(MENAFN- ProactiveInvestors) Closely followed hedge fund short-seller David Einhorn has fired a shot across the bows of the US oil fracking industry.
Einhorn in a presentation to the SOHN Investment conference in New York questioned the value of several of the largest American fracking businesses.
The fund manager who famously bet against Lehman Brothers prior to its collapse characterised US oil as a boom-and-bust industry and said too much cash has been put into the ground.
America’s largest frackers have together spent some US$80bn more than they’ve earned he said.
Moreover he claims that America’s sixteen largest oil fracking companies have spent about a third of a trillion dollars simply drilling holes.
These “frack addicts” have been propped up by Wall Street which he says has made billions in fees as it has “greased the skids” with the provision of debt and equity securities.
Einhorn adds that large scale investment has not delivered sufficient returns as the money has been spent on further drilling projects. He says that for fracking companies capex has on averaged 75% of revenue in the past eight years.
“As oil prices rose it seemed like the frackers should’ve been drowning in cash but none of them generated excess cash-flow not even when oil was at US$100 per barrel” he said.
He also criticised the use of non-traditional (non GAAP) financial metrics when investors gauge fracking companies. “The frackers insist they are investing for growth which leads investors to ignore GAAP financials in favour of non-traditional metrics such as EBITDAX.
“Investing for growth is a fiction. Unlike many businesses - where investment spending works towards building a durable asset a franchise value and a recurring revenue stream – here the capex goes to reducing [the size of the] assets one barrel at a time.”
“A business that burns cash and doesn’t grow isn’t worth anything.”
Einhorn’s high profile critique highlighted large oil fracking firms such as Concho Whiting EOG resources Continental Resources and Pioneer Natural Resources.
The last was certainly not the least criticised. Eihorn’s presentation somewhat singled out Pioneer as the ‘MotherFracker’ and whilst acknowledging that it is “well loved well located and well run” he says the company [America’s second largest oil fracker] earns a negative economic return on capex.
Stock prices across the sector tumbled following Einhorn’s presentation on Monday.
The hedge fund manager clarified however that he is not talking about natural gas fracking companies – which he describes as globally competitive low cost energy producers with attractive economics.
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