Jim Chanos REUTERS/Brendan McDermid
Yahoo Finance
Julia La Roche
November 16, 2016
Influential short-seller Jim Chanos, who runs hedge
fund Kynikos Associates, says the North American exploration and production
sector has been a “capital sinkhole for investors.”
“One area we have been really negative on from the run
up, the collapse, to the following run up, that we think is a capital sinkhole
for investors is the North American exploration and production industry —
frackers,” Chanos said at the Evidenced-Based Investing Conference in New York
on Wednesday.
Chanos, whose been looking at the hydraulic fracking
sector since going short Chesapeake (CHK) in 2011, realized it “was much an
accounting story as it was a geology story.”
Specifically, Chanos found that most of the companies
in the sector use what he calls “one of the great oxymoronic phrases of
finance” — full-cost accounting. This means everything is capitalized and
written off with the estimated life of the wells, he explained.
“What we’ve realized is over the course of oil going
from $40 to $100 to $40 and nat-gas going from $4 to $12 to $2 to $6 to $3, the
North American E&P space has never made a dime,” Chanos said.
“And if you allocate properly, again, the capital, and
depreciate, economically, the wells over their economic life, you do not have
return. And, in fact, what we would say is what they would call EBITDA minus
what we would say is the real capex to keep your production constant is a
negative number.”
This should terrify every commercial bank that’s lent
money, he noted.
In the last 18 months, we’ve see companies cut capex
“to the bone” because the capital markets were closed with oil prices hitting
lows. Those companies subsequently saw their production drop. When the capital
markets opened back up this year around April and May, Chanos said he expected
that the companies would see their capex budgets go up next year despite oil
prices still hovering around $43….
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