In a brilliant move, Occidental Petroleum is buying up Phibro, the trading unit that became politically embarrassing to Citigroup when it was revealed that its head was to be paid $100 million.
Occidental, as an actual oil and gas production company, probably won’t be subject to restrictions on pay that the Obama administration is planning for Wall Street. What’s more, the company will likely be exempt from attempts to regulate commodities trading. What you are seeing, in short, is the way regulatory arbitrage will be played in the future.
Here’s the press release:
LOS ANGELES, Oct 9, 2009 — Occidental Petroleum Corporation (NYSE:OXY) announced today that it signed an agreement to purchase Phibro LLC (“Phibro”) from Citigroup Inc., for approximately net asset value.
Primarily a trader in oil and gas, Phibro’s assets consist of cash, marketable securities and readily saleable commodity positions. Phibro does not trade in any exotic derivatives or hold any level three type assets. Occidental’s net investment in Phibro is expected to be about $250 million.
Phibro’s management team, headed by Andrew Hall, and its employees will remain with the company after closing. The senior management team has agreed to make a significant investment in Phibro and receive returns dependent upon the company’s future performance. Additionally, significant portions of current and future bonuses will be deferred and retained by Phibro and paid out in future years. These future payouts will be adjusted to reflect Phibro’s results during that period.
From 1997 until the second quarter of 2009, Phibro averaged approximately $200 million per year in pre-tax earnings, while over the last five years Phibro’s earnings averaged $371 million per year. Phibro has been profitable each fiscal year since 1997, attaining profitability in 80 per cent of all quarters.
The transaction is expected to close by year end. Upon closing, Occidental will support the credit of Phibro. Phibro will become a part of Occidental’s midstream segment which includes Occidental’s natural gas liquids, power, pipeline and existing trading business.