Tuesday, May 5, 2015

Einhorn Actually Likes Shale Gas

Much was made of the presentation yesterday (5/4/15) by Greenlight Capital's David Einhorn at the Sohn Investment Conference in New York where he slammed shale oil producers, questioning the economics of shale oil.  He is short Pioneer Natural Resources and EOG, calling them the Mother Fracker and Father Fracker in his presentation.  Einhorn is a celebrity "shorter" who bets against stocks and often makes a very public case against these stocks (in fairness, he also buys stocks he likes too), so his presentations often generate lots of buzz.

What was lost in the buzz was Einhorn's positive comment about shale gas producers noted by SNL, "I am not talking about the natural gas frackers, which are globally competitive, low cost energy producers with attractive economics."  I'm not used to people saying nice things about shale gas economics.

It has been known for a while that that shale oil requires high oil prices to be successful, usually north of $90, but Einhorn was also challenging how producers (I hate to call them "frackers") are valued.  He criticized the use of cash flow metrics, usually EBITDA (earnings before interest taxes and depreciation) instead of net income (the GAAP standard accounting bottom line), which takes into consideration interest (lots in a company that depends on debt), depreciation (lots in a company that makes big capital investments), depletion (lots in an oil company) and amortization (potentially lots if company makes acquisitions, especially bad ones).

Energy investors today are often more focused on growth potential (reserves growth, etc.) of producers than typical accounting measures like net income, but honestly, this is an age old argument in many industries, especially those with high capital expenditures.  It is also a big difference in valuing private and public companies.  Private equity investors focus more on EBITDA because they are focused on the cash flow available to pay off debt when they buy a company.  Oftentimes, net income only comes into play when calculating taxes and computing compliance ratios for the bank.

I'm not going to wade into this argument, but I can't say I saw anything terribly new in Einhorn's presentation. I doubt his celebrity is going to change how investors value energy companies, especially since the biggest single assumption in determining a company's worth is future energy prices, but he's never been shy about trying.

1 comment:

Anonymous said...

Interesting insight on producer EBITDA/Net income valuation.