Today David Einhorn gave his presentation at the Ira Sohn Investment Conference. For those who aren’t familiar with the conference, it’s turned into an annual who’s who lineup of top investment minds; and, it’s for a great cause – pediatric cancer research.
The title of his presentation was “Meet the Frackers (YouTube link).” In it, he describes the oil fracking companies (Pioneer – PXD, Concho – CXO ,EOG, Whiting – WLL, Continental Resources – CLR ) as “Addicted to frack,” in reference to their desire to continue to drill wells (funded by junk bond sales) despite losing money on each dollar deployed. There’s a joke here about losing money on each transaction but making it up on volume.
If you can’t make it through the whole presentation, slides 58 and 59 are the most damning. In it, he shows side-by-side the model used by a UBS analyst versus Greenlight’s model. Is it any wonder UBS’s model is much more bullish the fracking story given the fact that it makes millions of dollars doing M&A deals, and underwriting junk bonds (and equity) issued by that industry?
Just like many tech companies in 1999, and housing companies in 2006, many oil exploration companies are selling a story to Wall Street – who, in turn, sell it to Main Street. This one is being indirectly financed by the Federal Reserves 0% Fed Funds rate and QE bond purchases which have pushed money out of money markets, CDs and Treasuries and into junk bond funds (which we’ve written about before). The vast inflows into junk bond funds have allowed companies like Einhorn’s target Pioneer to raise capital despite its negative economics.
There’s no doubt this Junk Bond Bubble will end badly, most especially for companies that are burning cash like these oil frackers. Many energy companies have already begun to show up on our Junk Bond Bubble Dosimeter, and after this bubble pops, many more will be listed in infamy.
The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.