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May 7, 2015

Did Einhorn Just Discover Sex?

By Art Berman 

David Einhorn just discovered sex.   Too bad that he didn’t ask any adults if they already knew about it.


In a presentation at the Ira Sohn Investment Conference on May 4, Greenlight Capital hedge fund manager David Einhorn revealed that tight oil is not profitable even at oil prices of $100 per barrel.  

Mr. Einhorn has apparently just figured out what some of us have been saying publicly for many years.



In a post last month, I wrote almost exactly what Mr. Einhorn said yesterday:
“The financial performance of most companies involved in tight oil plays has been characterized by chronic negative cash flow and ever-increasing debt. The following table summarizes year-end 2014 financial data for representative tight oil-weighted E&P companies.”
Table 1. Summary of 2014-year end financial data for tight oil-weighted U.S. E&P companies. Money values in millions of U.S. dollars. FCF=free cash flow (cash from operations plus capital expenditures); CF=cash flow; CE=capital expenditures. Source: Google Finance and Labyrinth Consulting Services, Inc.

In an earlier post, I stated that tight oil companies had terrible financial results in 2014 when oil prices averaged more than $93 per barrel and that:
“this class of company has become the sub-prime derivative of the post-Financial Crisis period.”
Earlier this year, I provided considerable detail on tight oil and shale gas economics and reserves in a video (below).



David Hughes, Rune Likvern and others have also echoed much of what Einhorn apparently just discovered.

Mr. Einhorn gets shale gas completely wrong. He stated yesterday that “the natural gas frackers… are globally competitive, low‐cost energy producers with attractive economics.”  

The financial results for shale gas-weighted E&P companies are, in fact, much worse than for the tight oil companies, as shown in the table below.


Table 2. Summary of 2014-year end financial data for shale gas-weighted U.S. E&P companies. Money values in millions of U.S. dollars. FCF=free cash flow (cash from operations plus capital expenditures); CF=cash flow; CE=capital expenditures. Source: Google Finance and Labyrinth Consulting Services, Inc.
(Click image to enlarge)


Sampled shale gas companies’ negative cash flow for 2014 was -$15.5 billion–$5 billion more negative than their tight oil counterparts and $7 billion more negative than it was in 2013. Shale gas debt for 2014 was more than $93 billion, an increase of almost $10 billion over 2013.  

What part of these financial results does Mr. Einhorn see as economically attractive and globally competitive?

I give David Einhorn credit for recognizing what few among Wall Street investment firms have publicly stated namely, that tight oil was not profitable for most companies at high oil prices and is a big loser at current prices. It is difficult to understand why he needs to take credit for an insight that is hardly new.


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