Fracking, the technique to extract oil and gas from rocks, has made the U.S. the world's largest producer of natural gas, as well as an oil powerhouse that, according to The New York Times, is "ready to eclipse both Saudi Arabia and Russia."
Yet, wrote the Times, fracking's biggest skeptics are on Wall Street. Why? Because the industry's financial foundation is unstable.
Fracking is not generating enough cash to cover expenses. The 60 biggest fracking firms had negative cash flows of $9 billion per quarter.
Let's now move to streaming media, where just one firm, Netflix, has become a worldwide powerhouse, that, according to some predictions, is ready to eclipse traditional TV companies. Despite a reported $9 billion debt (some say $11 billion), Wall Street continues to value the stock higher than traditional media companies, when linear media actually generates higher profits. The question is: Why?
Last May, for just a short while, Netflix even surpassed Disney and Comcast in market cap. Surely, Netflix has taken over the wallets of investors and the hearts of the production community of agents, actors, and lawyers, all of whom love the influx of money that Wall Street has brought into the industry via Netflix, which has a commitment to spending some $8 billion in original content.
The studios, too, have gotten into the game, and although they don't like to produce for Netflix (since studios don't get back-end rights), they enjoy the income, which serves only to help amortize the studios' fixed costs.
Nonetheless, the production community is not investing in Netflix. "I love their money," said a Hollywood veteran, "but I don't have Netflix stock and I am not planning to buy it."
Experts now warn that with debt-to-equity levels three times larger than those held by Disney, and nearly twice as high as those held by Comcast, Netflix will need to ensure its consumer base (currently set at 130 million subscribers worldwide) keeps growing in order to accrue the cash intake necessary to service its debt. Last April, Netflix went to the bond market to raise $1.9 billion (its fifth bond issue in three years).
On Wall Street, as of last August, the three largest U.S. companies in the entertainment industry were: Disney (with a market cap of $166.83 billion), Comcast, (with a market cap of $161.78 billion), and Netflix (with a market cap of $146.49 billion). The list excludes companies where entertainment is just one aspect of their businesses, such...