Last month, when the news broke that Royal Dutch Shell was in talks to buy British energy company BG Group, the market gave it the normal golf clap that it gives to eye-popping mergers of massive companies.
Short seller Jim Chanos, however, is hardly impressed. At a massive hedge fund conference, SALT Las Vegas, on Thursday, he gave a presentation slamming the deal and characterising it as an opportunity to go short.
First off, he said the merger was “out of the blue.”
BG, he said, is plagued with the ills most of its industry faces, high replacement costs and high leverage to cover dividends and buybacks. He believes the company’s capital doesn’t cover spending even before dividends.
So why would RDS do the deal?
“Luckily BG has two businesses working for it in the future,” said Chanos.
The two businesses are its liquefied natural gas (LNG) business, and a stake in Brazil’s quasi-state oil company, Petrobras. That’s what RDS is really betting on here.
In challenging that bet, Chanos took on the LNG business first.
“What most people don’t know however is that for the last three years LNG demand has been basically flat… Capacity, however, is going to skyrocket in the next five years.”
Big projects in the sector are coming. “This is a disaster waiting to happen,” Chanos said.
Then there’s BG’s minority stake in Brazil’s Petrobras, which is in the middle of the biggest corruption scandal in the country’s history.
Aside from the “lying, cheating and stealing” in the company, Chanos thinks it simply doesn’t have the cash flow BG is likely hoping for.
“Petrobras seems to be the gift that keeps on giving for the sceptics,” Chanos said early on Thursday in an interview with Bloomberg TV. “And, you know, it is a troubled company, clearly. It’s far more troubled than we even thought it was a year, year and a half, ago. And the corruption has proven to be deeper than we thought. They have got some problematic issues.”
Last year at SALT Chanos predicted that casino stocks would suffer because of increased regulation in Macau, the gambling capital of the world. He nailed that.
So watch this one too.
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