Jim Chanos' Kynikos Associates is betting against a number of U.S. shale oil and gas stocks, saying Wall Street analysis of the sector is deeply flawed. Investors are taking for granted accounting methods that mask problems with the fundamental business model in the U.S. shale patch, Chanos warned during a speech Tuesday at CNBC's and Institutional Investor's Delivering Alpha conference. Their focus on certain metrics is causing them to overlook hidden threats that will leave drillers with skimpier returns than investors are anticipating, he said. "In our view, people have been looking at this industry through the rose-colored glasses of Wall Street. And this is the inherent problem with the North American shale business," he said. Chanos is not the first to sound the alarm about accounting and business practices in the sector. Analysts have long warned about drillers' persistent and unfulfilled promises to generate positive cash flow, especially as oil prices remain at less than half of their 2014 peak.

The way to think about it is that unlike other businesses, your assets literally get burned up Jim Chanos Kynikos Associates founder and president

But Chanos' remarks add an influential voice to the chorus of skeptics. Chanos, who foresaw the spectacular downfall of disgraced energy titan Enron, is renowned for scrutinizing accounting methods and spotting trouble on the horizon.



He has now set his sights on the U.S. shale oil and gas industry, which uses expensive drilling methods to extract oil and gas from rock formations. Frackers typically rely much more on debt than big, integrated oil companies like Exxon Mobil. Chanos focused on Continental Resources during his presentation, but said Kynikos is not singling out the shale oil drilling pioneer. Kynikos has taken a short position against a number of frackers in addition to Continental Resources, he said. Notably, it has not bet against those in the Permian basin in Texas and New Mexico, where producers can plumb oil at relatively low costs. Chanos looked at about three dozen drillers and found that their capital spending would eat up almost all of their earnings, minus certain expenses, this year. That leaves them with little cash to service their debt. "See the problem?" he asked the crowd. "It's a big one." Drillers have reduced the amount of capital they need to produce the same amount of oil, but not enough to make many of them profitable, he said. Chanos believes that capital spending is essentially a variable that creates a vicious cycle in the oil patch.

David A. Grogan | CNBC