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Citadel made one of its biggest investments yet in the physical US natural gas market, expanding in one of its most profitable business areas.
The hedge fund, led by Ken Griffin, agreed to buy assets from closely held Paloma Natural Gas LLC in a deal valued at about $1 billion, people familiar with the matter said. The acquisition gives Citadel access to acreage and producing assets, though it will not operate them directly.
While Citadel is already one of the most active traders of physical gas in the country, a foray into the drilling and production side of the industry is relatively unusual for a hedge fund.
Griffin, who started trading convertible bonds out of his dorm room at Harvard, has produced bumper profits from commodities investments in recent years, driven by natural gas trading both in Europe and the US, Bloomberg News has reported. The firm raked in at least $4 billion in profits from commodities in each of the last three years. In 2022, they accounted for about half of the firm’s record haul of $16 billion.
Citadel is down less than 1% for the year through Friday, according to a person familiar with the matter.
Natural Gas Boom
Griffin is joining a wave of interest from energy traders and investors in natural gas. Demand for the fuel is soaring, driven by rising US exports along with a jump in power consumption from data centers and artificial intelligence. Gunvor Group is looking to buy more US gas production assets, while Mercuria Energy Group Ltd. has invested in Black Bayou Energy Hub LLC, a gas storage facility in Louisiana.
“Investing in the growth of independent gas producers helps to ensure America’s energy independence, and Citadel performs an important role in that effort,” a spokesperson for Citadel said in a statement. The company didn’t provide details of the Paloma purchase, which was earlier reported by Hart Energy.
Physical trading allows firms to take advantage of more arbitrage opportunities by storing and transporting commodities, in addition to trading financial instruments linked to them. The businesses can also act as a natural hedge to financial trading, potentially reducing risks.
But such operations can take time to bring on board, given deals have to be signed over long time horizons and firms need be registered as counterparties in different areas of the market. Exiting positions can also be difficult in the relatively less liquid pockets of the market where physical traders operate.
Paloma Natural Gas listed 57,000 net mineral acres in Louisiana’s Haynesville shale basin on its website. The company did not respond to calls or emails for comment. EnCap Investments, which backs Paloma, did not respond to a request for comment.
Other large multistrategy hedge funds, including Jain Global and Balyasny Asset Management, have started to build out physical natural gas trading operations too, though both are in their nascency. Roscommon Analytics also has hired an additional US gas trader with an eye to go into the physical market.
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Citadel got a head start in 2014 when it set up a merchant trading business and built one of the largest physical natural gas businesses in North America with a portfolio of transportation and storage assets. Former Morgan Stanley commodities chief Jay Rubenstein leads Citadel’s effort.
In 2020, the firm invested in what was then called Ultra Petroleum Corp, one of the largest oil and gas drillers in Wyoming, the people said. Citadel subsequently divested its stake in 2023, when the company was called PureWest Energy. PureWest did not respond to a request for comment.
The Haynesville basin is viewed as a hotspot for gas assets given its proximity to export terminals expected to start up in the next few years. Newly formed Expand Energy has gained more scale in Haynesville assets, as well as in Appalachia.
The US is set to expand its LNG export capacity by 60% in the next few years, according to BloombergNEF.
— With assistance from Katherine Burton
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