On Monday, May 4, 2015, hedge fund manager David Einhorn gave a humorous speech criticizing the hydraulic fracturing industry at the Sohn Investment Conference in New York City. (Source: Bloomberg, May 4, 2015.)
Einhorn, founder and president of Greenlight Capital Inc., is famous for calling out companies with problems. He has a good track record, shorting Allied Capital, Lehman Brothers, and Keurig Green Mountain Coffee, Inc. stocks.
Hydraulic fracturing, or fracking, is a technique that stimulates wells by pumping hydraulically pressurized liquid (water, sand, chemicals) into the rock formation. When used alongside horizontal drilling, fracking can help open previously inaccessible shale deposits and make more profitable extractions. (Source: EarthWorks, last accessed May 5, 2015.)
Fracking Business: Too Much Spending, Too Little Return
At the conference, Einhorn expressed his bearish view on the hydraulic fracturing industry. He said that the fracking business is too expensive, and that investment returns will be “contaminated” if you invest in shale fracking companies. He argued that oil drilling companies are spending so much money on drilling that the returns will be limited no matter what the price of oil is.
He also took a shot at Wall Street, saying that the banks are “incentivized to help the frac-addits.” The result, according to him, is that Wall Street will have raised too much money for the fracking business, without it being paid back.
Pioneer Natural Resources: “Motherfracker” of the Industry
The company Einhorn picked on in particular was Pioneer Natural Resources Co., calling it the “motherfracker” of the industry. Einhorn pointed out that Pioneer is spending too much on drilling and waiting too long to see a return. For every dollar Pioneer puts into drilling, the company loses $0.20.
The hedge fund manager’s view is that Pioneer is “dramatically overvalued.” He also announced his short position on the company.
During his speech, shares in Pioneer plunged more than three percent before settling for the day, down more than two percent at $168.33 per share on Monday.
Is Fracking Really Overrated?
Whether Einhorn’s take on the fracking business is correct or not, one thing is for sure: if a business is spending too much of its resources without much growth, it’s time to pause and reflect.
Over the past few years, fracking companies have become the darlings of Wall Street, with a significant amount of money having been invested in them. Now, with oil prices well below what they were just in the summer of 2014, it will not be surprising to see them struggle.