Morgan Stanley, Citi Lose Oil Analysts as Hedge Funds Hire

Date: Tuesday, June 17, 2008
Author: Jim Kennett and Jim Polson, Bloomberg

Wall Street is losing its top oil analysts as securities firms suffer record losses and hedge funds offer the promise of higher pay.

Morgan Stanley's Douglas Terreson and Citigroup Inc.'s Doug Leggate, ranked first and second by Institutional Investor on coverage of the biggest oil companies, left their positions, the banks said. Geoff Kieburtz, the No. 3 analyst for oilfield contractors, is leaving Citigroup. Robert Morris, the top-ranked analyst for independent oil companies such as Anadarko Petroleum Corp., left Bank of America earlier this year.

Exxon Mobil Corp., Anadarko and other oil stocks rose to all-time highs this year as crude futures surged 46 percent to a record $139.89 a barrel and natural gas jumped 73 percent. The exits also came as banks and securities firms cut more than 83,000 jobs after the collapse of the subprime mortgage market led to $390 billion in writedowns and losses.

``Energy's been a hot area and you're getting some big turnover,'' said James Halloran, who helps oversee $38 billion in assets at National City Private Client Group in Cleveland. ``A lot of this has to do with Wall Street either not paying the same rate, or not being the same place, to be as fun anymore.''

Morgan Stanley dropped coverage of the three largest U.S. oil companies -- Exxon Mobil, Chevron Corp. and ConocoPhillips - - on June 4, after Terreson left, bank spokeswoman Jennifer Sala said last week. New York-based Citigroup, the largest U.S. bank by assets, got notice from Leggate on May 30.

Citigroup Defections

In a May 14 memo, Jonathan Rosenzweig, director of Americas research for Citi Investment Research, told employees Kieburtz was leaving to ``pursue another opportunity.'' Citigroup spokesman Duncan Smith confirmed the contents of the memo.

Faisel Khan, who covers refiners and gas-related companies, will take over Leggate's coverage, while Citigroup's oilfield- services coverage ``will be discontinued temporarily'' after Kieburtz leaves later this month, according the memo.

Leggate, 41, said in an interview that he left on May 31 to join hedge fund Quadrum Capital Management in New York. Terreson, 46, and Kieburtz couldn't be reached for comment.

Going from a securities firm to a hedge fund could mean doubling annual compensation to as much as $4 million because analysts often share in a percentage of earnings from their recommendations, said Alan Johnson, managing director for New York consulting firm Johnson Associates.

Seizing Opportunity

``Particularly if you're in a white-hot sector like energy, you can make a lot more money,'' Johnson said. ``If you've been around, you know these things are cyclical, and if you wait another year or two, the opportunity may pass you by.''

The losses reflect the increased value of energy analysis to hedge funds and mutual funds, said Ted Harper, who helps manage $9 billion at Frost Investment Advisors in Houston.

The Sarbanes-Oxley Act, passed by Congress in 2002, increased penalties for corporate wrongdoing and stiffened audit rules following the collapses of Enron Corp. and WorldCom Inc. The following year, former New York Attorney General Eliot Spitzer extracted $1.4 billion in settlements from 10 securities firms that he accused of using research to win investment banking business.

``The sell-side model prior to 2000 is not holding up,'' Harper said. ``You don't have the means by which to really underwrite a successful sell-side operation. As a result, they're no longer able to pay the salaries to attract the top talent.''

Oil Analyst Lost

New York-based Morgan Stanley, the second-largest U.S. securities firm, plans to replace Terreson, spokeswoman Sala said. Lloyd Byrne, an analyst who covers independent oil and gas producers, also is leaving, she said. Stephen Richardson, who assisted Byrne, will take over coverage.

The departures mean less information will be disseminated to investors and more will be locked up in hedge funds, said James Wicklund, who left an analyst job at Bank of America in early 2007 and later joined hedge-fund firm Carlson Capital.

``You're losing the art and intuition of the business,'' Wicklund said. ``If this whole business was as easy as running an Excel model and coming up with an answer, then we'd all be making lots of money.''

Credit Suisse Group AG is losing Houston oilfield-services analyst Ken Sill. Sill, 46, said he's taking a position at a local firm after the bank decided to move its Houston research operation to New York.

``Research on the Street is going the way of the dodo,'' National City's Halloran said. ``The Street is going to have to figure out a method to keep the good guys around and paying for them or it's going to die out.''

To contact the reporters on this story: Jim Kennett in Houston at jkennett@bloomberg.net; Jim Polson in New York at jpolson@bloomberg.net.