Is Fracking as Bad an Investment as David Einhorn Says?

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) 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), EOG Resources (EOG) and Continental Resources (CLR), 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.

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