This Einhorn thing has me a bit spooked, no doubt about it. At the Sohn conference, the master of the Greenlight hedge fund trashed the business model of the major US shale oil exploration and production companies – and I think his analysis is almost completely right, with a few caveats.
It's astounding, as I get ready to release my new book, “Shale Boom, Shale Bust”, how many of the themes I write about are starting to make headlines with 'the more powerful' – besides Einhorn, the NY Times has recently written about the transfer of 'swing barrel' responsibility from Saudi hands into the hands of producers here in the US, another major theme of the upcoming book. I must be on the right track. But back to Mr. Einhorn.
His arguments on the shale industry stem from development costs that outrace the enterprise value of the resultant business – in other words, costs sunk into getting oil out of the ground only serve to deplete the product you've paid to develop. He's got a problem with current low prices too.
Now, the oil business is always going to be based upon a depleting reserve model, so that was an immediate rebuttal to Einhorn – but shale is admittedly much different. It develops fast and for less per well than any other kind of oil, which leads to an incredible lack of development discipline, and it continues to sit at the upper end of breakeven costs, even with recent efficiency gains. Worst of all, the production…