Occidental-Phibro, a Conservative Match Made in Heaven?

Occidental Petroleum's announcement to buy Phibro, the energy trading unit under Citigroup, left lots of analysts and industry-folk scratching their heads --- surprised the oil and gas company would part from its typically conservative path.

Occidental said Friday it would pay $250 million-- or net asset value -- for Phibro, a successful and, more recently, controversial firm that primarily trades in oil and gas.

Citigroup, which has received about $45 billion in government bailout money, was widely criticized over a $100 million compensation package that was expected to be paid this year to Andrew Hall, the trading phenom who heads Phibro.

Occidental has largely shunned the practice of taking bets on commodities prices, an approach that has set it apart from majors like BP, which operate large speculative trading units.

The Los Angeles-based company hasn't completely avoided the energy-trading biz. It does operate a marketing division out of Houston. But Occidental's traders are only looking for the best price possible for its oil and gas production, spokesman Richard Kline said in a phone interview late Friday.

Phibro, on the other hand, is fully immersed in the volatile energy trading business.

But wait, it turns out Phibro is conservative too. Seriously. Forget the controversial bonuses issue for a minute.

"Occidental has always been quite conservative, " Kline said. "And Phibro is conservative as well. The company does not trade in exotic derivatives and is consistently an outstanding performer."

Phibro's annual earnings have averaged $371 million for the past five years and has been profitable each fiscal year since 1997, according to Occidental.

Still, this is a speculative trading business. They speculate. It's their job.

Occidental has already taken a few steps to keep Phibro in check.

Senior management has agreed to invest in Phibro, which will continue to be headed by Hall. Bonuses -- at least significant chunks -- will be retained by the company and paid out in future years. The payouts will be adjusted to reflect Phibro's results, Kline said.

Phibro will operate independently, but as Kline explained, "there will be close coordination and involvement in Oxy's management and finance department."

Occidental wasn't actively pursing Phibro, although the company is always looking for appropriate opportunities, Kline said.

"Quite frankly, it just showed up," said Kline, explaining Citigroup approached Occidental about a month ago. "This is going to give us additional trading depth, scope and insight. It's certainly synergistic."