NEW YORK (TheStreet) -- David Einhorn made waves in the oil and gas world when he rolled out a best investment idea at the Ira Sohn Conference this week when he suggested a short position on Pioneer Natural Resources (PXD).
The presentation of the hedge fund manager was well researched and contained a lot of solid analysis. I've commented here on TheStreet.com and at length in my upcoming book Shale Boom, Shale Bust on the long-term investment in shale oil fracking. Yet, I think Einhorn is too early to condemn the frackers as a whole.
Einhorn is right that oil fracking is an intensely capital-intensive business that forces major spending up front for positive returns in the future. He is also correct that calculations for reserves that are used to make valuations are done optimistically by the oil companies and by the analysts that follow them.
Further, the returns from oil wells are strongly front-loaded and give a false sense of confidence on the success rates and likely returns from future wells. This "treadmill" effect in oil fracking operations is only overcome by increasing production and spending, and is almost completely hostage to high and steady oil prices.
A high price is something we clearly don't have, nor are likely to have any time soon. This might have inspired Einhorn into bringing this investment idea to the conference. But even if I see some of the logic to his points, his timing is entirely premature.
Yes, there is a weakening market model of oil fracking over a very long period of time, but the growth period for shale oil is not spent in any way yet. There are still years of "prime" acreage opportunities that can fuel fantastic growth for shale frackers and spur stock gains far beyond where they are now. The largest gains in well efficiency and largest drops in costs for completing wells are only beginning to be seen.
Oil is hardly done going up ever again. I still think we will see $150 oil sometime in the next two years. So even if both Einhorn and I can agree on the ultimate future of U.S. fracking operations, we don't agree that the "end is nigh."
Great opportunities for investors still exist. I talk more about this with Jim Cramer in the video above.