Trader Who Scored $100 Million Payday Bets Shale Is

Dud
By Bradley Olson - Sep 3, 2014

Bloomberg Markets Magazine

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 hes 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 couldnt collect the 2009
payout from Citi because an antiWall 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. Hes 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.
Lost Touch?
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 its 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.

Inconvenient Obstacles
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, hes 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 Halls trading but arent 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.
Halls strategy -- which in a May letter he described as more akin to loan-sharking than market
speculation -- has already shown some signs of success.

Futures Rise
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 hes certain
are coming. If hes right, he could pocket way more than $12 a barrel, perhaps doubling the money
hes invested for himself and his clients.
If hes 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 hes held since 1993 -- even as the firm has changed hands. Already, Phibros
current corporate parent, Occidental Petroleum Corp., which acquired it from Citi in late 2009, has
said the company is for sale. If its sold, the new owner would be Phibros third in five years.

Wall Bump
Occidental, which declined to comment for this story, owns 20 percent of Astenbecks management
company; Hall owns the rest of it. Tom OMalley, the chairman of refiner PBF Energy Inc. who
recruited Hall to Phibro in 1982 after winning a bidding war for the traders services against selfproclaimed King of Oil Marc Rich, says the market may yet turn Halls way.
You cant play the game without bumping into the wall every now and then, OMalley 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 hes not watching the markets on his computer terminal, hes
parsing reports or calling analysts and economists to pepper them with questions on drilling
projects from North Dakota to Saudi Arabia.

Rowing Passion
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 Frances INSEAD business school, he arrived in New York in 1981 to
run BPs trading operation.
Hall, with a streak of clever trades, caught the eye of OMalley at Phibro, which had recently been
re-branded from its roots as Philipp Brothers. At Phibro, he and OMalley 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.

Really Long
As one of my clients once told me, he has three gears: long, longer and really long, says Philip
Verleger, president of Carbondale, Coloradobased 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 Obamas special master for
executive compensation.

Occidental Sale
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 houses gains during those
years, driven by Hall, amounted to $4.4 billion. Hall remained silent throughout the pay
controversy and turned to building Astenbecks 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.

Lower Forecasts
Predictions of $75 oil, espoused by Citigroup oil analyst Edward Morse in a Barrons 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 analysts theories in his June
newsletter, although he didnt 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 dont seem to augur in Halls 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.

Falling Prices
Halls 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. Halls position is that the world may be awash in new
oil but that new oil isnt 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, theyll 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 Russias
traditional reserves are being exhausted.

IOC Toast
Halls confidence in rising prices is expressed in an April letter to Astenbeck investors in which he
poses the seemingly audacious question of whether the worlds 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 theyve subsequently been spending almost every dime theyve 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. Thats like running as fast as you can only to stand still, according to
Halls investor letters. Prices, in his view, have to take the long road up.

Technological Innovations
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
didnt 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 Hubberts theory -- that American oil output would then begin an
unstoppable decline.

Production Record
The U.S. Energy Information Administration is now predicting domestic production will reach an
all-time high by 2016. Such projections dont 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.
Slowing Growth?
So far this year, there are signs that he may be on the right track. In North Dakotas 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.

Surface Scratch
We havent scratched the surface, Halls former mentor OMalley 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.
Hes a phenomenal trader, says David Neuhauser, a money manager at Livermore Partners who
has followed Halls progress as an Occidental shareholder. I believe hes right about long-term

prices; were in the same camp. What I dont know is how long it will take for the market to catch
up.
To contact the reporter on this story: Bradley Olson in Houston at bradleyolson@bloomberg.net
To contact the editors responsible for this story: Ken Wells at kwells8@bloomberg.net Joel Weber,
Tina Davis
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