At the 2014 Sohn Investment Conference, Einhorn was so inspired by a presentation predicting a sharp fall in oil prices that he reviewed his positions and started to sell. At this year's investment conference, he worked to wield influence over oil with some predictions of his own. His target: fracking, of which he is not a big fan.
The billionaire and manager of hedge fund Greenlight Capital tore into the industry in a presentation at the big-time investor conference in New York this week, and he didn't pull any punches.
Einhorn laid out an extensive case against hydraulic fracking companies (the full slide show is 92 pages), arguing they spend too much to generate a profit -- even when oil prices are at their highest. "As oil prices rose, it seemed like the frackers should have been drowning in cash," he said. "But none of them generated excess cash flow, not even when oil was at $100 a barrel. In fact, the opposite was true."
And now that oil prices have dropped, the fracking business is looking even worse in Einhorn's eyes. Frackers have less revenue, meaning they've been forced to cut capital expenditures. Production is no longer growing, but they continue to spend more than they take in. "A business that burns cash and doesn't grow isn't worth anything," Einhorn said.
Hydraulic fracturing -- fracking -- is a controversial way to get oil from shale, a kind of rock. Rock is fractured by a hydraulically pressurized liquid made of water, sand and chemicals. The practice has come under pressure from some who that it has a negative impact on public health and the environment. Einhorn's beef, however, is strictly business. "Profits and losses," he said. "We object to oil fracking because the investment can contaminate portfolio returns."
The billionaire pointed to a number of fracking offenders, including Concho Resources (CXO), Whiting Petroleum (WLL) , Continental Resources (CLR) and EOG Resources (EOG). He sunk his teeth into Pioneer Resources (PXD), which he called the "Mother-Fracker."
What's so bad about Pioneer? According to Einhorn, it loses about 20 cents of present value for every dollar it invests. It also, like many fracking companies, emphasizes non-traditional financial metrics to measure performance, including EBITDAX (earnings before interest, taxes, depreciation, depletion, amortization and exploration expenses) -- or, as Einhorn describes it, "earnings before a lot of stuff."
Moreover, he contends Pioneer has manipulated its investor materials by maintaining resource estimates that assume $90 oil and $5 natural gas -- and removing clarifications of its assumptions. "It would seem that Pioneer has not adjusted its resource estimates for lower prices," Einhorn said. "Surely, some opportunities that were economic before are not economic now."