Crashing Crude's First Casualty: One-Time Commodities Giant Phibro Liquidating

While we were expecting that one-time "god of crude oil trading" would have a poor year as a result of his consistent bullishness on the crude space, we were quite astounded to learn, as Bloomberg first reported yesterday, that Andy Hall - the man whose name was for a decade legendary in the commodity space - would call it a day. And yet that pales in comparison to the WSJ report overnight than Phibro itself, Andy Hall's 113 year old employer currently owned by Occidental Petroleum after its sale by Citigroup, would liquidate in the US after it failed to buy a buyer, marking the end of an era.

Phibro Trading’s Andrew Hall and his daughter, Emma, in 2012

What is paradoxical, and as we reported yesterday, Hall's hedge fund Astenbeck, has not done badly in 2014. In fact, it was up another 1.2% in November and was up 7.2% year to date despite a roaring bear market in commodities.

Alas, that is cold comfort for Phibro. As the WSJ reports, "the 113-year-old company, founded in Germany by two scrap-metal dealers, is winding down its U.S. operations after it failed to find a buyer, according to a person familiar with the situation. The sale process for units in London and Singapore continues, the person said. Phibro specialized in physical trading of oil and other raw materials, seeking to profit by moving actual barrels and acting as an intermediary between producers and consumers. The pool of potential buyers for these kinds of operations has dwindled in recent years amid a regulatory crackdown on Wall Street banks’ involvement in these markets."

As for Hall, while he will sever his relationship with Phibro, he will continue working for his $3 billion hedge fund Astenbeck, of which Occidental owns 20%.

Mr. Hall is expected to continue trading energy derivatives through his $3 billion hedge fund, Astenbeck Capital Management LLC, which has avoided taking much of a hit from this year’s plunge in oil prices because Mr. Hall curtailed bets and shifted to holding cash.

The end of Phibro is another stark reminder, that bull markets make geniuses out of everyone, but it is when the bear markets tide flows out that we truly learn who was swimming naked.

The effective demise of Phibro underscores investors’ fading interest and the challenging trading conditions in many energy and commodity markets, which in recent years have been pummeled by the combination of rising supplies and tepid demand growth. Mr. Hall reaped huge profits by correctly betting on rising commodity prices in the 2000s, which was driven by rapid growth in China.

That kind of strategy worked well during the commodities boom, but fared more poorly during a period of relatively stable oil prices that ended in the middle of this year. The price of benchmark U.S. oil futures has plunged about 40% in the past six months. On Tuesday, the front-month contract rose 1.2% to $63.82 a barrel on the New York Mercantile Exchange. The decline in prices accelerated in November after the Organization of the Petroleum Exporting Countries agreed to maintain its production target.

Phibro employees were being notified of the developments Tuesday, according to the person. Analysts have said Phibro added little to Occidental’s financial performance and that executives were uncomfortable with the volatility it sometimes brought to results. Earlier this year, Hess Corp. also sold its internal trading arm, Hetco.

In retrospect perhaps the liquidation of Phibro shouldn't come as a surprise: "Occidental in February said it was pulling back from proprietary trading of crude oil and other commodities amid a corporate reorganization, and a spokesman on Tuesday reiterated the Houston company’s plans to reduce exposure to these activities. Phibro executives had been shopping the operation to prospective buyers since the February announcement, according to another person familiar with the situation."

Still the complete lack of interest for a legendary name in the commodity trading space is somewhat stunning.

Founded as Philipp Brothers in the early 1900s, Phibro went on to become at one point the largest supplier of raw materials in the world. In 1981, it acquired investment bank Salomon Brothers, and the trading firm became part of Citigroup in 1998.

 

Mr. Hall and his traders were known for placing big, long-term bets. In 2007, Phibro accounted for 10% of Citigroup’s net income.

As for Hall, who as recently as September went "all in on a bet that the shale-oil boom will play out far sooner than many analysts expect, resulting in a steady increase in prices to as much as $150 a barrel in five years or less", what is his outlook now?

Mr. Hall cut back sharply on his wagers in August, moving much of his portfolio to cash. “We think longer-term oil prices are supported in the $70-$80 range,” Mr. Hall said in a Dec. 1 letter to investors, which was reviewed by the Journal. But for now, near-term prices “will stay under pressure and could become very volatile as the market strives for equilibrium without intervention” from OPEC, he wrote.

And, like yesterday, we leave it off with the $64K question: has Hall [and Phibro] already liquidated his long positions yet, or is he yet to liquidate them? Judging by the relentless slide in Brent and WTI, with the latter just touching on a $61 handle, the market is less than eager to wait around for the answer.