Energy bankers may be 2011′s hottest commodity
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
NEW YORK — Bankers in the oil and gas business know a thing or two about the laws of supply and demand. But they’re not accustomed to being the commodity in question. Some of the world’s cities may be overrun with financial types, but with energy sector activity rising they’re scarce in swampy, sprawling Houston. Bankers there may benefit accordingly in 2011.
As when rationalizing the price of crude, reasons for the popularity of energy specialists are easy to find. There are more buyers than ever for their talents, and there is a limited supply of professionals with both financial skills and those of a petroleum engineer or geophysicist.
First, the demand side of the equation. By one recruiter’s count there are some two dozen managing director positions open in Houston at firms ranging from advisory house Lazard to Canadian powerhouse Bank of Montreal. Their hope is to grab a bigger slice of one of the few investment banking fee pools that’s expected to grow nicely in 2011. So far this year, energy deals worth $462 billion accounted for 21 percent of worldwide M&A — the highest percentage on record, according to Thomson Reuters data. In the United States, the share was even higher, 29 percent, making it the most active sector for deals.
Wall Street’s top banks are trying to retain their positions as consiglieres to titans like Exxon Mobil and Chevron. But at the same time they’re struggling to keep pace with the growing spectrum of equipment makers, seismic technologists, nimble drillers and pipeline operators whose valuations have been lifted by robust prices for crude, emerging markets’ thirst for resources and a boom in U.S. natural gas activity.
Meanwhile, the global competition for hydrocarbons has brought new players into the business. Banks from Canada, Asia and Europe are trying to keep up with the rapidly expanding horizons of once-domestically focused oil groups, such as China’s CNOOC, or India’s Reliance. That requires on-the-ground expertise not just in Houston but in other centers of energy expertise such as Calgary, Rio de Janeiro and Toronto.
Now, what about supply? As far as Houston is concerned, a Gulf of Mexico posting may sound like hardship next to Paris. But it’s not just that Hermes-tied bankers don’t fancy the blue-flamed landscape of Texas City’s refineries at twilight.
To be a credible adviser in the oil patch, it also helps to have a background in the business — for example as a former petroleum engineer. Some grey hair and a Texas drawl can also make locally based clients feel more at home. Since many banks only opened sizeable outposts in Houston over the past decade, the selection of qualified talent isn’t that big.
That explains Stephen Trauber. The former head of UBS’s energy practice, along with a gaggle of colleagues, defected to Citigroup earlier this year for a pay package that news reports pegged at $30 million. Because Citi already had a strong energy group — it actually ranked ahead of UBS in the corporate finance rankings — Trauber was named one of three co-heads.
Remarkably, Citi has thus far managed to retain the bulk of its existing team. The end result is that despite the movement of the UBS team, no new supply has been put into the market. UBS has simply joined the list of banks trying to beef up their presence.
There are ways to fill the Houston talent gap. Some banks say they may dispatch troops from cities where energy corporate finance activity, or the ability to generate juicy fees, has slowed of late, including London and Dubai.
The other option is to buy one of Houston’s smaller boutiques. That’s what Merrill Lynch did in 2006 with the purchase of Petrie Parkman. At the time Merrill was struggling to rebuild its energy business after a scandal involving Nigerian barges and Enron. Independent firms like Simmons & Company and Tudor, Pickering, Holt say they’re not interested in selling. They’re too busy making lots of money.
But Simmons, focused on the oilfield service and equipment industry, saw its founder pass away earlier this year. And three-year-old Tudor, Pickering is about to embark on global expansion. Economic logic would suggest one of the many banks hoping to satisfy demand for a Houston build-up with limited supply will soon be sniffing around.