Jim Chanos’ Kynikos Associates is shorting a Major Oil Company

Date: Monday, June 21, 2010
Author: Business Insider

Bloomberg TV got famed short seller, Jim Chanos, to talk Big Oil today. He said that he’s not short B.P., but that there is another well known oil company who he thinks is playing fast and loose with their cash flow and dividend funding.

Of course not wanting to [provoke] regulators who are still confused over the merits of how short sellers help the market he didn’t name names.

So we checked in with a large investor with knowledge of the fund's holdings who told us that it's American integrated oil giant Exxon that Chanos has a big short position on.

Chanos, founder of Kynikos Associates told Bloomberg TV today, “"Our decision [to short oil major] predates [the Horizon Deepwater rig], and it has to do with financing.  If you look at some of the biggest oil companies in the world -- and I’ll let you use your own imagination as to which ones those are, there’s a small handful. If you look at their cash flow statements relative to the income statements, you will see companies that haven’t replaced reserves in years and haven’t seen any increase in revenues in years and yet their capital spending eats up all of their cash flow, meaning they are borrowing their dividend.”

Chanos, who built his career on data mining company balance sheets to find who’s not as healthy as they lead the market to think, is believed to have gotten into his Exxon short over a year and half ago. As Business Week and a few sharp blogs noticed in February 09 Exxon is a ‘religion stock’. Meaning investors own it because it’s done well before and some on the street assume its management knows what it’s doing – so why deep dive into their cash flow statements and worry about if they can replace all the barrels of oil they sell to keep the cash flow model going?

But Chanos points out in his Bloomberg interview, “They [We now know its Exxon] are in effect liquidating. And investors don’t realize that. It’s one of the reasons why - and the market does [realize it] to some extent - that’s why the yields are so high. But they’re not earning, in economic terms, in many cases, those yields. And if people did a careful analysis of the cash flows of some of the biggest, most well regarded, integrated oil majors, I think they would be surprised at what they’d find.”

Bloomberg Television's Erik Schatzker has all kinds of Chanos insights, such as why he’s short China and his frustration with U.S. tax policy, that will air on "For the Record" next Friday, 6/25