By Katya Wachtel
NEW YORK (Reuters) – Short-seller Jim Chanos said on Tuesday that shares of the international oil majors like Exxon Mobil Corp increasingly look like a value trap for investors as cash flows decline and returns slide.
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 national oil companies and the integrated majors. He added they were experiencing a “dropping return on capital” that “is really ominous.”
Chanos said the oil business has “changed reasonably dramatically, even in the last 12 months,” and that the cost of finding and drilling for oil has risen substantially.
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.” For many of the oil majors, it is becoming increasingly difficult to finance buybacks and dividends as cash flows decline.
“It isn’t the same cash flow generating business it used to be,” he said.
Chanos, who specializes in making money when stocks fall in value, said he is also “very bearish on coal” and is “pretty much short” all the U.S. leveraged coal companies, with the exception of one.
He pointed to a slowing of demand in China for coal, while in the United States the coal companies are facing pressure since the U.S. Environmental Protection Agency is “on the case here pretty stringently.”
Echoing similar comments by other well-known investors like Carl Icahn and Dan Fuss in recent days, Chanos said it was time for the average equity investors to be “a little more cautious,” even as the stock market may continue to rise.
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.
(Reporting by Katya Wachtel; Additional reporting by Jonathan Stempel; Editing by Jeffrey Benkoe)
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