Source:  BrightGate Capital / Companies' 10-Ks and 10-Qs, and own elaboration. Magnitudes in million dollars.
Source: BrightGate Capital / Companies' 10-Ks and 10-Qs, and own elaboration. Magnitudes in million dollars.

Analysts at BrightGate Capital pushed back this week on the story bought by Wall Street that the US oil fracking industry’s huge reserves and increasing efficiency will make up for companies’ incredible negative free cash flow.

While the analysts stop short of saying the stocks are in true bubble territory they argue, zeroing in on DiamondBack Energy, that one cannot defend current valuations in the face of the sheer magnitude of the negative free cash flow for fracking companies:

“Despite being a top-notch producer with the best possible acreage, the company has not been able to generate any cash flows for its shareholders. Even when the oil was around $100 in the good old days of 2013 and 2014 and the company was also able to realise a juicy $4/mcf of gas, it did not generate positive FCF because of the high levels of investment. […]

Because the company has burned $4.9B of cash over the period (a staggering amount, by the way, for such a small producer), the arithmetic says that that money must have come from somewhere: in this case, the table shows that the company has been able to tap almost $4B from the equity markets over the whole period. The company closed the 1Q’17 with a net debt of $3.1B, which has been refinanced by its creditors in the past. […]

But this post is not an investment case to short Diamondback. In case you think we did some cherry-picking here, Diamondback is not an isolated example in the industry. We conducted the same analysis with other leading frackers, a group of 8 names (including FANG). The suspects are (in order of production size): EOG (NYSE:EOG), Devon Energy (NYSE:DVN), Pioneer Natural Resources (NYSE:PXD), Continental Resources (NYSE:CLR), Concho Resources (NYSE:CXO), Cimarex (NYSE:XEC) and Whiting Petroleum (NYSE:WLL). Our analysis dates back to the first quarter of 2013, but we could have gone even further back in time and the results would have changed very little – actually, they would have been reinforced. […]

Summing up, although from an investor’s point of view, we think the shale revolution will prove to be a disaster, from a macroeconomic point of view, we strongly disagree with those who argue that the burst of the sector will have profound consequences for the global economy. First, the losses will be mostly burdened by US investors and, second, the stability effects that the shale industry has had on the global economy so far have been far more important than any potential investors’ losses. The growth in the global economy has been fragile in the last few years, and the last thing the world needs is another round of oil price increases like the ones we witnessed at the beginning of the 2000s, in 2007-08 and in 2012-2014 – the period in which the breakup of the Eurozone loomed closer. The shale patch is thus one of the crucial battlefields where the war for the destiny of the global economy is taking place.”