Short seller Jim Chanos of Kynikos Associates warned that
the North American energy industry could be overvalued and
specifically called out Continental Resources in a best ideas
presentation at a conference on Tuesday.
In our view, people have been looking at this industry
through the rose-colored glasses of Wall Street, said
Chanos at the CNBC Institutional Investor Delivering Alpha
Conference at the Pierre Hotel in New York.
Noted short-seller Chanos, the founder of hedge fund Kynikos
Associates, shared that as a result of this view, his firm is
shorting the crude oil and natural gas producer, which is based
in the Bakken Reservoir.
According to Chanos, a mismatch between production
growth and capital expenditure will eventually drive down the
companys share price. Chanos said Continental Resources
has had negative free cash flow, which has led to a buildup of
about $6.5 billion of debt.
This, coupled with the companys problematic mix
of gas and oil assets as well as a corporate compensation
structure that relies on production of assets rather than
returns, makes Continental an attractive shorting opportunity,
according to Chanos.
Ive got nothing against Mr. [Harold] Hamm,
Chanos said, referring to the CEO of Continental. This is
really just about more where his company is positioned. Wall
Street has to struggle to get its arms around it.
Chanos is not the first short-seller to point out problems at
Continental. David Einhorn of Greenlight Capital cited it in a
2015 presentation at the Sohn Investment Conference as one
of the "mother fracker" stocks he was shorting at the time. The
stock fell 3.4 percent, to $34.09, during Chanos's presentation
but bounced back to $34.61 at the close, up 1.2 percent from
the market open.
Beyond Continental Resources, the industry itself is rife
with problems, Chanos said during his presentation.
The problem, of course, is the rapidly depleting
nature of the asset, he said.
Chanos criticized the use of EBITDA earnings before
interest, taxes, depreciation, and amortization as a
valuation metric, saying it is particularly misleading for the
fracking industry, as most of that gets eaten up by capital
expenditure. Virtually all the dollars that come out of
the ground have to go right back in before you can pay your
creditors, he said.
He added that the energy production industry, particularly
in North America, is prone to booms and busts.
It is a Catch-22, Chanos said. The more
capital it attracts, the more people are incentivized to
This then drives down asset prices.
Chanos noted Continental isnt the only energy producer
with this problem.
Im not singling them out as being worse than
their Bakken competitors, said Chanos. Those competitors
include WPX and Hess Corp., both of which were recommended as
value investments by Leon Cooperman earlier at the