NEW YORK (The Street) -- With lower crude oil prices in recent months, it doesn't take much to worry investors about the already uncertain future of U.S. shale fracking.
So when Greenlight Capital President David Einhorn narrowed his attack on the fracking industry at this week's Sohn conference to lambast Pioneer Natural Resources (PXD - Get Report) for a "nearly infinite supply of negative return opportunities," the company's stock immediately slid 4%.
The dip in prices was felt across Pioneer's peer group. Concho Resources (CXO - Get Report), EOG Resources (EOG - Get Report) and Continental Resources (CLR - Get Report), all fell 2% within 30 minutes of Einhorn stepping onto the stage.
Jim Cramer's Action Alerts PLUS charitable trust holds stock in EOG Resources, and he recently wrote about hedge-fund manager David Einhorn's attack on fracking. Read Cramer's thoughts on Real Money here.
But is the industry, which extracts oil from shale formations in the U.S. with a process known as hydraulic fracturing, or fracking, as bad an investment as Einhorn said? The answer depends on your perspective.
Historically, the business of drilling for shale oil creates an "endless circular appetite for more drilling for lesser returns," says Dan Dicker, a former New York Mercantile Exchange trader and TheStreet columnist.
"Think of a classic Ponzi investment scheme -- constant fresh capital is needed to generate false gains and pay off early investors," Dicker wrote in a recent column for TheStreet. "Shale production is similar in that more and more drilling is constantly needed to continue to generate even equivalent returns, much less growing ones."
Many investors still have faith in fracking, though, holding onto the stock on the assumption that future cash flows will make up for temporary losses and capital expenditures.
The trading turbulence on Monday was more the result of investor anxiety than flaws in Pioneer's business fundamentals, said Daniel D. Guffey, an oil and gas equity analyst with Stifel Nicolaus.
"In standard Einhorn fashion, his pitch was filled with quotable one-liners claiming that 'Mother Frackers,' such as Pioneer, destroy value and produce negative returns on capital," Guffey wrote in a report Tuesday.
"He went so far to say that 'frackers are doomed,'" Guffey continued. Einhorn also claimed most sell-side analyst valuations are done using inaccurate short-hand math focusing solely on multiples of EBITDA," an industry measure of earnings that excludes items such as depreciation and taxes, he said.
"We disagree on all accounts," Guffey said.
The marginal costs of production have also dropped in the Permian basin in west Texas, through technological developments and new methods that allow frackers to grow inventory from development in tighter spaces, adding "significant value" to its business, according to the Stifel Nicolaus report.
Stifel maintains a buy rating for Pioneer with a $195 price target, emphasizing strong liquidity versus debt on Pioneer's balance sheet. At the end of last year, Pioneer had $2.5 billion in liquidity comprising $1 billion in cash and $1.5 billion in an unsecured credit facility.
Still, for many investors, Einhorn's gloomy analysis gave voice to the uncertainty surrounding the future of the once-burgeoning industry, especially as lower oil prices diminish opportunities for companies like Pioneer to turn a profit.
"We object to oil fracking because the investment can contaminate portfolio returns," Einhorn said. His chief indictment: Fracking companies have been burning cash for more than a decade and are obfuscating losses with nontraditional accounting metrics.
The low energy prices are almost irrelevant to Pioneer's failure to turn a profit, Einhorn said. The fracking industry has been using up cash regardless of the commodities environment -- in the flush years of $100-per-barrel oil and amid today's supply glut and $60 crude-oil prices.
Among the 16 biggest oil frackers, there has been a cash burn of more than $80 billion since 2006, according to a Greenlight Capital analysis. That reflects both low returns and massive capital expenditures to develop the shale oil basins, such as the Eagle Ford in south Texas, the Permian, and the Bakken in North Dakota.
"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 $100 a barrel. In fact, the opposite was true," according to Greenlight Capital.
"They responded to higher oil prices with even more aggressive capital spending, financed ever more cheaply by Wall Street," Greenlight said. "The result was that higher oil prices led to even greater cash burn. Last year, with $100 oil, the group burned $20 billion."
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After capital expenditures, production costs, taxes, and transportation fees, Einhorn estimates Pioneer is losing about $12 a barrel.
And one of his major criticisms is that large fracking companies are measuring their performance with metrics other than those defined in the Generally Accepted Accounting Principles (GAAP) that the SEC requires publicly traded companies to report. One such method involves including expected future earnings.
"One useful rule of thumb: when someone doesn't want you to look at traditional metrics, it's a good time to look at traditional metrics," Einhorn said.
Although Pioneer does emphasize certain non-GAAP models such as EBITDAX, an earnings measure that excludes a variety of expenses such as "depletion," the company does file official GAAP net income and cash flow figures with the SEC.