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Exxon Mobil, Royal Dutch Shell, and Petrobras In Trouble?

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By: MICHEAL KAUFMANPublished: Jan 20, 2015

James Chanos is a renowned short-seller, hedge fund manager, and the founder of Kynikos Associates – an investment firm which specializes in short-selling. In an interview with CNBC last Friday, Mr. Chanos cited serious problems for some of the largest oil producers, leading him to short some major oil companies for a couple of years, including Exxon Mobil Corporation (NYSE:XOM), Royal Dutch Shell plc (ADR) (NYSE:RDS.A), and Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR).

Mr. Chanos believes that the US shale revolution was uneconomic from the very beginning and major drillers continue to lose as weaknesses in shale economics are exposed. The US will become the biggest oil producer in 2015 and the increase in supply would be large enough to disrupt the entire market, including the Big Oil firms. “Days of finding cheap oil are over,” he added.

Due to the lack of cheap and conventional oil sources, companies have been trying to explore oil which is difficult and expensive to drill. Major oil exploration and production companies will find their business models “challenged” and would have to take up exploration activities to the Arctic or set up drilling rigs in the middle of an ocean. The current oil price level is not high enough to adequately support such capital intensive crude oil exploration.

He noted concerns over billion-dollar long-term projects of oil producers despite the availability of cheap energy in North America. The increasing production will only serve to extend the demand-supply gap, further compounding the misery of oil producers. Moreover, these projects are highly leveraged. They rely on debt, which adds a new dimension of risk for oil companies. Unprofitable investment projects, excessive supply, and a ton of debt is a “witch’s brew” according to Mr. Chanos.

Another interesting point from his interview was that Mr. Chanos would have maintained his negative view on the big oil companies even if crude oil price ranged from $80-90 per barrel. His negative viewpoint stems from his belief that the business models of large-scale oil producers are struggling. It implies that major oil producers might be in trouble even if crude oil price rebounds.

When questioned whether oil companies would bust, Mr. Chanos refused to give out a general verdict which would be applicable across the energy sector but focused on looking at each company individually as they have differing balance sheets, cash flow statements, and income statements. He did, however, point out that major national firms, like Petrobras, are more likely to be “problematic”.

Stocks of Exxon Mobil and Shell have tumbled 8.11% and 10.08%, respectively, over the last year, while Petrobras shares have crashed 43% as it fights a major corruption scandal.

Conventional wisdom will make it seem like Exxon Mobil and Shell are better positioned than smaller energy firms to withstand the volatility in oil price. However, for a man who has made his fortune short-selling major stocks, Mr. Chanos, said something might be wrong here.


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