David Einhorn Short PXD Sohn Conference
See David Einhorn notes here.
I’m not going to talk about St. Joe. But I do want to draw parallels between St. Joe and today’s idea.
During the last housing boom, St. Joe, a Florida?based real estate company, invested heavily in land development but destroyed value. It had a million acres ? practically an infinite supply ? that aside from a few premium spots on the beach could not be developed profitably.
What is an infinite supply of negative return investment opportunities worth? Not much. By 2007, St. Joe’s best option was to halt development and gradually liquidate its land. And that’s what it did. By ceasing investment, the company avoided bankruptcy.
Today I’m going to describe a similar situation with certain energy companies. These companies have negative development economics, meaning that aside from a few choice locations, they don’t earn a positive return on capital, but have a nearly infinite supply of negative return opportunities.
What should such a supply be worth? Not much. Yet, the share prices are very high and we believe are poised for a fall.
Whether oil fracking uses immense amounts of scarce water, contaminates the groundwater, emits carcinogenic chemicals, or causes earthquakes is beyond the scope of this presentation.
In some places, the rocks hold oil. Lots and lots of oil.
The frackers have found significant amounts in 3 major basins: the Bakken in North Dakota, the Eagle Ford in South Texas, and the Permian in West Texas.
Fracking is expensive. Buying the land, setting up infrastructure and drilling the holes costs money. Lots and lots of money.
So the frackers took their story to Wall Street, explaining how fracking is a new way to get rich in oil.
The large oil frackers have spent $80 billion more than they have received from selling oil. Wall Street greased those skids by underwriting debt and equity securities that allowed them to garner billions in fees.
The banks are clearly incentivized to enable the frack addicts. What’s less obvious is whether investors are furnished a clear analysis of the returns these companies actually generate.
Full David Einhorn slides below