Andrew Hall and his famed Phibro energy-trading operation won't embarrass Occidental Petroleum as they did bailout recipient Citigroup
Occidental Petroleum's (OXY) $250 million purchase of Citigroup's (C) Phibro energy-trading business drives home two points. One is that Oxy has been a canny acquirer in recent years. Two, the company's board has a high comfort level with stratospheric pay packages.
The deal, announced on Oct. 9, gives Los Angeles-based Oxy control over a storied firm that was a leader in commodities trading long before futures contracts and exchange-traded funds put such assets in the portfolios of pension funds and individual investors. Phibro, formerly Philipp Brothers, was founded in 1901. Over the years it has been home to all kinds of controversial characters, including fugitive financier Marc Rich. Although trading oil and metals is a notoriously tricky business, Phibro has usually come out ahead, producing average annual profits of $200 million since 1997—and $371 million over the past five years.
The sale solves a thorny political issue for Citigroup, which has received $49 billion in U.S. taxpayer bailout funds and is 34% owned by the federal government. Controversy over the $100 million pay package of Phibro chief Andrew J. Hall put the big bank in the difficult position of justifying that level of compensation after the bailout. Selling the business to a corporation that is not under government supervision solves that problem, as Phibro's top executives have agreed to defer compensation until Oxy pays it.
Stakes in Phibro for Senior Traders
Oxy says it's getting a steal. The $250 million purchase price is roughly equal to the difference between Phibro's current assets and liabilities, so the oil giant is purchasing the company for book value. Most large energy companies, including Oxy, have trading operations, but they are usually focused on selling the firm's own oil and gas output. Oxy says it intends to operate Phibro as a separate business out of its Westport (Conn.) headquarters. "I would pay my own money to talk with Andy Hall every day about oil markets," Oxy President Stephen Chazen told investors on Friday. Oxy's stock price closed down 0.55, or 0.69%, at 79.54.
Oxy is offering Hall and other senior Phibro traders an undisclosed equity stake in Phibro. Oxy is also asking the traders to reinvest some of their compensation in the business, to give them even more of a stake in the success of their trades.
Once known as an unwieldy conglomerate under its controversial former chairman Armand Hammer, Oxy has changed under the direction of Chairman and CEO Ray Irani, refocusing on its oil and gas roots. The company made a string of acquisitions in the past decade that left it the largest producer of oil in Texas and the largest producer of natural gas in California, just when domestic sources of energy have traded for fat prices. Last year the company earned a record $6.8 billion on sales of nearly $25 billion.
Oxy's board has seen to it that Irani is well-compensated for that success. In 2008 the Lebanon-born executive earned nearly $90 million in total compensation, according to a Securities & Exchange Commission filing. That made him the last decade's highest-paid CEO in the Standard & Poor's 500-stock index and the third-highest-paid executive in the country last year, according to the Corporate Library, a shareholder advocacy group. "We've had consistently outstanding performance," said Oxy spokesman Richard Kline. "We hope and expect Oxy to do well and as a result our executives will do well."