sense of whether this is an outlier or not. As an originator, is the bonus paid a percentage of the NPV (or P/L) of the deal, similar to how many traders are paid or is it computed differently? Any idea what the % paid out is if it is proportional to P/L? I figure your answers will probably be applicable across a range of commodity sectors including oil.

 

@"quester" the main difference between long term and short term in this industry is mainly complexity and monetization. Long term deals take a long time to negotiate and involve extensive deal team review, including finance, legal, ops etc so can be a bit of a pain in the arse. ST traders rely on the options built in the LT contract to make money on the day, so more directly see P+L. There are advantages to both - LT is more BD so we get rewarded for closing innovative, high NPV deals, regardless of whether in the money. ST actually delivers P+L on the day and is closely influenced by the vagaries of the spot market. Big billion dollar deals aren't common, you get maybe 2 or 3 in a career and you're made. Compensation is quite opaque - part of it is your ranking vs the bonus pool, part is how much you've brought in. 6 figures for most, 7 if you're top of your game. This advice applies to gas and LNG, and to some extent crude and products.

 
monty09:

good friend of mine runs the commodities arm of a banks s/t and he told me recently that his crude orig guys are the highest paid guys in the firm the trailing three years

Any clue whether this due to a situation similar to that which @"punchypots" mentioned where the crude guys closed one massive deal which they are getting compensated over a number of years, or is this mostly due to consistent closing of a number of deals year after year?

 

I could be wrong but I dont think they are paid over multi year but more to the fact that most shops now dont pay all $$ in year earned... lets say you make 1mm in bonus.. you may see 250k in cash now, 250k in year 2 and so now or a mix of cash/stock etc etc .... so going forward you will see 100% bonus in 2015 but its a mix of 2015,2014,2013,2012 bonus pay outs... the idea of a bonus is mostly over now and everyones "performance bonus" is looking more and more like a "retention bonus"

 
monty09:

I could be wrong but I dont think they are paid over multi year but more to the fact that most shops now dont pay all $$ in year earned... lets say you make 1mm in bonus.. you may see 250k in cash now, 250k in year 2 and so now or a mix of cash/stock etc etc .... so going forward you will see 100% bonus in 2015 but its a mix of 2015,2014,2013,2012 bonus pay outs... the idea of a bonus is mostly over now and everyones "performance bonus" is looking more and more like a "retention bonus"

I see. As an aside, if you are getting paid the bonus which you earn in one year over the course of a couple years and you leave to another company, do you get anything at all out of what you would've normally received over the next few years? Or is it up to your new company to sort you out if you're leaving money on the table at your old firm? And what if you are fired? Could it happen that your company owes you so much bonus money over the next couple of years from one amazing year that they would just rather fire you, assuming you're not making a killing for them anymore?
 
monty09:

you leave on your own and they owe you nothing. trust me it happens a lot. Also most people will try to broker a sign on but you will never get 1:1.... i know a guy at a bank who had some major equity take a sub 1mm cash sign on to move firms... is it fair? no does it happen often? yes

Any idea what happens if you get let go from your firm and you have deferred comp still outstanding?
 

Not just commodities most trading jobs if not all now have retention bonuses, most brought those rules in 2012. If you leave you get nothing, hence retention point. If you get canned they must pay you out somewhat of that structure again those the rules.

2500mm deal in any environment is a career deal that may never come about again. If you really need to ask how common that sort of deal is, not sure what to tell you. It is right up there with the volatility trading saw in Jan-Apr last year where the entire grid blew up, that shit ain't happening again again career year for most if not all.

A deal that size is major slam dunk, but again I will lean to saying that 2500mm NPV does not always end up being 2500mm cash flow end of the day. EIther way you bring in that size of an elephant you are kicking major arse.

quester, to your other questions I missed way back. First you off if you rely on risk/logistics/finance to vet your deals you are most likely not smart enough to be doing a deal like that in the first place. Very few firms hire top notch people in those functions, so it would be weird for them to understand the opportunity better than commercial folks. You require buy-in from various groups but at end of the day commercial leads the ship.

No I do not think simply being a risk person gives you enough of a background to jump to this realm of work. Risk does not deal with the day-to-day risks or complexities of the physical side. They just look at overall book VAR and report P&L.

 

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