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Jim Chanos just delivered a presentation slamming a $70 billion energy deal people have been swooning over

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Jim Chanos just delivered a presentation slamming a $70 billion energy deal people have been swooning over

By Linette Lopez: 7 May 2015

Last month, when the news broke that Royal Dutch Shell was in talks to buy British energy company BG Group, the market gave it the normal golf clap that it gives to eye-popping mergers of massive companies.

Short seller Jim Chanos, however, is hardly impressed. At a massive hedge fund conference, SALT Las Vegas, on Thursday, he gave a presentation slamming the deal and characterizing it as an opportunity to go short.

First off, he said the merger was “out of the blue.”

BG, he said, is plagued with the ills most of its industry faces, high replacement costs and high leverage to cover dividends and buybacks. He believes the company’s capital doesn’t cover spending even before dividends.

So why would RDS do the deal?

“Luckily BG has two businesses working for it in the future,” said Chanos.

The two businesses are its liquefied natural gas (LNG) business, and a stake in Brazil’s quasi-state oil company, Petrobras. That’s what RDS is really betting on here.

In challenging that bet, Chanos took on the LNG business first.

“What most people don’t know however is that for the last three years LNG demand has been basically flat… Capacity, however, is going to skyrocket in the next five years.”

Big projects in the sector are coming. “This is a disaster waiting to happen,” Chanos said.

Then there’s BG’s minority stake in Brazil’s Petrobras, which is in the middle of the biggest corruption scandal in the country’s history.

Aside from the “lying, cheating and stealing” in the company, Chanos thinks it simply doesn’t have the cash flow BG is likely hoping for.

“Petrobras seems to be the gift that keeps on giving for the skeptics,” Chanos said early on Thursday in an interview with Bloomberg TV. “And, you know, it is a troubled company, clearly.  It’s far more troubled than we even thought it was a year, year and a half, ago. And the corruption has proven to be deeper than we thought. They’ve got some problematic issues.”

Last year at SALT Chanos predicted that casino stocks would suffer because of increased regulation in Macau, the gambling capital of the world. He nailed that.

So watch this one too.

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Chanos sees trouble for LNG producers: Shell, BG Group, Chevron

by Kelly Bit, Simone Foxman and Saijel Kishan

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Jim Chanos, founder of hedge fund Kynikos Associates, said he’s betting against shares of Royal Dutch Shell and BG Group because of poor prospects for producers of liquefied natural gas.

“This is a disaster waiting to happen,” Chanos said at the SkyBridge Alternatives Conference in Las Vegas on Thursday, adding that he was also wagering against Chevron.

Chanos said that demand for LNG has been flat for the past few years and capacity is going to “skyrocket”.

Shell agreed in March to buy smaller rival BG for $US70 billion in the oil and gas industry’s biggest deal in at least a decade. Chanos, who predicted the collapse of Enron in 2001, said earlier Thursday that he was shorting oil majors.

The companies face problems in replacing their reserves because they operate in “very difficult and expensive costly places,” Chanos said in a Bloomberg Television interview. “The majors have gone down a lot and we’ve covered some of our shorts in the first quarter but the stocks have all snapped back quite nicely and we’re looking again in this area,” he said.

Kynikos, based in New York, had about $US2.5 billion in assets, including leverage, at the end of February, according to a regulatory filing.

Bloomberg

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