Texas Blackout Boosts Macquarie Bank By Up To $270 Million

The deep freeze that plunged millions of Texans into darkness is rippling through energy markets in unexpected ways, producing a financial windfall for Macquarie bank and severe pain for other companies caught up in the disruption.

The extreme weather froze wind turbines and oil-and-gas wells, closed oil refiners and prompted power stations to trip offline, sending a jolt through energy markets. Wholesale power prices rocketed, as did spot prices for natural gas in Texas, Oklahoma, Kansas and Arkansas.

The turbulence led to a bonanza for commodity traders at Macquarie Group Ltd., whose ability to funnel gas and electricity around the country enabled them to capitalise on soaring demand and prices in states such as Texas.

The bank bumped up its guidance Monday for earnings in the year through March to reflect the windfall. It said that net profit after tax would be 5% to 10% higher than in the 2020 fiscal year. That equates to an increase of up to $273.1 million. In its previous guidance, issued Feb. 9, Macquarie said it expected profits to be slightly down on 2020.

“Extreme winter weather conditions in North America have significantly increased short-term client demand for Macquarie’s capabilities in maintaining critical physical supply across the commodity complex, and particularly in relation to gas and power,” the bank said.

Macquarie’s windfall shows how big profits can be made wagering on relative scarcity of natural gas in a country awash in the fuel.

The U.S. shale-drilling boom unleashed so much gas over the past decade that prices have been depressed to the point that producers with gushers have gone bankrupt. Yet gas buyers, such as power plants and manufacturers, are routinely left paying surging prices when demand peaks during winter storms.

Behind such instances of energy feast and famine is a gas infrastructure system that has failed to keep up with all the drilling. Pipelines laid decades before the shale boom are often in the wrong places, or too small to meet today’s demand. Having space reserved on certain pipelines can become incredibly lucrative when uncharacteristic weather causes swells in demand.

Scarcity in Texas and the Great Plains was amplified last week when temperatures dropped low enough to freeze shut many of the region’s gas wells and other energy infrastructure. Capacity on pipelines into the region became precious. Traders and energy firms that had paid in advance for the right to use these supply routes were suddenly in position to rake in huge profits as utilities vied for fuel deliveries.

Macquarie describes itself as the second-largest marketer of physical gas in North America behind BP PLC, with a team in Houston and access to 80% of pipelines spanning the U.S., according to a person familiar with the matter. The business, which Macquarie has built out for over a decade, received a boost from the acquisition of Cargill Inc.’s North America power and gas division in 2017.

The bank rents access to natural-gas pipelines and electricity networks across the U.S., enabling it to profit when prices in some regions are significantly higher than in others and when consumers are in urgent need of fuel or power. That was the case last week, when frozen energy infrastructure and the closure of oil-and-gas wells set off a race for natural gas among Texas power plants and other consumers.

Macquarie sent large volumes of gas from the north of the U.S. to the south, where the cold weather sent prices soaring last week, the person familiar with the matter said. It supplied electricity in Texas as well as gas to generate electrical power.

At one point, natural gas changed hands for more than $900 per million British thermal units at the ONEOK Gas Transportation hub in Oklahoma, according to commodities data provider S&P Global Platts. By Friday, prices at the hub had fallen back to about $14 per million British thermal units. That was still comparatively high: Benchmark futures for U.S. natural gas, which are tied to delivery at Henry Hub in Louisiana, have generally cost between $2.50 and $3.50 per million British thermal units in recent months.

Shares of Macquarie rose 3.4% on Monday after the company raised its profit outlook. They are now down 2.8% over the past 12 months.

Millions were left without power and heat in Texas last week as the lowest temperatures in decades wreaked havoc on the state’s utilities. Frozen water lines burst and left big residents in cities without safe drinking water. Stores closed because they had no power, which made food and water even more scarce.

Roughly 70 deaths, mostly in Texas, have been attributed to the cold weather, according to the Associated Press. Some are believed to have frozen to death in their homes.

Macquarie last year provided an undisclosed amount of investment capital to upstart Houston-based utility Griddy Energy LLC, whose business model is to pass variable wholesale electricity prices through to customers. Griddy customers complained of paying lofty sums when power prices shot up to thousands of dollars per megawatt hour last week, according to local Texas media reports.

One customer told the Dallas Morning News that his electric bill for five days stood at US$5000, the amount he would normally pay for several years of power. Another told the Dallas-Fort Worth NBC affiliate that he had been charged more than US$16000 for February.

A Griddy spokeswoman said an order by the state utility agency to the operator of the electricity grid to make market prices reflect the scarcity of power pushed up prices for its customers. On Feb. 12, the company started emailing and texting customers to say they might be better off switching providers for a short time to avoid exposure to wholesale prices, she said.

Corporate casualties from the freeze are also starting to emerge. Just Energy Group Inc., a Canada-based energy supplier, on Monday said it faced a financial hit of about US$250 million, in part from buying electricity at sky-high prices in Texas during the cold blast. The company, which said the blow could stop it from continuing as a going concern, saw its shares slump 31%.

In another instance, shares of Atmos Energy Corp. fell 4.4% Monday after the Dallas-based gas supplier said it would have to pay between US$2.5 billion and US$3.5 billion for gas it bought at elevated prices in Texas, Colorado and Kansas. Atmos may issue stock or raise debt to help to pay for the purchases, it said Friday.

German energy company RWE AG said its 2021 earnings would be hit by outages at the company’s wind turbines, as well as from high prices for electricity.

Berkshire began liquidating its big stake in the banking company in mid-July—and has already unloaded about 15% of its interest. The selling has been fairly aggressive and has totaled about $6 billion. (Berkshire still holds 883 million shares, an 11.3% interest worth $35 billion based on its most recent filing on Aug. 30.)

The selling has prompted speculation about when CEO Warren Buffett, who oversees Berkshire’s $300 billion equity portfolio, will stop. The sales have depressed Bank of America stock, which has underperformed peers since Berkshire began its sell program. The stock closed down 0.9% Thursday at $40.14.

It’s possible that Berkshire will stop selling when the stake drops to 700 million shares. Taxes and history would be the reasons why.

Berkshire accumulated its Bank of America stake in two stages—and at vastly different prices. Berkshire’s initial stake came in 2017 , when it swapped $5 billion of Bank of America preferred stock for 700 million shares of common stock via warrants it received as part of the original preferred investment in 2011.

Berkshire got a sweet deal in that 2011 transaction. At the time, Bank of America was looking for a Buffett imprimatur—and the bank’s stock price was weak and under $10 a share.

Berkshire paid about $7 a share for that initial stake of 700 million common shares. The rest of the Berkshire stake, more than 300 million shares, was mostly purchased in 2018 at around $30 a share.

With Bank of America stock currently trading around $40, Berkshire faces a high tax burden from selling shares from the original stake of 700 million shares, given the low cost basis, and a much lighter tax hit from unloading the rest. Berkshire is subject to corporate taxes—an estimated 25% including local taxes—on gains on any sales of stock. The tax bite is stark.

Berkshire might own $2 to $3 a share in taxes on sales of high-cost stock and $8 a share on low-cost stock purchased for $7 a share.

New York tax expert Robert Willens says corporations, like individuals, can specify the particular lots when they sell stock with multiple cost levels.

“If stock is held in the custody of a broker, an adequate identification is made if the taxpayer specifies to the broker having custody of the stock the particular stock to be sold and, within a reasonable time thereafter, confirmation of such specification is set forth in a written document from the broker,” Willens told Barron’s in an email.

He assumes that Berkshire will identify the high-cost Bank of America stock for the recent sales to minimize its tax liability.

If sellers don’t specify, they generally are subject to “first in, first out,” or FIFO, accounting, meaning that the stock bought first would be subject to any tax on gains.

Buffett tends to be tax-averse—and that may prompt him to keep the original stake of 700 million shares. He could also mull any loyalty he may feel toward Bank of America CEO Brian Moynihan , whom Buffett has praised in the past.

Another reason for Berkshire to hold Bank of America is that it’s the company’s only big equity holding among traditional banks after selling shares of U.S. Bancorp , Bank of New York Mellon , JPMorgan Chase , and Wells Fargo in recent years.

Buffett, however, often eliminates stock holdings after he begins selling them down, as he did with the other bank stocks. Berkshire does retain a smaller stake of about $3 billion in Citigroup.

There could be a new filing on sales of Bank of America stock by Berkshire on Thursday evening. It has been three business days since the last one.

Berkshire must file within two business days of any sales of Bank of America stock since it owns more than 10%. The conglomerate will need to get its stake under about 777 million shares, about 100 million below the current level, before it can avoid the two-day filing rule.

It should be said that taxes haven’t deterred Buffett from selling over half of Berkshire’s stake in Apple this year—an estimated $85 billion or more of stock. Barron’s has estimated that Berkshire may owe $15 billion on the bulk of the sales that occurred in the second quarter.

Berkshire now holds 400 million shares of Apple and Barron’s has argued that Buffett may be finished reducing the Apple stake at that round number, which is the same number of shares that Berkshire has held in Coca-Cola for more than two decades.

Buffett may like round numbers—and 700 million could be just the right figure for Bank of America.

Texas Blackout Boosts Macquarie Bank By Up To $270 Million

Macquarie shares up as a result of Texan deep freeze.

When will Berkshire Hathaway stop selling Bank of America stock?