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

Katya Wachtel and Ernest Scheyder
Tuesday, 19 Nov 2013 | 1:58 PM ET

'value traps'@ (For other news from Reuters Global Investment Outlook Summit, click on http://www.reuters.com/summit/Investment13) (Adds background on Exxon, quotes on equities and Europe)

NEW YORK, Nov 19 (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.

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 to not only find new reserves but pay dividends and fund buyback programs, prompting concerns the companies have limited growth potential, Chanos said.

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.

"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.

He 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)

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