Top-rated analysts invariably have a thing or two to say about investor relations. Here we talk to the winners of the UK’s Extel awards which were announced at the end of June, and France’s Grand Prix de l’Analyse Financiere, which were presented earlier in the month. Both best analyst prizes went to individuals covering the oil industry.
Fergus MacLeod – BT Alex Brown: Bucking the trend may go against the nature of many investment analysts, but Fergus MacLeod of BT Alex Brown, seems to thrive on it. Not only has he won Extel’s coveted award as the most highly rated analyst in the UK for his oil industry coverage but his team was ranked number one in any sector for the fifth consecutive year.
‘I think the biggest mistake an analyst can make is to follow the consensus and say the same thing everyone else says,’ notes MacLeod, reflecting on his success. ‘Many people find it very difficult psychologically to stick out their necks and take a different stand from their peers. However, if I was advising someone interested in building a career as an investment analyst, I would tell them to actively seek out the opportunities to be different.’
MacLeod started out as a fund manager at Schroder Investment, before joining the ranks of the investment researchers at BZW, followed by Natwest, which recently became BT Alex Brown. He first made his name with a controversial positive report on British Petroleum in 1992. ‘It was when the company fired chief executive Robert Horton and then cut its dividend,’ he recalls. ‘I had been negative on the company for a couple of years before that, but in the summer of 1992, I was sitting in my office late at night when I thought, The share price has collapsed, the company has brought in new people, so now is the time to buy. I wrote a big note – What would you do if you were David Simon? – about how the new team planned to turn the company around. At that time, most analysts were very negative on the company but I received my first award five years ago because BP did well. It was a piece of luck but I was also willing to be controversial.’
Interestingly, BP also changed the way it communicated with the City and shareholders and, as a result, has itself been the recipient of several awards in recent years from this magazine for its investor relations function. MacLeod attributes BP’s success in this field to the high priority the company places on the investor relations function. ‘IR people are only as good as the information they receive,’ MacLeod points out. ‘BP keeps its investor relations department well informed and the management team and the department work closely together. If there is a poor IR director, it is usually not the individual’s fault but the fault of the management team because they are not giving the individual enough access or information to do their job properly.’
No substitute
However, although MacLeod believes IR departments can add value, ‘They are no substitute for speaking to management directly,’ he says. ‘The most important part of my job is to spend time with management and understand their strategy. If something different is going to happen, you are not going to find it by looking at the last quarterly figures but by analyzing any change in strategies. For me understanding the management is the real value added. I try to meet with them as often as I can and if I have not seen a senior manager of the companies we follow every month, I start to feel uneasy.’
As for the numbers, MacLeod spends a great deal of time looking at returns and comparing key figures for the major oil players. ‘Analysis has become more sophisticated and it has happened quite quickly over the last few years,’ he points out. ‘When we first put together a big global comparative analysis of the major global integrated companies in 1994 we considered it to be leading-edge stuff. But now we look back on it and it looks rather basic.’
The first document the team produced was 75 pages, a seemingly paltry number compared to their most recent 450-page tome. ‘This is not to say that bigger is better but the way in which we analyze data has changed. For example, instead of using three parameters to evaluate upstream activities, we might now look at 20,’ he says.
Although MacLeod is pleased that he and his team have once again grabbed the top spots on the Extel charts, he is not complacent. ‘The most important thing you must remember in this business is that you are as good as your last piece of work or recommendation. There is a lot of competition out there and many people would like us to stumble. That’s what keeps us on our toes.’
Aymeric de Villaret – SG: ‘The most important factor for me when I call an investor relations department is that there are knowledgeable people available who can answer my questions quickly and in detail,’ says Aymeric de Villaret, oil analyst with SG (formerly Societe Generale), who recently won the award for best analyst in all sectors in awards run by L’Agefi, the French financial newspaper, and the Bourse de Paris.
‘It’s crucial to have someone in the IR department who is an expert in the industry. For example, Total’s IR officer worked on the exploration and production side of the business so he really knows how the industry works. On the other hand, there’s someone at another company who invariably tells you, You asked a good question, thanks you politely and then never calls you back with any answers.’
Although regular company visits and tours of production sites are an integral part of de Villaret’s job, the investor relations departments take on perhaps an even more prominent role in the continental European oil and gas industry, because top management is not often available for chats. ‘The investor relations officer is your main contact,’ de Villaret points out. ‘The top management are often on busy schedules and they don’t have time to meet with you except for when their results are announced or at annual general meetings. However, when you have been covering this industry for ten years, you know the companies very well and which people to contact.’
De Villaret started his professional life as a chemical engineer, but after ten years made the switch to analyzing chemical stocks for SocGen. In 1990, the analyst then in charge of covering oils left the company and de Villaret rose to the new challenge. Back then it was even more of a highly charged sector: the Gulf War had just erupted, oil prices were volatile and oil shares had taken center stage on the world’s stock markets.
It is these external influences which de Villaret believes are the main difference between analyzing chemicals and oils. ‘Although there is some connection between oils and chemicals, and some oil companies such as Total own chemical divisions, the two sectors need different approaches,’ de Villaret argues. ‘Chemicals are more cyclical in nature but with oils, you need to adopt a much more macroeconomic perspective.’
Outside edge
De Villaret believes the best analyst encompasses both a top-down and bottom-up approach. ‘The main driving force in the oil industry is where the prices are going and how the companies are going to react to the different fluctuations,’ he says. ‘You also have to look at where companies are spreading their assets. For example, are they in refining, gas distribution, chemicals or production?’
De Villaret began his career as an oil analyst covering Total, Elf Aquitaine and Norsk Hydro but his stable was broadened to include six European and two small French stocks when the bank decided to adopt a more pan-European approach to its investment research.
He was posted to London about two years ago to help create a pan-European team for the oil and gas industry. ‘We have a global approach. In general, this has been the big difference in the past five years with many investment houses taking a pan-European approach,’ he says. ‘The markets have become much more global and next year the single currency will make it much easier to make comparisons across Europe.’
SG has three analysts covering the oil and gas sector – one focusing mainly on the UK stocks, one on the exploration and production side of the businesses and de Villaret who looks after the integrated players such as Shell, Petrofina, Repsol and ENI.
The group produces a quarterly sector review as well as comment notes on the industry and any big meetings that have taken place. It also sends daily fax briefings to clients with updates on oil news and views.
‘Currently, the oil sector has underperformed so we are taking a cautious view,’ he concludes.
