Banks and hedge funds power up energy desks

Deborah Rivera, founder of New York-based alternative-investment recruiter The Succession Group, says, 'With all the volatility and uncertainty in fixed-income and equity markets right now, banks and funds want to be diversified in an area that's not correlated with the rest of the market. The search for energy traders is red hot.'

A Who's Who on where the jobs are

With the exception of acknowledged sector leaders Goldman Sachs and Morgan Stanley, most banks paired back or steered clear of energy trading in the tainted wake of Enron's collapse in 2002. Just two years later, they're back in force. Michael Karp, a managing partner at global search firm Options Group, says, 'A lot of the banks are looking to chase commodities revenue.'

The list of banks hungry for a piece of the action seems to be growing longer by the week. Merrill Lynch made a statement in September that it had agreed to purchase Houston-based Entergy-Koch. Meanwhile, Credit Suisse First Boston's recent failed effort to acquire Dallas-based energy company TXU Corp. has the bank redoubling its efforts to grow its practice from scratch.

ABN Amro continued its build-out earlier this month by hiring Bill Foley and Bruno Stanizale of Deutsche Bank, and Katie Spilman from Bank of America, to bolster the Dutch bank's oil and gas marketing efforts. This summer, ABN kicked off its global energy derivatives practice by poaching from BNP Paribas, Merrill Lynch, and Deutsche Bank, including BNP's former head of European energy trading, Wayne Harburn, who is now heading ABN's global commodity trading effort.

Two months earlier, BNP raided Société Générale in London, hiring Sébastien Lemoine to head structured transactions on its energy desk. BNP also brought in four others from HSBC, Sempra Trading, and Shell Trading to round out its commodity derivatives practice.

Dresdner Kleinwort Wasserstein officially tossed its hat into the ring in August by poaching Neil Rothwell from RWE Trading as head of commodities and mandating him to set up an energy trading business.

Deutsche Bank and Barclays Capital recently doubled the size of their teams and are still hungry. Others rumored to be aggressively wooing skilled energy traders include Bank of America, Swiss Re and SocGen.

Playing the contrarian this September, UBS drastically cropped its US-based energy trading team-purchased lock, stock, and barrel from Enron two years ago-from 630 to 150 employees. Observers remain uncertain whether it's a sign of right-sizing or bad timing.

While many banks are chasing energy traders, they're not the only suitors. Hedge funds have also seized on the lucrative market as a way to diversify returns. Alternative-investment recruiter Rivera says, 'Most of the work we're doing right now is for hedge funds. In conducting our research for a very substantial mandate for a large fund, we've spoken to many others who are thinking of expanding their energy practices.'

Energy trading desks tend to be located in Houston, Singapore and London, with New York becoming an increasingly weighty presence.

Big bucks for big trades

Compensation varies dramatically, but the news right now is all good. The big money is being thrown at energy traders who can quickly produce profits in prop trading. Says Rivera, 'An energy trader on the absolute low end is going to make $1.5 million, and there are many energy traders making $5-10 million.'

At the moment, hedge funds appear to have a recruiting edge over banks. A fund may offer a base in the $200,000-250,000 range (vs. $150,000-200,000 at a bank), a guarantee of a million, and a percentage of proceeds (the amount varies wildly) above a certain target. Says Rivera, 'Publicly-owned investment banks are a little more cautious, which is why they have a hard time buying teams.'

In a cutthroat business where you're only as good as your last trade, some traders are reluctant to move at all. Those who didn't lose their jobs in the post-Enron shakeout two years ago are sometimes reluctant to go anywhere because they remember their friends and colleagues being out of work.

And memory, after all, is an energy trader's best friend. To be valuable, a trader needs to have gone through several energy-trading cycles. Unlike their twenty-something counterparts in almost any other sector, energy traders hit their prime in their late thirties and early forties.

When will the party end?

It's anybody's guess how long the flush times will last. Says Rivera, 'Everyone I've spoken to feels like the market has a good two years to profit from the energy trading boom, but I think the most intelligent firms will find a way to find longevity beyond that.'

Indeed, there is evidence that the new new thing among banks, hedge funds, and private equity firms is direct ownership of the refineries, power plants, pipelines and electric grids themselves-in other words, they're cutting out the middlemen and going directly for execution. Since October 2003, for example, Goldman Sachs is reported to have bought $1.2 billion in power assets and taken on more than $5 billion in debt to acquire over a dozen power plants.

Karp at Options Group says, 'There are plenty of distressed assets in the United States when it comes to energy and power. Owning those assets and trading on the back of them makes them more attractive.' Karp predicts that growing worries in Washington, D.C., about the lack of regulation and transparency will eventually have some effect on the purchase of energy assets.

For those in the game ahead of the SEC, however, the flow of gigawatts and black gold all but guarantees more than a few flush wallets.