MarketFolly had a summary of what Einhorn said during the Ira Sohn conference yesterday:

“Energy companies with negative development economics, negative on frackers in general.  US production boom: Bakken, Eagle Ford, Permian.  Buy the land, set up drills (expensive).  Huge cumulative CAPEX, more than oil brought out.  None of them generated cash flow, even when oil was high.  $20B cash burn by group last year.  Depletion is the “D” in EBITDAX.  It’s not really growth, because once you get the oil out it’s gone.  CAPEX has been 75% of revenue over last 5 years.  Not natural gas frackers, they are fine.  PXD:  Well located, well run, Permian assets mainly.  #2 pure play behind EOG.  $26B market cap, EV $27B, may earn $1.50 per share next year.  Spent $19B in CAPEX last few years – funded partially by capital raises.  Proved reserves have been flat or down despite huge CAPEX.  $36 rev/bbl, if you take out the $28 CAPEX, they lose $12/bbl.  Negative NPV if you include time cost of money.  If you had used $68 price of oil, reserves are only worth $9/share.  He says if you cut their costs, it’s $22/share.  Value creation per $ spent is only 0.74.”

News from SeekingAlpha on Pioneer Natural Resources:

  1. Pioneer Natural Resources (NYSE:PXD) plunges following negative comments on PXD and other frackers by Greenlight Capital’s David Einhorn at the Ira Sohn conference
  2. Einhorn calls for shorting PXD, which he dubs “the mother fracker,” and says PXD loses $0.20 of present value for every $1 invested, is burning cash and is not growing.
  3. Of the sector, Einhorn says fracking companies offer an “almost infinite supply of negative return investment opportunities.”


During the Pioneer Natural Resources presentation, the stock dropped ~6% on the first initial reaction. That drop wicked into a previous price memory area – the original breakout price. What really took a toll was when Einhorn said Pioneer Natural Resources was worth $78/share.



Trade Review:

My initial reaction was, I want to buy this when it dropped out. Even though there was a lot of accounting being talked about by Einhorn, there will still be large momentum funds that are willing to trade this or other hedge funds that will think that this is an opportunity for them to buy a “feeler” position. Another reason was because of a huge buyer at the previous breakout price at $162.50 on the daily chart. That resistance area became support, very CLEAN support. Take a look at the ticks chart below as Pioneer Natural Resources went parabolic into the previous breakout of $162.50. It ran into that price perfectly and then the buyer stepped up to $163.00. To me, the buyer was aggressive; so I joined the buyer to catch a few points to the upside with my risk quantified below that $163.00 – $162.50 level. But of course, this is just looking at the charts; when you read the tape, the buyers were so aggressive. The bids stepped up, held, and then swept the offers, and kept doing that for a few points.


Secondary Trade:

For some people, the initial reaction is like a heart attack and they prefer a slower movement on the tape. Those traders might prefer The Second Day, Trade. It is the day after the initial movement; it is when everyone has had time to read through the presentation and comments made about a stock. The trades are usually more controlled.

Today, 5/5/15, I traded Pioneer Natural Resources as a Second Day, Trade. When opened up, it ran towards yesterday’s price before it dropped out around $172.00. I wanted to put a feeler fade on but was not brave enough and I waited until the tape was tight holding below VWAP – VWAP hugging does not happen all of the time. The second thing was the offers kept stepping down from the $170s very quietly with hidden offers. I started shorting at $169.07s and then when they cleared through the 58,000 shares at $168 and dropped a point to $167 in a flash, I offered more back at $168 to put some resistance and pressure at that level.