In November 2007, the relatively unknown hedge fund manager David Einhorn raised major concerns about the accounting at Lehman Brothers. It led him to bet against the company, and short the stock.
No one paid much attention… until Lehman Brothers collapsed.
Einhorn’s reputation was made, and his firm, Greenlight Capital, became one of the hedge funds to watch.
Now, Einhorn has found another prominent target: the frackers, U.S.-based oil exploration and production (E&P) companies.
Zeroing In
Einhorn called much of the industry “frack addicts” who were wasting money on wells that’ll never pay off.
He said some companies are currently getting a negative return on their invested capital. And that, in some cases, that was true even when oil was trading at $100 per barrel!
Einhorn added, “When someone doesn’t want you to look at traditional (financial) metrics, it is a good time to look at traditional metrics.” By “someone,” he means exploration and production companies.
Einhorn dislikes how these firms report their earnings through methods like EBITDAX, which means earnings before interest, taxes, depreciation, amortization, and exploration expenses. He said this measure “stands for earnings before a lot of stuff.”
In particular, Einhorn targeted five companies: Pioneer Natural Resources (PXD), EOG Resources (EOG), Continental Resources (CLR), Whiting Petroleum (WLL), and Concho Resources (CXO).
Pioneer seems to be his No. 1 target, since he dubbed it “the motherfracker.”
“A business that burns cash and doesn’t grow isn’t worth anything,” said Einhorn about Pioneer.
Instead, Einhorn encouraged investors to focus on cash as a guide to the health of the industry.
Since 2006, the U.S. oil exploration and production industry has spent $80 billion more in capital than it made selling oil. Einhorn says companies were only kept alive by the constant inflows of capital from bankers (also known as loans) and investors alike.
