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'Dark side' of nat gas boom, according to Chanos

Sunday, 13 Oct 2013 | 5:00 PM ET
Alexander Zemlianichenko Jr. | Bloomberg | Getty Images

The shale natural gas upswing in the U.S. has been well documented, but closely watched short-seller Jim Chanos told CNBC he's a "glass half-empty kind of guy," and there's a downside to boom.

At historically low nat gas prices of around $3.75 per million British thermal units, "some of the levered players are struggling to cover their debt service and their obligations to drill more holes under their leases," Chanos said on "Squawk Box" on Thursday.

A day earlier, energy entrepreneur T. Boone Pickens appeared on the show, saying he's unlikely in his lifetime to see nat gas back up to $10.


T. Boone Pickens
Adam Jeffery | CNBC
T. Boone Pickens

Every time prices get up to around $5 or $6, production kicks into high-gear again, which in turns pushes prices down, the 85-year-old BP Capital founder said.

(Read more:Keystone would mean OPEC is obsolete, says Pickens)

Chanos, founder and president of Kynikos Associates, deferred to Pickens—saying "he certainly knows more about that than I'll ever know" but added, "it does seem that natural gas is pretty range-bound here for a while. And production is basically still increasing. Even down here."

"For some of the guys who paid too much acreage, clearly it's been a struggle," he added. "It's an area you have to do fundamental work on. You can't just say, 'Oh, this is bullish. I'm going to buy natural gas producers.' They all have different capital structures and lease obligations."

James Chanos: Bad news for global coal
James Chanos, President, Kynikos Associates, says there is more bad news for global coal on the horizon as many countries switch to natural gas.

Natural gas boom slams coal

The boom in nat gas supplies, and the subsequent low prices, is "bad news for global coal as more and more countries switch over to natural gas," said Chanos. "It's not only going to be the U.S., [but] ultimately China ... and Europe more so."

"Most of the leveraged coal guys you can assume we're short," he said. "I think they're almost all problematic."

Chanos, whose hedge fund has $5 billion in assets under management, added, "Cheap gas burns better, easier to transport, and ultimately when we liquify it it'll be easier to transport globally."

This past week, the Energy Information Administration estimated that the U.S. will be the top producer of oil and natural gas in 2013, surpassing Russia and Saudi Arabia. (Read more: US overtaking Russia as top oil producer: IEA)

Chanos: Stay away from state-owned oil companies
James "Jim" Chanos, President, Kynikos Associates, says companies like Petrogras are basically just political vehicles, not businesses.

Shorting major oil companies?

For different reasons, "we're short two different groups of the major oil companies," the big publicly traded majors like Exxon, and the nationalized companies like Petrobras of Brazil, Chanos said.

For Exxon and others, they've had "a great business that's really becoming a mediocre business" right now, he added. "Their problem is finding costs" in reserves like deep-water drilling and the Arctic. "These are all much, much, more expensive places to be doing business."

"[But] they're in a lot better shape than the national oil guys; Petrobras, Ecopetrol (Colombia), and PetroChina (China) and companies like this who are really not businesses," Chanos said. "They're pass through [political] vehicles for their citizens. That's our thesis there."

Read more Chanos ...
Still short HP—it remains 'under assault': Chanos
Why stocks seem to be signaling a debt deal ...

In effect, he continued, "Western shareholders and bondholders are subsidizing the citizens of Brazil through Petrobras."

"They cannot charge full gasoline and diesel prices," Chanos said. "And meanwhile, they have to do business with Brazilian suppliers. They're getting it on both ends."

By CNBC's Matthew J. Belvedere. Follow him on Twitter @Matt_SquawkCNBC.

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