Fracking is set to see a resurgence under President-elect Donald Trump and a Republican House and Senate, but influential short-seller Jim Chanos is telling investors to stay away from the North American exploration and production sector.
“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,” Chanos said at the Evidenced-Based Investing Conference in New York on Wednesday. He went as far as to call the industry a “capital sinkhole for investors.” (Source: “Jim Chanos: Fracking is a ‘capital sinkhole for investors‘,” Yahoo! Finance, November 16, 2016.)
Advertisement
Chanos points to the fluctuating price of oil and natural gas, and the use of full-cost accounting as two of the major reasons that the industry is doomed to fail.
“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,” said Chanos.
He went to warn all commercial banks that have lent money. And Chanos expects capital to return to the sector, but only to be wasted. “Already there’s so much capital coming back into this industry that the production numbers are starting to go back up,” he said. “The problem is this is Wall Street incinerating its capital. You give an oil driller money, they are going to drill.”
And to Chanos, they’ll continue on in this “terrible business” because the executives are compensated on production, giving them an incentive to “just keep drilling.”
It seems the order of the day is to be wary about the crude oil and natural gas market. Whether you’re bearish or bullish on investments like fracking, it’s good to take all advice under consideration.
