David Einhorn At 2015 Ira Sohn Conference PresentationVW Staff
Einhorn is Chairman of the Board of Greenlight Capital Re, Ltd, founder of Greenlight Capital. founder of Greenlight Masters, and serves on the boards of Hillel: The Foundation for Jewish Campus Life, The Michael J. Fox Foundation for Parkinson’s Research, and the Robin Hood Foundation.
David Einhorn graduated summa cum laude with distinction in all subjects from Cornell University, where he earned a B.A. in Government, from the College of Arts and Sciences. Want to know more about his early life and time at Cornell? Check out this transcript which ValueWalk obtained from a recent speech to students.
David Einhorn is the first speaker at the Sohn 2015 Conference, which is interesting since in prior years he was last or near last. We do not know if there is any specific reason but see below to hear what he has to say.
David Einhorn live coverage begins below (note everything is in EST and PM).
12:05 David Einhorn is talking about frackers – it is a boom and bust industry and in the 80s it busted. Enter the frackers. Frackers pushes chemical, water and sand and use horizontal methods to get oil in the rock in three places there have been found lots of oil. Fracking is expensive with buying the land and drilling etc. So the frackers took there story to Wall Street. Frackers have spent $80 billion more than they made.
12:10 Even with oil at $100 a barrel they could not make money – they just borrowed more money – at this price they lost $20 billion. Some frackers made up metrics like EBITDAX – and investing for growth in this area is fiction. Here the CapEx goes towards getting out one barrel at a time. Wall Street claims Capex funds growth and depreciation is non cash, but Einhorn believes the real reason is because it does not fit their investment story.
12:13 The industry only wants us to look at the cash that comes out of the business. A business which burns cash and doesn’t grow is not worth anything. Einhorn specifically talks about PXD one of the largest frackers. Pioneers has a $26 B market cap and EV of around that and should earn more next year. Einhorn does the math for Pioneer Natural Reserves and notes that natural gas and NGLs both trade at much less than WTI.
Einhorn said some energy companies have “negative development economics” and criticized the oil fracking industry’s cash burn rates and dependence on alternate accounting methods. Einhorn said frackers and bankers were ignoring depletion because it did not convey the story they wanted to tell. Einhorn said Pioneer specifically “earns a positive margin, but it’s not a positive value.”
Pioneer’s reserves are worth a lot less than stated since oil has tanked since the estimates were done. PXD has exciting story but it has little to do with financials. PXD has not adjusted any of its estimates despite the drop in oil. The bulls counter that PXD has new technology which makes historic performance irrelevant.
Einhorn says that few analysts consider current cost and use multiples of EBITDAX. However, Einhorn assumes that all the BOE exists and other conservative assumptions and discounted at WACC the number is a negative and gives the company a PT of $78 a share while the shares currently trade at $167.
12:30 The best way to bet on frackers is to buy oil because the value of the frackers depends on the long end of the curve – the alternative is to end spending – either way the frackers are doomed.
Reserves have cost about 28 dollars they net about 36 dollars per barrel. They lose about 12 dollars a barrel
Einhorn thinks prices will recover to about 68 a barrel ( future strip price)
People are paying 27 billion for the company that is too much
Pioneer needs to update its price
Should be 20.68 BOE
The problem with exploiting your best prospects is that it leaves you with some less exciting items.
DCF assumptions hypothetical
11 billipn BOE exists
all costs retained
capex is 20.66 BOE
Big picture, Fracking for OIL 75% of revenues are spent on capex