This Should Keep Oil and Gas Investors Up at Night, Says Jim Chanos
Famous short-seller Jim Chanos, who’s often referred to as the “China Bear” for making a correct call on China’s economic troubles way before the market picked up on them, is now making very vocal bearish calls on U.S. energy companies. (Source: “Jim Chanos Says Pain from Oil’s Fall Will Get Worse,” Wall Street Journal, October 20, 2015.) Members of the Organization of Petroleum Exporting Countries (OPEC) convened a meeting with non-members on Wednesday and apparently the inconclusive meeting is also hinting in the same direction.
Jim Chanos has lately been shorting oil and gas energy companies on the premise that these companies are generating returns by raising more and more debt, rather than by tangible operations. According to him, the companies are spending more on capital expenditures than they are making. Oil companies in the U.S. have suffered greatly in the last year as per barrel prices fell from $114.00 highs to under $40.00. Ever since, oil has been making attempts to rebound—but all in vain.
On Wednesday, OPEC members met with oil-producing non-members to discuss a solution to the sliding oil prices. But apparently the meeting ended fruitless with no final agreements on cutting oil output in order to prop up prices. Many invitees didn’t even show up. Meanwhile, OPEC members like Kuwait and Iran have continued to increase oil production at the current low prices despite Saudi Arabia’s efforts to curb their growing market share. They foresee losing market share to the U.S., fearing that the U.S. will rack up its oil production should they decide to cut down on output. The result? The U.S. faces declining output while OPEC continues to hike its production.
The U.S. Energy Information Administration (EIA) released a forecast this month saying that the country’s crude oil production declined further in September and will continue to head south through this year until the middle of next.
Now, Chanos points out that the U.S. oil companies will continue to lose as their costs of drilling oil outweigh their revenue in the wake of falling prices. According to him, oil companies are just using accounting techniques to paint a rosy picture of their company’s financials.
Companies have largely relied on their revolving credit facilities for debt-backed operations. The current low interest rates have encouraged many companies to step up their borrowing for capital expenditures, instead of using funds generated from within the business. According to Chanos, not only are these companies under threat, so are their creditors because in no way can these companies pay back the debt, at least in the foreseeable future.
It remains to be seen whether Jim Chanos will be right on another of his big bear calls. But there’s no questioning the future for oil companies which, as of now, looks bleak. Nonetheless, U.S. consumers are at least winning from low oil prices that have kept overall commodities’ inflation in check.
To sum it all up, I don’t see oil prices heading north any time soon.