Einhorn slams "mother fracker" at Ira Sohn conference

http://www.cnbc.com/id/102645305

I actually do like his explanation into what different terms mean, and Pioneer is the company I have said numerous times is inexplicably valued.  So I agree with him on his selection of a short I guess.

But the presentation is very deceptive in a number of ways.

1) First of all I totally disagree with the notion that a company is destroying value if it has negative free cash flow, as he basically stated.  By that metric, nearly every tech startup is worthless.  If a company is growing, and it is reinvesting cash faster than it is generating it, it may be destroying value, or it may not.  But you certainly can't make the sweeping generalization that it necessarily is.

2)  You can't take the current price of oil (which is low), and then compare their costs from prior years (which is high), and then say that this means they are destroying value.  EOG has certainly been earning an economic return, yet they made lots of gas investments back in 2005 and 2006, which would be totally uneconomic at today's prices.  At the time, the price of gas was much higher.  An example of this is if I were to drill a well and sell forward the production to lock in the price, then the price of oil goes to $5/bbl for some reason and someone comes along and says "you idiot, look at all this value you are destroying!  It costs you $40/bbl to produce that oil and now oil is $5/bbl, look at what a bad idea it was to drill the well!"  Not really, I made money on the well because I was hedged, it would just be stupid to drill another well at this price...

3) When a company is in the process of shifting from inexpensive gas production to expensive oil production, as PXD was and is, then they may not be growing on a per BOE basis but they may be growing when you adjust the difference in value between oil and gas.  For instance, EOG was showing very poor growth numbers on a per BOE basis (in both reserves and production) when they were shifting to oil from gas, but in fact their cash flow was growing big time.  Einhorn points to their negative FCF and slow growth in BOE of reserves, and then says that they are free cash flow negative and not growing... that is a deceptive argument.

Unconventional oil production has certainly gone through an inefficient and chaotic period over the past half decade or so now, but this was a relatively immature technology and it has improved at an astounding pace.  The increases in efficiency are incredible.  But while I do find much of his presentation deceptively worded, and perhaps he thinks it makes his case stronger, I DO AGREE that PXD has an inexplicably high valuation, and long has.  So I like his pick, but don't buy a lot of his explanation.

Earnings Notes

Whiting Petroleum (my only current position)- Bakken Oil producer. They missed earnings but shares gained when they said they might consider adding rigs (from 11 in the back half of this year) if oil were to go up to $70 (nymex).  They said they expected to grow production in the high single digits yoy at $50 oil and spend inside of cash flow.  The vast majority of discussion was about ways to streamline costs and the technical improvements in their fracs.  They've seen costs in Bakken come down from $8.5mm per well to about $6.5mm and they think there's another 20% of cost to come out yet.  Some of the technical talk was about major improvements from going to "slickwater" fracs instead of gel-fracs.  They are seeing big improvements in the 90 day rates in the bakken.  These are on top of the improvements from the last several years related to moving to cemented liners, increasing sand, and frac stages.  The overall gist is that the economics are indeed improving on multiple fronts, and the so called "breakeven" point continues to drop.

Cabot- Dry gas North-East Marcellus Producer.  They are reporting cash costs of $.80 per mmbtu of gas, plus F&D (capex) cost of about $.45.  The wells they are drilling in North East Marcellus have estimated ultimate recoveries of 20 BCF of gas.  If all gas wells were this productive you'd only have to drill about 4 wells per day, and you could supply the whole US's gas consumption with about 60 rigs.  They also report that they can do 80% IRRs on $2.45 gas price realizations.  Its not even low gas prices that are holding up production, it is lack of takeaway infrastructure.  Capacity out of North East Pennsylvania is set to double to 12 BCF/d over the next four years.  If you have any thoughts that natural gas prices might go up significantly in the USA, listen to their conference call.

Range Resources- South East Marcellus producer.  Similar themes to Cabot.  The resource size is hard to conceive, and cost continue to go lower.  In Range Resources's 400,000 acres they may have enough gas to satisfy US demand for 6-8 years at current consumption levels, based on their resource estimate for the Marcellus, plus the Utica and Devonian potential for the same acreage.  The stock has been hot for the past few weeks.

Those are the only transcripts I've read.

The majors crushed earnings estimates
Exxon at $1.17 beats by .35
Total at $1.13, beats by .28
BP (NYSE) $.82, beats by .22
Chevron $1.37, beats by $.57

Almost all of the beats were due to refining, transportation and chemicals.  It is rather amazing that estimates could be that far off and so consistently.... some of these companies had only half of their earnings from upstream.


US inventories are still building, but only at 1.9 million barrels last week, though some of this moderation in the build may be due to seasonality, as we are starting to get into a seasonal draw period as the refineries run at a high utilization rate into the summer.