VaultingChemist said:
Looking at Pioneer, negative FCF with little to no growth in proven reserves does not seem sustainable.
To make matters worse, daily production added per rig in the Permian Shale play is declining.
Have you even read their investor presentations? From the June presentations on their website: expected to grow production 15-18% y/y (they have consistently beaten this target. Hedged 85% of production for 2017 at >$50/bbl, scheduled to be ~cash flow neutral in 2018 while continuing to grow production 15% y/y (oil growth art 25% y/y, IRRs between 50 and 100% including facilities capital, $2.2B cash on hand on a $2.8B capital program (that's not even including operating cash flow - expected to be ~2.2B), net debt of $400MM, >20,000 drilling locations.
You can argue they are overpriced, but they are not a bubble. The examples you provided of bubbles show this isn't a bubble. The dot com bubble was fueled by companies either selling products below operating costs or by having absolutely no revenue but because they had a website being with hundreds of millions of dollars (see: pets.com). Housing fundamentally has no direct cash flows either so it's easy for valuations to get insane on housing and leverage up to unhealthy levels. In this case you are talking about companies that have healthy operating cash flow, that are growing operating cash flow (on constant commodity price basis) ~20% y/y and barely have any net debt. The only way I see these companies having issue is severely depressed oil prices for a very long time. Again I can see an argument for overpriced, but they are not a bubble. Crypto currency has much more in common with the dot com collapse with all the margin accounts an asset appreciating at an unhealthy rate and no underlying cash flows.
The Einhorn piece is out of date across the board. But both seem to fundamentally not understand that's a volume business and you make money on deployed capital for years. That's why they'd concerns about FCF are annoying. "They couldn't make FCF at $90 means they can't ever make money" fundamentally shows they don't understand 1) how compounding growth in revenue (by volume) on a flat capex can lead to amazing growth in FCF but you might have to wait years to see it, 2) just how quickly the market has innovated, 3) the capital you deployed can create an amazing amount of value that isn't priced in if EOR can be consistently developed with shale (which is something that companies are working on and have made some progress on). If the goal was just FCF they could just stop investing in themselves and print money for you. The exciting thing to think about is, at current trends, the FCF they will have in 5, 6, 7 years IMO. If they come up with another great development strategy to grow cash flow economically so they can have even more FCF, then maybe that's worth doing even if it delays FCF further.
I think the real exciting upside for these highly priced companies is really 2-fold. They are a hedge against a spike in oil prices be it political or demand from India... But also if EOR works out in shale, which I do think we will be able to produce more than 5-7% of the OOIP at some point in the future, then all of these wells that are in the ground get so much more valuable. This is largely driven by how easy it is to model current shale development (and thus price) in addition with the hype surrounding these companies. Again, I can see why you could argue these companies are overpriced, but the upside case exists and they aren't a "bubble".