A week after it was revealed Warren Buffett's Berkshire Hathaway took a $3.5 billion in Exxon Mobil, hedge fund manager Jim Chanos called it a bad decision. Speaking at a conference in New York on Tuesday, Chanos said Buffett's "returns are dropping". Buffett's investment occurred during the second quarter of 2013; since July 1, Exxon Mobil shares are up 5% versus the S&P 500's return of 11%.
Chanos manages the $6 billion Kynikos Associates ("kynikos" is Greek for cynic). He knows a thing or two about being negative on energy companies – and making a lot of money from it. Most legendarily, Chanos made a fortune shorting Enron.
In an in interview with Reuters news service, Chanos elaborated on his views on oil companies and Exxon Mobil specifically, saying:
"In terms of the integrated oil companies, the business demonstrably has gotten worse and it's for a simple reason: the cost of finding and replacing reserves has gone up. Let's just use Exxon as an example. Their revenues are down year-over-year yet the amount of capital they've employed in the business continues to grow. Their cash flow has dropped dramatically and, where in the past Exxon had been able to finance dividends and its buybacks out of free cash flow, it's no longer able to do that. It only basically finances half of that (dividends and buybacks).
"Exxon used to have returns on capital of around 30% -- an amazingly profitable business. Well, it's been cut in a third in the past year. Now it's about 20%. So, it's telling you that on the margin, these companies are increasingly finding it difficult to cheaply replace reserves. And, I've basically called them 'liquidating trusts'. They're not the values they used to be. They're having now to borrow to finance a lot of the financial engineering that they're doing to keep their shares up at the same level…. It's not a value stock, it's a value trap."
Which fund manager is right on Exxon Mobil: the world's most famous investor or the world's most famous short-seller?
CNBC contributor Gina Sanchez, founder of Chantico Global, has noted that Exxon Mobil offers the lowest dividend yield of its peer group. And, that group is having a tougher time.
"All of these big integrated companies are spending more and more and getting the same amount of oil out of the ground," says Sanchez.
On the other side, Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, says the technicals support Buffett's investment.
"The technicals at this point support Mr. Buffett's bullish view as opposed to Mr. Chanos' bearish view," says Ross. "I have the luxury [as a technical analyst] of focusing on the price action alone and, right now, those prices are telling me we go higher [in Exxon Mobil]."
Watch the video above to see what technical levels Ross believes are in play with Exxon Mobil and to also hear the Sanchez's on the obstacles ahead for the company.
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