Trader Who Scored $100 Million Payday Bets Shale Is Dud
Andrew John Hall -- known as the God of Crude Oil Trading to some of his peers -- has built his success on a simple creed: Everyone who disagrees with him is wrong.
For most of the past 30 years, that has been a killer strategy. Like a poker player on an endless hot streak, Hall has made billions for the companies for which he’s traded by placing one aggressive bet after another. He was one of the few traders who anticipated both the run-up in and the eventual crash of oil prices in 2008.
Hall was so good that he bagged a $98 million payday in 2008, when he ran Citigroup Inc.’s Phibro LLC trading unit, and was up for about $100 million more in 2009.
In the end, Bloomberg Markets will report in its October 2014 issue, he couldn’t collect the 2009 payout from Citi because an anti–Wall Street backlash against the bank -- which had just received a $45 billion U.S. government bailout -- led regulators to block it. No such bonuses have awaited Hall of late. He’s racked up losses in two of the past three years.
His wager that oil prices would rise and rise has run headlong into an unanticipated energy revolution -- the frenetic push in the U.S. and elsewhere to wring crude out of shale. Shale drilling has boosted U.S. oil output to the highest level in 27 years; it helped the U.S. supply 84 percent of its energy demand last year. Oil prices, far from taking the upward trajectory Hall predicted, have been essentially unchanged since 2011.
For the 63-year-old Hall, who has used his wealth to build an extensive modern art collection, this has meant a sobering comedown. Assets under management at his Astenbeck Capital Management LLC hedge-fund firm fell to $3.4 billion in May, down from as much as $4.8 billion in January 2013. Astenbeck, based in Westport, Connecticut, fell 3.8 percent in 2011, posted a 3.4 percent gain in 2012 and slid another 8.3 percent in 2013, according to Astenbeck letters obtained by Bloomberg. This makes some wonder whether Hall has lost his touch.
“At one point, Phibro traders were the rulers of the world,” says Carl Larry, a former trader who publishes a newsletter on oil markets. “The best always learn how to adapt. Maybe it’s taking him longer to do that now. Or maybe his time has come.”
Hall, based on comments in his letters to investors, is unfazed by the losses and secure in his view that the price of oil is destined to rise. In those letters, he regularly mocks those who are convinced that a shale boom will mean long-term cheap, abundant energy.
“When you believe something, facts become inconvenient obstacles,” Hall wrote in April, taking issue with an analyst who predicted a shale renaissance could result in $75-a-barrel oil over the next five years.
Hall is going 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.
Investing ever-larger sums of his own money, he’s buying contracts for so-called long-dated oil, to be delivered as far out as 2019, according to interviews with two dozen current and former employees and advisers who are familiar with Hall’s trading but aren’t authorized to speak on the record. To attract buyers, the sellers of these long-dated contracts -- typically shale companies that have financed the boom with mounds of debt -- need to offer them at a discount to existing prices.
Hall’s strategy -- which in a May letter he described as more akin to “loan-sharking” than market speculation -- has already shown some signs of success.
In February, a futures contract for a barrel of December 2019 West Texas Intermediate benchmark crude was selling for $76. In July, those contracts were selling for $88. That means Hall could have made $12 a barrel by cashing out -- a 16 percent gain, according to those who understand his positions.
The thing is, Hall may not cash out. He may stand pat, waiting for those price spikes he’s certain are coming. If he’s right, he could pocket way more than $12 a barrel, perhaps doubling the money he’s invested for himself and his clients.
If he’s wrong, Hall could sully his reputation and deal another blow to Phibro, a storied commodities firm with century-old roots that once had 2,000 employees and helped create modern oil-trading markets.
Hall, in addition to running his hedge fund, has remained chairman and chief executive officer of Phibro, positions he’s held since 1993 -- even as the firm has changed hands. Already, Phibro’s current corporate parent, Occidental Petroleum Corp., which acquired it from Citi in late 2009, has said the company is for sale. If it’s sold, the new owner would be Phibro’s third in five years.
Occidental, which declined to comment for this story, owns 20 percent of Astenbeck’s management company; Hall owns the rest of it. Tom O’Malley, the chairman of refiner PBF Energy Inc. who recruited Hall to Phibro in 1982 after winning a bidding war for the trader’s services against self-proclaimed King of Oil Marc Rich, says the market may yet turn Hall’s way.
“You can’t play the game without bumping into the wall every now and then,” O’Malley says. “Anybody who bets against Andy Hall might be making a poor bet.”
An introvert with eyes shading to pale blue, Hall has long been known for his intense study and grasp of historical oil markets. When he’s not watching the markets on his computer terminal, he’s parsing reports or calling analysts and economists to pepper them with questions on drilling projects from North Dakota to Saudi Arabia.
The son of a former British Airways Plc pilot instructor, Hall was born in Bristol, England, and earned a chemistry degree from the University of Oxford, where he began a lifelong passion for rowing. He started working for British Petroleum Co., now BP Plc, in 1969 and soon enough would be thrown into the tumult of the early 1970s Arab oil embargo when the oil majors lost pricing power to OPEC.
After earning an MBA from France’s INSEAD business school, he arrived in New York in 1981 to run BP’s trading operation.
Hall, with a streak of clever trades, caught the eye of O’Malley at Phibro, which had recently been re-branded from its roots as Philipp Brothers. At Phibro, he and O’Malley bought large, long positions, betting on rising prices.
Hall was convinced as far back as 2004 that the world was entering an age of scarcity, according to “Oil,” a 2010 book by Tom Bower. That conviction, based on his belief in massive demand coming from China and other emerging markets, led Hall to bet more than $1 billion, according to the book.
“As one of my clients once told me, he has three gears: long, longer and really long,” says Philip Verleger, president of Carbondale, Colorado–based PK Verleger LLC and a consultant and economist whom Hall has tapped for advice.
Phibro has a complex pedigree. In 1981, Phibro Corp. acquired Salomon Brothers and eventually the firm became Salomon Inc. In 1997, Travelers Group Inc. acquired Salomon, which became part of Citigroup the next year after Travelers and Citicorp combined. In 2008, the unit, once again known as Phibro, with Hall at the helm, was one of the only profitable divisions at Citi in a year when the company lost $28 billion.
Hall, after netting about $100 million in 2007 and $98 million in 2008, was on track to receive the same or more in 2009. In the tumult of the financial crisis, with Citi now a ward of the state, the bonus was “untenable,” says Kenneth Feinberg, President Barack Obama’s special master for executive compensation.
The controversy forced the sale to Occidental, which agreed to defer payment of that $100 million or so by allowing Hall to reinvest those funds into Astenbeck, according to those familiar with the transactions.
Phibro had been profitable every fiscal year since 1997 and in 80 percent of the quarters during that period, according to data compiled by Bloomberg. The trading house’s gains during those years, driven by Hall, amounted to $4.4 billion. Hall remained silent throughout the pay controversy and turned to building Astenbeck’s assets.
Oil prices fell in the 2008-to-2009 recession, hitting $110 a barrel in February 2011 and remaining close to that level since then. Brent crude, the global benchmark, traded at $104.28 on Aug. 13. The pressure on prices, even as economic growth has recovered, has come from a surfeit of supply.
The unprecedented rise in U.S. oil production has been spurred by fracking, a process that breaks up brittle shale layers to release previously unreachable oil and gas. Hall has no charity for those touting the message that shale drilling will take over the globe and usher in a new era of lower energy prices.
Predictions of $75 oil, espoused by Citigroup oil analyst Edward Morse in a Barron’s story in March, really bug him, according to those who know his thinking.
“We are not sure what supports his conviction,” Hall wrote of the analyst’s theories in his June newsletter, although he didn’t identify Morse by name. “It is apparently not facts or analysis.”
The shale revolution faces political, environmental and technical hurdles in other parts of the world that will stall its rollout, Hall wrote. Morse, who also correctly predicted the sharp rise in crude prices in the past decade, says Hall has let his admiration of peak oil theorists cloud his judgment.
“It took a long time for believers in the Cold War to admit it was dead. So, too, is it taking a long time for peak oil believers to admit that it is dead,” Morse says.
The numbers currently don’t seem to augur in Hall’s favor. Oil prices have slumped to the $92 to $96 a barrel range in recent days. Reflecting those prices, regular gasoline in some parts of the nation, including New Jersey, Virginia and Louisiana, is selling for under $3 a gallon, the lowest in four years.
Hall’s main problem with the falling-price scenario is that it contains the seeds of its own demise. Shale drilling depends on high prices to survive. If oil falls toward $75 a barrel, much of the wave of new U.S. production would become unprofitable, prompting output to be cut, Hall wrote in April.
Scarcity would then start to drive up prices. Hall’s position is that the world may be awash in new oil but that new oil isn’t cheap to produce. The fact that the U.S. shale revolution has been able to replace most of the crude lost to strife in recent years in places such as Iraq and Libya is a fluke, in his opinion.
And while energy powers such as Russia and Saudi Arabia still have plenty of oil, they’ll have to significantly increase investments to maintain production levels. In a June letter, Hall made note of a statement from an OAO Lukoil executive, who acknowledged the “threat” that Russia’s “traditional reserves are being exhausted.”
Hall’s confidence in rising prices is expressed in an April letter to Astenbeck investors in which he poses the seemingly audacious question of whether the world’s biggest oil companies are doomed.
“Are the IOCs (international oil companies) toast?” he asked. While Exxon Mobil Corp. and its four biggest peers have posted more than $1 trillion in combined profits in the past decade, Hall points out that they’ve subsequently been spending almost every dime they’ve earned.
Since 2004, Exxon, Chevron Corp., Royal Dutch Shell Plc, Total SA and BP have tripled capital spending, reaching $166 billion last year, only to see their combined output decline by more than 1.4 million barrels a day. That’s like running as fast as you can only to stand still, according to Hall’s investor letters. Prices, in his view, have to take the long road up.
A Chevron spokesman said the company expects its production to start increasing in the next two years. BP said the Gulf oil spill has hurt its oil output. Exxon declined to comment. Shell and Total didn’t respond to queries seeking comment.
Hall doubters respond that technological innovations in the recent past have rendered wrong many predictions that either the world would run out of oil or prices were destined for a permanent arc upward.
M. King Hubbert, a geophysicist who first propounded the theory of peak oil, accurately predicted in 1956 a crest in U.S. oil production by 1970, a forecast that intrigued Hall. Yet fracking has undermined the second part of Hubbert’s theory -- that American oil output would then begin an unstoppable decline.
The U.S. Energy Information Administration is now predicting domestic production will reach an all-time high by 2016. Such projections don’t move Hall, a man who owns most of a town in Vermont and a castle in Germany and is featured nude with his wife, Christine, in a painting by American artist Eric Fischl, whose work the Halls collect.
In his counterarguments, he digs deep, delving into the minutiae of how Texas discloses oil production, the tendency of some shale wells to play out quickly and the degree to which the boom has relied on debt. The simplest of his reasons, though, is that producers have already drilled in many of the best areas, or sweet spots. Hall predicts that growth in shale output will begin to moderate this year and U.S. production will peak as soon as 2016.
“Once those areas have been drilled out, operators will have to move to more-marginal locations and well productivity will fall,” Hall wrote in March. “Far from continuing to grow, production will start to decline.”
So far this year, there are signs that he may be on the right track. In North Dakota’s Bakken and Texas’ Eagle Ford formations, which have accounted for almost all of the jump in U.S. output, the combined year-over-year growth in production in July fell below 30 percent for the first time since February 2010.
Two central questions about technology and shale will likely determine the outcome for Hall: how many wells producers will be able to drill in a finite amount of land that sits atop oil-bearing layers of rock and whether the U.S. renaissance will be repeatable abroad. Hall is betting no on both counts. Morse, and many in the energy world, are betting yes.
“We haven’t scratched the surface,” Hall’s former mentor O’Malley says. “There are massive additional shale fields in the United States. Technology does tend to move forward.”
Hall supporters point out that Astenbeck -- benefiting from a rise in global demand and volatility caused by turmoil in places such as Iraq -- is up 19 percent this year after the losses of last year.
“He’s a phenomenal trader,” says David Neuhauser, a money manager at Livermore Partners who has followed Hall’s progress as an Occidental shareholder. “I believe he’s right about long-term prices; we’re in the same camp. What I don’t know is how long it will take for the market to catch up.”
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