Einhorn Slams "Mother Frackers"

David Einhorn, the famous billionaire hedge fund manager, just found his next target: U.S. onshore E&Ps or the oil fracking companies. He laid out his short thesis during the annual Sohn Investment Conference in New York. The share price of Pioneer Natural Resources (PXD), EOG Resources (EOG), Concho Resources (CXO), Continental Resources (CLR) and Whiting Petroleum (WLL) dropped just as he mentioned them in his speech at the conference .

He called shale oil fracking a “business that burns cash and doesn’t grow anything.” "The banks are clearly incentivized to help the frac-addicts" by financing "The most expensive method of extracting oil, the industry simply can’t withstand lower oil prices". He specifically cited Pioneer Natural Resources as the 'Mother Fracker' (and EOG Resources, the 'Father Fracker', if you are wondering).

He thinks PXD should trade closer to $78 a share, instead of the near $170 current levels. PXD stock suffered an almost 2% loss on the day, and continued to drift lower in after hours. EOG stock was able to roll off Einhorn and managed to end the day flat (EOG has relatively stronger balance sheet with 2014 Debt-to-EBITDA ratio at  0.6 vs. PXD at 0.9).   

Slammed by Einhorn 

Source: Yahoo Finance, May 4, 2015 4:18pm US CST

We think in general Einhorn's view may be justified as many smaller E&Ps have outspent their cashflow in the past few years with poor balance sheet positions. This is also confirmed by Moody's (MCO), 

[The oil and gas sector] liquidity-stress index (LSI) more than doubled to 9.8% in March from 4.4% in December as negative cash flow, borrowing-base redeterminations, and increased potential for covenant breaches pressured liquidity.  

One better news is that Moody's noted, 

.. the [LSI] index is still well below its 26% peak in March 2009 during the last oil price slump.   
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Alexis Renault 5 years ago Member's comment

Einhorn's fund fell 1.7% Q1 so why is mr. market even listening?

Joel Santiago 5 years ago Member's comment

Because in this case he's right. And he's not the only one who says so. Look at the Moody's data the author included. I'd say Einhorn is right on this one.

Dick Kaplan 5 years ago Member's comment

Interesting, I originally dismissed Einhorn's statements since his recent track record has been anything but stellar. But based on your recommendation, I'll take a deeper look.