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Jim Chanos Slams the Fracking Industry

Is it Time to Short the Frackers?

Written by Jeff Siegel
Posted November 18, 2016 at 2:22PM

Jim Chanos is likely the most famous short-seller on the planet.

A savvy investor, Chanos has built a fortune by betting against certain industries and companies.

I’m not personally a fan of short-selling though.

I get it.

Certainly you can make a lot of money if you know what you’re doing. But just the idea of betting on a company to fail seems kind of shitty. Especially when it’s a company that’s doing great and important things.

Take Tesla (NASDAQ: TSLA), for instance.

Jim Chanos has been bashing Tesla for years, and has willingly used his influence to help put negative attention on the stock. After all, if he’s shorting Tesla, certainly he’ll want to do whatever he can to make sure the stock tanks.

But in all fairness, his analysis is typically sound – from a technical point of view.

That being said, if you know anything about Tesla, you know that this is not a stock you can analyze in a conventional manner. There are simply too many factors that cannot accurately be quantified, such as the brilliant mind of Elon Musk or the legions of Tesla fans around the world who have shown evidence of mimicking the type of fanaticism that helped build the Apple (NASDAQ: AAPL) empire.

These are the things Chanos cannot wrap his head around, and these are the things that keep me from putting too much faith in Chanos’ analysis of the company.

Of course, that’s just one example of where I see Chanos making a miscalculation. Outside of that, the guy’s usually on-point. And his latest comments on fracking are without a doubt, spot-on.

The Great Fracking Sinkhole

In a recent presentation, Jim Chanos noted that the North American exploration and production sector has been a capital sinkhole for investors. He is right.

Check it out …

One area we have been really negative on from the run up, the collapse, to the following run up, that we think is a capital sinkhole for investors is the North American exploration and production industry — frackers.

What we’ve realized is over the course of oil going from $40 to $100 to $40 and nat-gas going from $4 to $12 to $2 to $6 to $3, the North American E&P space has never made a dime. And if you allocate properly, again, the capital, and depreciate, economically, the wells over their economic life, you do not have return. And, in fact, what we would say is what they would call EBITDA minus what we would say is the real capex to keep your production constant is a negative number.

Earlier this year, Chanos told investors that a number of oil and gas producers’ CAPEX would shoot up, even with oil prices hanging out at $43. He was right.

Sure enough, it happened because it has to. Already there’s so much capital coming back into this industry that the production numbers are starting to go back up. The problem is this is Wall Street incinerating its capital. You give an oil driller money, they are going to drill.

Chanos went on to say that if you read the proxy statements, you’ll see that a lot of the executives are compensated on production and there’s a real incentive to just keep drilling.

… with capital markets open, they’re going to drill. It’s a terrible business, at least as it stands right now.

I couldn’t agree more.

Invest accordingly.

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