A hedge fund’s $8bn bet on Venezuela’s Citgo

0:04Costas Mourselas: It's a Saturday afternoon in January and I'm standing here at the corner of Myrtle and Classen Avenue in Brooklyn at a Sitco gas station. It's very cold outside, about 23 degrees Fahrenheit. night. There's a lot of snow piled up around and it's pretty busy now. There's one, two, three, four, I think five cars getting gas. Zitko is the brand that's known for the sign with the bright red triangle. I'm looking at one right now. Next to ads for the New York lottery and Nathan's famous hot dogs. There's about 4 ,000 of these Citgo gas stations across the U.S. While these stations are run by independent owners, the brand is part of an even larger business that includes three major refineries in Louisiana, Texas, and Illinois.

1:05Costas Mourselas: Now, the reason I'm here is because Citgo is in the middle of being taken over by a hedge fund. The fund hopes this$8 billion deal will be a massive windfall. But there's a big hitch. Citgo's owner is Venezuela. And if you've been following the news recently, it means that things are likely to be very complicated.

1:40Costas Mourselas: I'm Michaela Tendera from the Financial Times. Today on Behind the Money, how Elliott Management's$8 billion oil bet became entangled in U.S.-Venezuela geopolitics.

2:12Amelia Pollard: so elliot is a hedge fund unlike any other that's my colleague costas morcellus who covers hedge

2:20Costas Mourselas: funds for the FT. He's talking about Elliott Management, the firm at the center of this story.

2:26Amelia Pollard: Elliott basically say when everyone else is running away from a situation, we run towards it because that means that there's opportunity. It's about getting in there, becoming an important party that has a seat at the table and controlling situations that you eventually make money out of it.

2:41Costas Mourselas: Control. That's a key part of Elliott's strategy. And a lot of where that comes from is the fund's founder, Paul Singer.

2:50Amelia Pollard: Singer began his career as a lawyer. After attending Harvard Law School, he spent a handful of years practicing the law before he decided to pivot to investing full-time. And that's when he founded Elliott, the hedge fund, which got its start investing in complex legal situations and other distressed debt deals.

3:07Costas Mourselas: That's my colleague Amelia Pollard, who's the FT's U.S. investment correspondent. She's been reporting on this with Kostas.

3:14Amelia Pollard: Nobody on Wall Street likes losing money, obviously, and hedge fund managers in particular hate to lose money. But Singer really has built this reputation over the years for being extremely focused on not losing money.

3:28Costas Mourselas: A big reason for that is because early on in his life, Singer lost a lot of money.

3:34Amelia Pollard: Short selling, long puts, short calls. And that culminated in a catastrophic loss in the 74 bear market. At one point, and I'm talking about$50 ,000 for my mom's special stash in the bottom of the dresser drawers.

3:57Costas Mourselas: That's Singer talking there on another podcast for Norgaz Bank Investment Management. He's saying how he started to trade stocks around the time he was going to begin law school.

4:07Amelia Pollard: So my desire never to lose money again was a combination of wanting to get my mother's, my parents' money back. and the feeling of real devastation. Singer basically decides that if there's one thing that Elliott management is going to do for its investors is it's not going to lose money. They are totally adamant about that. It comes up in their investor letters over and over and over again. And that helps explain a lot of the trades that Elliott has made over the years. And he's really, really adamant that the hedge fund is not there to take market risk or take a view on the airline market or on the oil market.

4:50Amelia Pollard: That's for other hedge funds. Again, it's all about getting a seat at the table, speaking to management and getting them to change strategy to create value. And if they don't listen to you, that can mean aggressive proxy tactics, getting on the board and other things.

5:06Costas Mourselas: Elliott's famous for those tactics across the corporate world, pursuing investments in companies like PepsiCo, BP, and Southwest Airlines. Amelia tells me that Elliot has taken the word aggressive to a whole other level.

5:20Amelia Pollard: The most famous example is this battle that Elliot waged very publicly against the country, the sovereign nation of Argentina, for about 15 years. And the climax of this really wild trade was that Elliot seized a naval training ship in a port off the coast of Ghana in 2012. And they basically seized it as collateral. This was a peaceful seizure, but it was nonetheless extremely dramatic.

5:49Costas Mourselas: So to be sure, Elliott isn't afraid of a challenge, and they'll go to extreme lengths to control the situation and get what they want. So when Citgo goes up for sale in 2023, Elliott sees another tricky situation and another opportunity. But the reason this deal is particularly complex has to do with Citgo's history, which starts in the U.S. The company's roots began here more than a century ago.

6:17Amelia Pollard: This is the newest sign of service to our nation's motorists. This is Citgo. Riggers and drillers in constant quest for oil. Builders and operators of continental pipelines. This is Citgo. New name for one of this nation's leading...

6:31Costas Mourselas: But eventually, it's sold to Venezuela's state oil group. PDVSA, or PIDVIZA, in 1990. After that, Amelia tells me that Sitco becomes Venezuela's most prized foreign asset.

6:46Amelia Pollard: You know, Sitco is a lucrative business, but maybe even more importantly, it's hugely symbolic to Venezuela. So there's been decades of tension and political tumult between U.S. and Venezuelan relations, And so it meant a lot to politicians and a lot of Venezuelan people that they owned and ran and operated this huge refinery business in the U.S. And so it's a little bit of, you know, the American baby. It's commonly called the jewel in the crown of Venezuela's foreign assets.

7:18Costas Mourselas: As a result, over the years, SICCOs often caught between the U.S. and Venezuela.

7:23Amelia Pollard: During the first Trump administration, various sanctions were slapped on Pita Vista that essentially prevented money from flowing from Citgo in the U.S. back to Venezuela or its owner, which was the state oil company.

7:37Costas Mourselas: So Citgo is the jewel in Venezuela's crown and a regular political sparring piece. And a few years ago, that gets taken to a new level.

7:49Amelia Pollard: So U.S. courts decided that the state-owned oil company of Venezuela was considered in legal terms the alter ego of the Venezuelan state. And that meant that creditors in the U.S. and elsewhere could come after Venezuela for the money that they were owed through, for instance, the defaulted bonds, but also claims against the Venezuelan state for seizing foreign assets under Hugo Chavez, the leader of Venezuela, many years ago.

8:14Costas Mourselas: What that meant was creditors in the U.S. and elsewhere who were looking to be repaid could pursue Venezuela via Citgo. So then in 2023, the court ordered an auction to kick off the sale process of Citgo.

8:27Amelia Pollard: It's essentially considered a forced sale. So a lot of the lawyers and advisors we spoke to told us that in their recent memory, there hasn't been a company this big that the U.S. has essentially forced to be sold without the owner's consent. And so basically every single step of the process, there was fierce opposition by PDVSA, by politicians in Venezuela, even the opposition government. Like the one thing that all Venezuelan politicians seem to agree on is that Sitco should not be sold.

9:02Costas Mourselas: You're hearing Delcy Rodriguez, the then vice president of Venezuela, speaking in Spanish on state television recently, referring to the court's order as a forced sale.

9:20Costas Mourselas: She also calls the auction fraudulent.

9:36Amelia Pollard: And one advisor described this to me as Venezuela basically has decided to fight this until hell freezes over and then they're going to fight this on ice skates. So they're never going to stop basically. Not backing down. They're not backing down, to put it mildly.

9:53Costas Mourselas: So taking a beat here, you have the U.S. forcing Venezuela to sell its prized asset, Citgo. And Venezuela is looking to fight this tooth and nail. Not an easy situation here.

10:06Amelia Pollard: It's an area where a lot of other hedge funds would say, nope, can't deal with the reputational risk. It's a highly political situation. You'd be going up against the government of Venezuela, even the opposition government of Venezuela. Don't want to touch this with a 10-foot barge bull.

10:21Costas Mourselas: Which is exactly the type of deal that Elliott Management likes.

10:24Amelia Pollard: So one of the reasons Elliott finds it so appealing is they've had a lot of experience in oil and gas over the past decade. And they plan to actually run the business, as I understand it, which is really unique for a hedge fund. You know, most hedge funds will buy and sell shares. But Elliott actually planned to appoint the right people, make sure that their operational improvements are made and ultimately make as much money as possible. So it's quite a unique trade. And they've been building towards this because they're an activist and they've been an activist investor in a number of big energy companies, including BP, Philips 66.

11:00Amelia Pollard: And they also have a private energy portfolio of assets, which has done very well. Another reason why Elliot's so interested in this deal is that they have intense expertise in complicated legal situations. So Paul Singer himself, your member, has a law degree, worked in the law for a handful of years before starting Elliott. But many of their best investments have been deals that are super contentious and involve complicated court processes.

11:27Costas Mourselas: So Elliott's got this energy experience, the legal smarts, and then there's one more key factor, too.

11:34Amelia Pollard: The other big important feature here of why Elliott likes this deal so much is that they have a history of taking on sovereign nations head on. So in their Argentina debt trade, for example, the sovereign nation of Argentina was extremely opposed to what Elliott was pushing for, which was this big payout. And in this case, too, Venezuela itself is hugely opposed to the deal. So they're taking on Venezuela head on, which is something that a lot of other hedge funds wouldn't be willing to do.

12:03Costas Mourselas: So while other hedge funds would shy away from something like this, Elliott dives in to pursue Sitco. And you can probably guess that this auction process is not smooth or simple. I'll spare you all the legal maneuvering ins and outs, but just know that it takes another two years before the winners announced late last year.

12:22Amelia Pollard: Ultimately, Elliott does win. They are chosen with an$8 billion bid. And also critically, they have amassed this big group of very high-profile Wall Street firms to back their bid. So Apollo's in there, other well-known firms including Oaktree, Silverpoint, a hedge fund called Caronade. They're all backing Elliott's bid. And so they ultimately get the court's blessing in the fall.

12:48Costas Mourselas: And to be clear, when they win this for$8 billion, Kostas and Amelia's reporting shows that they're getting this company for a great price.

12:57Amelia Pollard: While Elliott All-In has bid$8 billion for Citgo, analysts have estimated over recent years that the company could be worth as much as$13 billion.

13:11Costas Mourselas: So Elliott wins Citgo for at least$5 billion, less than what some experts say it's worth. Elliott's overcome a lot to get here. But to be clear, the deal is not 100 % sealed. And after the break, I'll tell you just how much more complicated this situation becomes.

13:54Costas Mourselas: With award-winning service, low costs, and transparent advice, you can manage your wealth your way at Schwab. Visit schwab.com to learn more.

14:06Costas Mourselas: At the beginning of this year, the situation for Elliott in Venezuela shifts dramatically. The breaking news this morning. President Trump says the U.S.

14:15Amelia Pollard: carried out large-scale strikes on Venezuela overnight. He says its president, Nicolas Maduro, and his wife, Celia Flores, have been captured and flown out of the country. With any major deal, especially one that's$8 billion, the more uncertainty, the worse. So they were basically within the yard line of getting OFAC approval, which is the Office of Foreign Assets Control. And that sits under the Treasury Department. So without that, Elliot can't buy sick go. And it really means everything that they receive the green light. from Treasury through OFAC. But, you know, this basically added a crazy new layer of complication to the deal.

14:59Costas Mourselas: Then in January, during a White House press conference, President Trump says that he has found a new appreciation for Venezuela. Now, I'm loving Venezuela. They've been working with us so well. It's been so nice.

15:14Amelia Pollard: And obviously, this is a mercurial administration. But that adds all the more uncertainty of how the Trump administration will now view this deal, given that this government that he is working with is vehemently opposed to this deal. So this is just one piece in the U.S.'s much bigger planning for how to restart and revamp the oil industry in Venezuela. And there are big unknowns about how Citgo fits into that.

15:43Costas Mourselas: So not only does closing this deal require legal expertise and energy industry expertise, but now toss in a bit of U.S. diplomacy expertise, too.

15:54Amelia Pollard: Citgo is in a really unique position here. It's sitting at basically the crossroads of U.S. and Venezuelan relations. It's essentially a keystone business between the two. It has long been owned by Venezuela and is still technically currently owned by Pita Vesa, the state oil company. But now the U.S. and Trump has all of these new interests and relationships with the country. And so what that means for Elliott and its new or very close to new ownership of the company is now kind of thrown into question in a new way that it hasn't been before and definitely wasn't even a few months ago.

16:32Costas Mourselas: So, Amelia, what are the changes in this geopolitical situation mean for Elliott?

16:37Amelia Pollard: So obviously Elliott loves complicated deals and they were within the final yard line of getting that and presumably owning Sitgo. So now this newfound complication is maybe unwanted or has gone a bit too far. And I think it's fair to assume that Elliott only wants complication to a point when it benefits them. But, you know, too many added wrinkles is really not in their benefit.

17:01Costas Mourselas: So we talked about how Venezuela was planning to fight this sale until hell freezes over. But I'm curious, after last month's events and now that Delce Rodriguez is acting president of the country, is the fight going to continue in the same way?

17:19Amelia Pollard: We don't have any indication from our reporting that they've backed down from this or plan to back down.

17:26Costas Mourselas: Well, as we've established, Elliott's MO is all about controlling the situation. Do they have anything else in their back pocket to make sure that things proceed in their favor to get this deal over the line?

17:39Amelia Pollard: So Elliott is already in a uniquely good position for this potentially because Paul Singer has deep ties to the Trump White House. He is a huge conservative donor. He was one of the first backers of Marco Rubio, who's now the U.S. Secretary of State. Rubio now is playing a big role in the Venezuelan situation. So it basically means that the political sway and influence that Paul Singer and Elliott already have in the White House are now going to be kicked into high gear.

18:09Costas Mourselas: So back to that plan, what is coming down the pike here? What's the status of this deal right now, you know, in February? And how long might this take to close?

18:22Amelia Pollard: There are currently appeals from the government of Venezuela and a rival bidder, a mining company called Gold Reserve, which are being heard. So it will be quite a few months before we know for sure what will happen if sit go.

18:35Costas Mourselas: So in both of your opinions, do you think this deal is going to go through? Is Elliott going to close this?

18:42Amelia Pollard: Well, if we look at what other hedge funds have done in the wake of this crazy situation, the beginning of January, when Maduro was apprehended by the U.S. government, they were rushing to trade oil, to trade paper claims, to track down esoteric debt claims. And meanwhile, Elliot was sitting here on the sidelines with a cold hard asset of being within an inch of owning Citgo. And by luck or by skill or by both, they're better positioned than maybe anyone else to make money off the situation. And if this does all go through successfully, they'll be poised for a huge windfall of processing oil from Venezuela just as the country ramps up production in the years to come.

19:25Amelia Pollard: I agree. Elliot is very good at getting what it wants. And I think that there will certainly be some in the Trump administration that will enjoy that this sort of key Venezuelan asset, the jewel in the crown of PDVSA, will be in the hands of American business people. So I think that is still the base case. But whether it's delayed, it's subject to legal wrangling, or there's some conditions set by the White House, as we discussed earlier, that's all to play for.

19:57Costas Mourselas: Behind the Money is hosted by me, Michela Tendera. This episode was produced by me and Safiya Ahmed. Fact-checking by Simon Greaves. Sound design and mixing by Sam Giovinco. Special thanks to Andreas Parlight. Original music is by Hannes Brown. Topher Forges is our executive producer. Cheryl Brumley is the FT's global head of audio. Thanks for listening. See you next week.

20:53Costas Mourselas: You can invest and trade on your own. Plus, get advice and more comprehensive wealth solutions to help meet your unique needs. With award-winning service, low costs, and transparent advice, you can manage your wealth your way at Schwab. Visit schwab.com to learn more.