Last week, noted short seller Jim Chanos, president and founder of Kynikos Associates, said he is short oil giants Royal Dutch Shell (NYSE: RDS-A) and Dow component Chevron (NYSE: CVX).
Chanos is skeptical of Shell’s $70 billion acquisition of rival BG Group. The biggest energy sector acquisition in a decade was announced last month. By enterprise value, Shell’s takeover of BG is expected to be the third-largest energy sector deal ever. [Shell/BG News Barely Moves Energy ETFs]
Chanos is not impressed. He said the access Shell is gaining to Brazilian reserves by way of the BG buy may not pan out and even if it does, it may not be as profitable as Shell is hoping it will be. The short seller also expressed a bearish view on global liquefied natural gas demand, which would be problematic for both Shell and Chevron, the second-largest U.S. oil company.
In other words, Chanos probably would not be a fan of the $1.2 billion iShares Global Energy ETF (NYSEArca: IXC). IXC features Chevron as its second-largest holding at a weight of 7.7% and a combined weight of 7.5% to two Shell securities. IXC is up 3.8% this year, just behind the 4% gained by the U.S.-focused Energy Select Sector SPDR (NYSEArca: XLE).
Energy stocks are not considered inexpensive.
“Profit expectations have fallen dramatically–though the pace slowed recently–which in turn has pushed the sector’s P/E ratio much higher even as stock prices have declined,” according to AltaVista Research.
AltaVista does not view XLE as a bargain on valuation. The research firm estimates the ETF’s 2015 price-to-earnings ratio to be 33.8 before falling to 23.9 next year. That is well above AltaVista’s estimated 2015 P/E for the S&P 500 of 17.5. [Big if for a big Energy ETF]
Chanos has been bearish (and right) on major global oil stocks in the past. In unveiling his bearish view on Shell, Chanos skewered Brazil, the efficacy of its energy data and its corruption history, reminding investors of his shorting or Brazil’s state-run oil company Petrobras (NYSE: PBR).
Chanos has since covered his Petrobras short, but even with a one-month gain of over 29%, Petrobras is still down 48.4% over the past two years.
iShares Global Energy ETF
