Swiss traders lured by oil assets in pursuit of scale

* Dearth of M&A activity creates opportunities

* Traders seen as "selective" in choice of assets

* Investment a way to lock up long-term supplies

By Emma Farge

GENEVA, Sept 25 (Reuters) - Swiss oil trading houses are investing tens of millions of dollars in oil assets, morphing from middle men to producers, as they look to swoop on cheap assets during a period of depressed M&A activity.

With oil trading profit margins often as low as 1 percent, traders are seeking to diversify, especially in Africa where Vitol and Glencore are already pumping oil.

"Most other natural buyers are not focused on M&A at the moment as they are focused on exploration, creating opportunities for trading houses to get even further up the value chain," said Oswald Clint, a senior research analyst at Bernstein.

Based on data for the first nine months of 2013, energy analysis group Wood Mackenzie estimates that M&A activity in the oil and gas upstream sector this year could be the lowest since 2004.

Geneva's Mercuria last month bought a minority stake in Seplat, an independent Nigerian producer which has three oil blocs in the Niger Delta, for around $60 million, according to a statement from the seller MPI.

Gunvor also made its first big foray into oil exploration in June by agreeing to buy the bulk of the $136 million rights issue by Swedish oil firm PA Resources which has projects in the North Sea, Tunisia, Republic of Congo and Equatorial Guinea, among other places. This leaves Gunvor with a 49.9 percent non-controlling stake.

The latest purchases come at a time where many traders are awash with liquidity, after successfully tapping debt markets for the first time.

Their prime targets are often minority stakes in producers or, in the case of a recent bid by Vitol for Sterling Resources (Other OTC: SGURF - news) , a full takeover following a steep decline in the firm's share price. Vitol later withdrew its plans.

Oil traders holding stakes in producers could stand to gain a lot if Brent prices hold near current levels of $110 a barrel, potentially dwarfing the profits they could expect from trading.

Wood Mackenzie's Luke Parker said that trading houses could expect a return of over 10 percent if oil prices outperform the $85-$90 a barrel level - taken as the price assumption for company valuations.

PURSUIT OF SCALE

Over the last few years, large oil traders have accumulated assets across their businesses as they seek vertical integration and greater control of supply chains.

Last year for example, Vitol and Gunvor both bought European refineries from insolvent Petroplus.

Investment in upstream assets is partly about emulating asset-rich Glencore, which began pumping oil in late 2011 through a stake in an oilfield in Equatorial Guinea although Vitol opened its exploration and production unit in 2004.

"Some have attempted to replicate Glencore's model. It's the ambition of becoming an integrated oil and gas actor," said Ecobank's head of energy research Rolake Akinkugbe.

Pumping oil themselves is also a way for traders to secure long-term access to defend market share against both their direct competitors and expanding state oil firms, such as Azerbaijan's SOCAR.

The risk for them is that increasingly active state oil firms, marketing directly to consumers, shrinks the size of the so-called "tradable market", defined as volumes which are not distributed directly by producers to consumers.

"There are pressures as the world is being carved up, meaning that in order to play the game trading houses have to look to make investments," said Robert Piller, commodities lecturer at the Geneva Business School.

"It is about accessing commodities," he added.

Even in Africa, traditionally a region where traders enjoy plentiful access to government oil exports, some state oil firms such as Gabon's GOC have expressed an interest in marketing their oil directly.

"National oil companies...are increasing their marketing and trading activities so there's less of a market for off-take contracts," said Roland Rechtsteiner, managing partner at Oliver Wyman.

"Sometimes they can only access new flows through significant investment."

"SELECTIVE OPPORTUNITIES"

So far most investments have mostly been carefully selected niche opportunities, often with the traders in the role of minority stakeholder rather than operators.

In the most recent example, this week Mercuria bought a $50 million stake in Romanian gas producer Amromco Energy.

"Traders will never play any significant role, or any role whatsoever, in massive exploration such as arctic drilling," said Gunvor's Chief Executive Torbjorn Tornqvist at an FT event earlier this year.

"(But) Maybe they could make a difference there in financing the operation, in taking risks which the bigger companies cannot or will not do. I think trading houses are looking at those selective opportunities in upstream."

In some areas, such as onshore Nigeria, large companies like Royal Dutch Shell (Xetra: A0ET6Q - news) and Chevron have sought to scale back, creating opportunities for new investors.

But some say traders' interest in production could be short-lived and might fade if the Brent price falls again, making it harder to break even on oil projects.

"If the oil price reverses they might be sellers," said Duncan Clarke, head of African oil experts Global Pacific & Partners (Frankfurt: A0JJY6 - news) .

"This is not meat and potatoes for them. It's more like the gravy."