Short-seller Chanos says oil majors increasingly look like 'value traps'

NEW YORK (Reuters) - Short-seller Jim Chanos said on Tuesday that shares of international oil majors like Exxon Mobil Corp increasingly look like a value trap for investors as cash flows decline and return on capital slides.

Jim Chanos, Founder and Managing Partner of Kynikos Associates LP speaks at the Reuters Global Investment Outlook summit at the Thomson Reuters building in New York, November 19, 2013. REUTERS/Mike Segar

His comments at the Reuters Global Investment Outlook Summit in New York came a week after Warren Buffett disclosed a large position in Exxon, the world’s largest publicly traded oil company.

Chanos said his Kynikos Associates fund was bearish on both national oil companies and the integrated majors.

“The costs of finding this stuff (oil) has gone through the roof,” Chanos said. “The economics are clearly deteriorating.”

“It isn’t the same cash flow generating business it used to be.”

Exxon Mobil and other oil producers like it continue to spend heavily not only to find new reserves but also to pay dividends and fund buyback programs, prompting concerns the companies have limited growth potential, Chanos said.

As recently as 2010, Exxon Mobil’s free cash flow, a measurement of cash flow minus capital spending, eclipsed the cost of share buybacks and dividend payouts. Yet executives have been buying back stock at a breakneck pace in recent years. In 2012 the company spent $30.97 billion on dividends and buybacks, with $21.9 billion in free cash flow.

Last week, Buffett’s Berkshire Hathaway Inc disclosed that it acquired 40.1 million shares in Exxon Mobil for $3.45 billion.

“He’s got his reasons but unmistakably the returns are dropping,” Chanos said of Buffett’s bet on the oil giant. “It increasingly looks to us like a value trap.”

Exxon Mobil spokesman Alan Jeffers declined to comment.

Exxon Mobil shares, as well as those of many other multinational firms, have badly lagged the S&P 500 this year despite generous buyback and dividend programs. Additionally, Exxon Mobil was late to develop U.S. shale assets, and has had to boost spending in remote and politically unstable parts of the globe to try to find oil.

It’s the smaller, nimble producers in U.S. shale plays and other niches, such as Continental Resources Inc and Whiting Petroleum Corp, that have become Wall Street darlings.

Exxon Mobil’s return on capital, a measurement of how well cash for growth projects is allocated, fell to 18.7 percent last year from 27 percent in 2008, according to Thomson Reuters data.

“The dropping return on capital is really ominous,” Chanos said.

Chanos, who specializes in making money when stock prices decline, said he is also “very bearish on coal” and is “pretty much short” all the large leveraged U.S. coal companies, with the exception of one.

“We’re even seeing slipping demand for coal in China due to pollution concerns,” Chanos said. In the United States the coal companies are facing pressure since the U.S. Environmental Protection Agency is “on the case here pretty stringently.”

U.S. coal producers have come under withering competition from shale-derived natural gas, regulatory pressure and slipping demand for steel, especially in China.


Echoing comments by other well-known investors like Carl Icahn and Dan Fuss in recent days, Chanos said it was time for the average equity investor to be “a little more cautious,” even as the stock market may continue to rise.

Chanos said that sharp rises in the share price of Sotheby’s, the auction house, has historically occurred at around the same time froth in the markets peak.

“Every time we see some sort of excess in the marketplace Sotheby’s” stock moves from about $10 to $50, then “collapses.”

Sotheby’s, currently the target of an activist campaign by Third Point’s Dan Loeb, was trading at $51.96 midday Tuesday on the New York Stock Exchange.

It began the year trading around $34. The stock price “is more an indicator of what the 1 percent is doing than anything else,” Chanos said.

Separately, Chanos said he is currently raising money for his fund.

“Now is a good time to do it. At this point it is prudent (for investors) to hedge off some of their market exposure. It’s exactly when they don’t want to do it.”

Chanos, who founded Kynikos in 1985 with $16 million, won recognition on Wall Street after his prescient call on accounting fraud at Enron a decade ago.

He has been one of the most vocal China bears in recent years, and said he is also not convinced that Europe is out of the woods yet.

“There are some structural issues in Europe that I don’t think are solved,” he said, questioning the rush of capital into distressed assets in Southern Europe.

“If you think buying a block of apartment buildings in Spain or state-owned assets in Greece” is the same as buying property in Florida “you are completely mistaken,” he said.

“The politics are completely different - people are going to find out to their surprise that they are now partners with the government in Europe.”

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Reporting by Katya Wachtel; Additional reporting by Jonathan Stempel and Ernest Scheyder; Editing by Jeffrey Benkoe and Phil Berlowitz