“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.
“As oil prices rose, it seemed like the frackers should have been drowning in cash. But none of them generated excess cash flow, not even when oil was at $100 a barrel. In fact, the opposite was true.
“Recently, oil prices have declined. Because the frackers have less revenue, they’ve been forced to cut Capex. Though they will continue to spend more dollars than they take in, production is no longer growing. A business that burns cash and doesn’t grow isn’t worth anything.
“On the $36 of revenues per BOE [barrel of oil equivalent], Pioneer [Pioneer Natural Resources] spends about $14 on field operating expenses and another $6 on corporate expenses. Subtract the historical $28 of Capex, and Pioneer loses $12 for every BOE it develops. That’s like using $50 bills to counterfeit $20s.”
All of the above is from a recent presentation by David Einhorn, cofounder of Greenlight Capital
