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.
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.
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