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David Einhorn: Greenlight Capital Investor Letter Highlights

As Greenlight Capital and David Einhorn notes in its 3Q investor letter, “It appears that the real criteria for raising rates are:

  • Market forecasters fully expect a rate increase.

  • The most recent move in the S&P 500 was positive.

  • There is no trouble in foreign economies or financial markets.

  • There are no potentially destabilizing geopolitical events, including foreign elections.

  • The Cubs win the World Series.

Clearly, there is little appetite for normalizing policy, even under normal conditions. Instead of defending the continued easy money policy, Chairwoman Yellen recharacterized it as only“modestly accommodative.” She also denied that the U.S. election drove the decision, which makes her politically neutral enough to moderate a presidential debate.Our quarter was marked by strong profits on our longs led by Apple (AAPL), Chemours (CC),and CONSOL Energy (CNX), and partly offset by losses throughout our short portfolio, most notably Pioneer Natural Resources (PXD). The macro portfolio was flat.”

As for its short on PXD:

“As for PXD, shares advanced more than 20% from $151.21 to $185.65 despite stable oil prices and another money-losing quarter. The company’s investor relations effort should be commended for its effectiveness, if not for its veracity. This quarter’s whopper was the CEO’s claim that “the [Permian] horizontal well operating cost excluding taxes is down to almost $2 per BOE. So definitely we can compete with anything that Saudi Arabia has.” This quote was so colorful that even Forbes couldn’t resist having fun with it asking, “Is he serious? Naw.” Forbes went on to say that the company’s total variable costs per barrel last quarter totaled $18 compared to Saudi Arabia’s $6.

We spoke with a number of industry contacts in the Permian basin and couldn’t find anyone who believed the $2 claim. Perhaps the company is capitalizing operating costs; perhaps it is operating its own service company at a loss for intercompany accounting purposes; probably it is excluding salt water disposal costs; and almost certainly PXD is counting only the newest wells that are benefitting from very high initial flow rates. We don’t really know, but we can’t find any support for the idea that the Mother-Fracker has long-term sustainable operating costs approaching $2 per BOE.”