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Oil Majors Falling Out Favor With This Hedgefund Boss

 Huge oil companies, among the largest businesses in the world, don’t excite hedge fund manager Jim Chanos because today they have to work harder and more inefficiently than ever to bring their products to market.

“[W]e’re just seeing that … these guys like Exxon and Chevron and Royal Dutch Shell are simply replacing $20 [per barrel] oil with $80 oil,” Chanos said May 24 on the PBS television program “Wall Street Week.” “So high return-on-capital businesses are becoming more mundane return-on-capital businesses.”

Related: Why Tesla’s Battery’s Won’t Work For Rooftop Solar

This isn't surprising, as the average global price of oil plummeted from its high of more than $110 a barrel 11 months ago to less than half that value by the end of 2014. Now it's recovered a bit to prices in the mid-$60 range.

Chanos, the president and founder of the New York investment adviser Kynikos Asssociates, said the reason that operating expenses are racking up is because oil majors have to “deal with Mr. Putin” – that is, Russian President Vladimir Putin – and “having to do things like drill in the Arctic.”

Further, he said, energy companies are now forced to “construct these enormously expensive LNG – liquefied natural gas – plants and increasingly add … risk to the portfolio where it just used to be much simpler. You know, drill somewhere and pull the oil out.”

All told, he said, he and other hedge fund managers have come to feel “really negative” about integrated oil companies. As a result, he said, Kynikos is short-selling some of the most prominent energy giants because of a potential surplus of oil and gas that is a “disaster waiting to happen” to the industry.

Related: Shell Approval May Trigger Resource Race In The Arctic

Chanos said he’s “leery of the very leveraged guys in any company that’s running negative cash flow after capital spending. So they’re not covering their dividends or their buybacks.” As for specifics, he said, “So names like Chevron, names like British Gas-slash-Royal Dutch, and then of course some of the big national companies, the Petrobrases of the world.”

Such comments from Chanos are nothing new. Earlier this month, at the May 5-8 Skybridge Alternatives Conference in Las Vegas, he said Kynikos is betting against shares of Chevron as well as both Shell and British Gas, now known as BG Group, which Shell has decided to buy for $70 billion, making it probably the world’s biggest LNG producer.

Chanos said that making such a large bet on LNG could be a liability because in addition to the expense of producing, storing and shipping the fuel, there’s been languid demand for it during the past several years. BG’s CEO, Helge Lund, has since responded, saying demand for the fuel is growing and that LNG will gradually take over an increasingly larger share of global energy.

Related: China To Create An Oil Supermajor Twice The Size Of Exxon?

Closing the program, one of the interviewers, Anthony Scaramucci, the founder of Sky Bridge Capital, asked Chanos if he could offer an “actionable idea” for investors. In a nutshell, Chanos replied, he would “short the North American frackers,” whose oil and gas extraction process is so expensive.
“It’s a flawed business model,” Chanos said.


By Andy Tully Of Oilprice.com

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  • David Hrivnak on May 27 2015 said:
    I for one have gotten out of anything fossil fuel based and have gone with solar and electric vehicles. Powering my home and cars cleanly from the sun is quite liberating.
  • Blaine on May 27 2015 said:
    What Jim Chanos, fails to take into consideration - and what most people fail to take into consideration - is technological evolution in the oil and gas industry. 15 years ago the US was considered a tapped out producer - while everyone knew there was still a lot of oil in the ground, getting it out was always the issue. The oil and gas industry is characterized and populated by men and women who take such a statement as a challenge and figure out ways to get oil and gas out of the ground economically. If a fracked well costs $80 a barrel today, you can bet someone is working on how to make that $40 a barrel. The beauty of the US oil and gas industry is that it's NOT nationalized and is populated by wildcatters, entrepreneurs, geniuses and driven individualists who make it a point to prove people wrong. This has been the hallmark of the oil and gas business in the US since the late 1880s and it continues today.

    I suspect that we will reach a point in the near future where finding the hydrocarbons to burn will not be the issue, we will instead have reached a point where we have plenty of stuff to burn, but if we continue doing so, places like Houston and New Orleans will be under water.

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