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I like your balanced posts Weathervane but I'm drowning in the irony of your last post...
Keep harping on about a bad company that’s going nowhere, why waste your time lads.
PUTUP,
‘A Company can increase share count with the stroke of a pen. Issue 50m shares into treasury. Done. It doesn’t increase equity value.’
Of course it doesn’t. But these shares weren’t issued, they were bought on the open market at a range of prices over an extended period. And because they were purchased to satisfy the vesting of employee options they clearly have an immediate impact, reducing the net assets of GKP as demonstrated in the 2019 accounts.
‘5) And howsoever you calculate that loss, wherever you put it in the accounts, one way or another the net worth of GKP is reduced by that decision to cancel.’
Of course the decision to cancel, in and of itself, has no relevance to the Balance Sheet, that goes without saying. But ACTING on that resolution has a major effect and will create further equity write downs on top of those in the 2019 accounts if and when the Board act.
However, I agree with your assessment that further buybacks will follow, and according to the AGM Resolution these will be bought back into Treasury, as last time.
I contend when they’re bought back they should be cancelled, and they won’t be, as last time.
And what a wasted opportunity, as last time.
Reality
Accounting
Smart people pro forma the latter to get the former.
A company can increase share count with the stroke of an accountant's pen. Issue 50 million shares into treasury. Done. It doesn't increase equity value.
"5) And howsoever you calculate that loss, wherever you put it in the accounts, one way or another the net worth of GKP is reduced by that decision to cancel."
The value of the company was NOT affected - at all - by the decision to cancel the treasury stock. The value of the company was reduced when cash was returned to shareholders at the time stock was bought. Some shareholders did well from taking cash out of the company, others not so.
I give up trying to teach you anything. Best of luck to you. Expect more shares to be bought into treasury soon enough...and then, possibly, cancelled at some point (or perhaps not).
PUTUP,
If you understand accounts, just turn to p113 of the full year accounts and you’ll find the net assets have reduced from $553m down to $520m in 2019.
Look further and you’ll see Treasury shares as a negative figure of $29.7.m, the major contributor to this reduction.
I’m not discussing who benefited from the buyback, and I never was. Rather I’m pointing out what the effect of cancellation will be to GKP’s Balance Sheet…..I’m starting to get the feeling you don’t understand.
And I’m not here to teach you.
"GKP now say they only need a few of these shares and they are cancelling the bulk of them. The effect, as you would know, is to increase the physical assets per share by something approaching 10%. So the Reserves and Resources figure, per share, increases by a fair amount."
I should address this point much more directly. Any sensible person would conduct ANY 'per share' computation based on fully-diluted shares in issue net of treasury stock. The jump in assets per share occurs not when the stock is finally cancelled but pro forma when the stock is bought.
Previous post addressed Straycat.
Now a reply to surreyscot (whose views I generally find more sensible). The authority to buy back shares was effected because the key shareholders saw returning capital to those shareholders who desired to sell, and hence increasing the ownership of those that didn't, to be sensible. The key shareholders, rightly or wrongly, saw value in increasing their stakes at those levels and were pushing (and continue to push) the company to use its excess liquidity in this fashion. Once again, if all shareholders participated in the stock buyback pro rata the effect is no different in net effect than a special dividend. Now, clearly with the benefit of hindsight, those who decided to sell into the buyback were smarter than those who did not. But perhaps those that liked the company at, say, GBP2.20 simply like the company even more at 92p and will be very happen for the buybacks to continue at these lower levels. Personally I looked at the company when the stock was above two quid and passed. At these levels it is considerably more attractive. At these levels I very much want the company to use any excess liquidity to buy back its stock.
Management compensation is another issue and I fully recognize the frustration here. However claims that the next CEO should not get options but rather buy shares out of his/her own pocket are very misguided to say the least. They can do that any day of the week without taking on the job. Candidates will need to be rewarded with compensation mechanisms linked to performance and stock price performance. Hence my earlier claim re at the money options (rather than zero cost options) and performance vesting.
As for Ferrier being removed, rarely does one 'remove' a CEO without having first done a lot of work identifying a replacement. JF clearly jumped before (potentially) being removed but he wasn't removed. There is, currently, no replacement identified let alone secured, although I fully expect the board to be moving as quickly as they can (and in consultation with key shareholders) to find one. In the interim, don't expect too much to happen.
I have no view on "the current merger “rumour”with Genel idea" but again don't expect anything to happen without there being a new CEO appointed first.
Good God, there's no helping you. The $50m went to shareholders. You chose not to receive your slice instead opting for a higher ownership stake at the price the stock was bought at. The share count in issue is lower the moment they're bought by the company. If you don't understand this you really shouldn't be investing in the stock market. Staggering.
PUTUP, GKP said they needed shareholders to approve the buyback authority, at the previous AGM, in case they needed to move quickly. They had at that time no such authority in place, nor any typical authority to issue up to 10% of new shares without an EGM. What they did have in place was authority to issue some more Notes.
What was never explained was why they might need to move quickly. Or why, shortly after being given shareholder buyback authority, they used it in full. The brokers did not acquire the shares cheaply, they paid a multiple of recent market prices.
GKP now say they only need a few of these shares and they are cancelling the bulk of them. The effect, as you would know, is to increase the physical assets per share by something approaching 10%. So the Reserves and Resources figure, per share, increases by a fair amount. Maybe there is some M&A dimension, or maybe it was executive bonus-related. There is certainly shareholder anger over the bonus scheme, even though it has been modified more than once.
BTW the current merger “rumour”with Genel idea goes back many years. Peel Hunt might be trying to give the share price a fillip, who knows? Major GKP shareholders would lose influence from such a merger. Why would they agree to it? They are irritated by Jon Ferrier, hence his removal. Embarking on some new adventure wouldn’t seem high on their wish list, nor would losing influence. I think they want a strong financial return. They will not be prepared to wait forever.
IMO
PUTUP,
I can’t tell whether you’re obfuscating, or whether you’ve genuinely missed my point. I'm going to give you the benefit of the doubt.
Nobody is discussing shares held in Treasury.
I am wholly uninterested in shares bought back and then held in Treasury.
The discussion is around the real and accounting cost of CANCELLING those Treasury shares. They were bought from Common stock in the market, at market prices. $50m was paid for them, and now the Board has resolved to cancel them. If they do, then those shares which we paid $50m for will no longer exist and there will be 10% fewer shares as a consequence. But equally, our $50m is gone too.
And the Balance Sheet will necessarily reflect that as a reduction in net assets.
In fact the treasury shares bought in 2019 already show as a reduction in shareholders funds or equity in the 2019 full year accounts of ($29,749,000) (p113).
That $29.7m is simply the accounting treatment for the reduction in the bank balance following the 2019 market purchases. Those purchases are deemed necessary for the vesting of staff share options, and will vest as they become due, at no cost to the employees.
But at significant cost to GKP if they all vest.
The accounting treatment is no different for cancelled shares….they will be written out of shareholders equity in the same way, but for very different reasons.
I hope this clarifies matters.
IMO. DYOR.
In the first scenario the company buys back shares from every stock holder in proportion to their percentage ownership. $50m leaves the company and goes to shareholders. The equity value of the company falls by $50m. The share count used to compute equity value falls to reflect the number of shares bought back - they are no longer 'in issue' (even if they sit on the books accounted for as treasury stock). Here all the shareholders have sold in proportion to their ownership, therefore their percentage ownership position remains the same and the $50m is received proportional to ownership - just like a special dividend. The only difference is that instead of a 'ex-div' price adjustment occurring to reflect the reduction in equity value there is a share count adjustment (while, ceteris paribus) price remains the same.
Now let's looks at open market purchases. If everyone sold in the market to the company's bid proportional to their ownership then we have the same result as a compulsory pro-rata tender offer. When some don't sell and others do we have a situation where some shareholders effectively decline the 'return of capital (similar to a special dividend)' in return for investing more while those that do sell take a disproportional share of the return of capital (similar to a special dividend) in return for a lower ownership position.
So when a company is effecting a return of capital to shareholders via an o-en market stock buyback and you aren't selling into that buyback YOU are making the decision to increase your proportional ownership of the company - you hold the same number of shares versus a lower share count for shares in issue.
The only reason for shareholders to fear treasury stock is that management can often place them - effectively 're-issue' them - without shareholder approval. There has been basically zero chance of that risk here.
Now what about vested, in-the-money stock options (and for that matter any securities which, given the current stock price, oblige the company to deliver stock)? These are added to 'shares in issue' (ex treasury stock) to compute (fully diluted) equity value. Whether they are backed by treasury stock or require new shares to be issued is rather by-the-by.
Once you understand that treasury stock have no value - remember I can't create value by simply creating treasury stock - you'll worry a lot less about. Only worry if they may be placed in a situation which you would disapprove of and which if they were to otherwise be new issued shares you'd have the chance to vote against the corporate action. Rest easy, treasury stock is nothing but accounting.
[And if you protest 'but dividends are paid to the treasury shares', again rest easy knowing that those, at worst, dividends merely round-trip back into the company's cash account and such is fully taken into account when deciding the size of the dividend in the first place.]
"1) They’ve used an asset ($50m cash) to buy another asset (common shares, some 19m of them).
2) As long as those shares remain in treasury there is no change to the net assets of the Company apart from the valuations placed on those treasury shares at year end, which will result in either a profit or a loss on those shares dependent on sp performance.
3) As soon as they issue any of them (under employee nil cost option schemes for example) then the net assets of the Company are reduced accordingly because GKP have given awarded an asset at nil cost to the employee, namely treasury shares.
4) Similarly, if the Board decides to cancel 18m treasury shares, their value is lost to the Balance Sheet forever. They no longer have any value because they are no more. In this case I estimate that cancellation cost/loss at c.$45m. i.e. the Company has made investments in an asset (common shares) which no longer exist, no longer have any value.
5) And howsoever you calculate that loss, wherever you put it in the accounts, one way or another the net worth of GKP is reduced by that decision to cancel."
Straycat
I don't know how much of your net wealth is invested in the stock market but it's rather scary that you (and a few others here) don't understand these concepts correctly. Let's walk through two basic scenarios in the hope it leads to greater understanding.
First, let's consider the simple case of a company that issues/creates $50m of shares and holds them in treasury. Has there been value creation? No. Have the assets of the company gone up? No. Has the equity value of the company gone up? No. Has the enterprise value of the company gone up? No. It's merely an accounting exercise. The treasury shares are ignored for the purposes of calculating equity value.
Now consider a company with, for example, $50m of excess liquidity/cash. It decides to return this capital to shareholders. Management can do this a number of ways including:
1. A special dividend
2. A stock buyback
In BOTH scenarios the cash leaves the company and goes to shareholders. In the first case, the number of shares "in issue" used for calculating the equity value of the company stays constant. There is a price adjustment, the shares go ex-dividend, to compensate for the $50m reduction in the equity value of the company. In the other case, ceteris paribus, the price stays the same but there is a reduction in share count for computing equity value to make up for the $50m that has left the company. The shares are sitting in treasury 'as an accounting issue' just as in my first example.
Now let's take the second scenario a little further. There are a number of ways to execute a stock buyback. Let's consider two options:
(a) a compulsory, pro rata tender
(b) open market purchases (however conducted)
tbc in next post
Bravedog, you're a perfect example; you responded to everything I said, albeit not addressing any of it, with 'could, would, should'. None of that simplistic rationale has every applied to Kurdistan, the KRG or GKP. If it did, your historic and very forceful prediction of a merger between GKP and Genel would have happened years ago.
That makes sense again, and again I ticked you up. And although I too have wanted the hapless Jon and Jaap gone for a long time, now that is upon us I am filled with foreboding, a foreboding as history tells us it is merely the end of a cycle before another begins of yet another set of Execs coming in and spending 3-5 years of feathering their nest and enriching themselves greatly without enhancing company or shareholder value one bit.
Why would Jon leave if there was any 'Glory' to be had here? The glory that would go with bringing one of the most torrid and sorry tales in LSE history, whether for Insti's or retail to and end, maybe even, just maybe, a satisfactory one.
The fact that he has thrown the towel in on his career would indicate the end of the tale, an increasingly dull one, looks certain to continue.
****eye
4£ max!
What are you talking about?
The cy is at least worth the money owed by KRG, especially the amounts they will recover. If my memory is correct, they should receive 80% of the 500 mio $ which are recoverable. That is 400 mio$.
Then you have the cash available plus what the unpaid months.
Pricing the reserves is more complicated. You can price a production of 55kbd at a very good price because the pipe is there and most of the investments should be ready by year-end. The production beyond need very heavy investments and a new pipe, but by time it is operational, the price of oil will be much higher: lack of investments will create scarcity of oil and a higher price.
The last sizable and comparable field sold was Lake Alberta by Tullow to Total in April. Price was 1$/bl, including a 1450km heated pipe to Tanzania and building a refinery in Uganda for a peak production of 230kbd and reserves around 2bil bl, with a net pay that can’t compare with Shaikan. Production was trucked away and very marginal, so the field hasn’t been tested like Shaikan. Heritage Oil didn’t even bother to test several wells!
So you have at least 58% of 1 bil bl 3P+3C at 1$.
All this gives you 1 bil $ as a rock bottom value to which you add a takeover premium. 1 bil $ is 5$.
Bets are open on how much reserves they will disclose and on the price per bl.
IMHO
Hello ****eye,
And welcome back.
No Volte-face I’m afraid, in fact I’m still banging the same old drum.
The fact that I have no confidence in Ferrier or Huijskes has been a matter of record for quite a while now. If you remember, I was calling for bb opinion on JF’s suitability for office well over a year ago. That infamous ‘straw poll’. Well it’s finally happened and he’s on his way. Just Huijskes to go now.
As for the buyback initiative, I had no issues with it so long as it was accompanied by cancellation of the shares once acquired. I still maintain that should have been done at the outset, and immediately, to maximise the impact of such a reduction in the share base.
Instead the Board have only just resolved to clear the stock out of treasury by cancellation, nearly a year after the buyback initiative commenced…..and only then after recognising they only needed 1m of the 19m!
It’s probably too late for cancellation to have much of an impact now, so much other stuff has gone on in the intervening period.
Finally, I thought it was worth pointing out the financial implications of such a course of action if taken by the Board.
But no about face…..not yet!
And I know you'll be watching!
Straycat,
”Similarly, if the Board decides to cancel 18m treasury shares, their value is lost to the Balance Sheet forever.”
When the bod cancels those shares at the end of day one, the price goes up on day 2. Otherwise the market cap goes down around 8%.
”In this case I estimate that cancellation cost/loss at c.$45m. i.e. the Company has made investments in an asset (common shares) which no longer exist, no longer have any value”.
Ok, they paid around 50 mio $. There is no loss.
There will be a profit or a loss depending upon when they cancel the shares. If it is today, they paid around 2.5£ for a stock worth less than 1£. Bad luck due to covid and oil war between KSA and Russia.
If they cancel the shares upon an agreement with ICG, the stock will be far above 2.5£ and the buyback will prove to be a very good investment.
Just common sense. At these prices, GKP is grossly undervalued.
I thought you were angry because you told somebody to shut up.
ATB
BD
Hello Straycat, hope you are well. Interesting to see a certain degree of volte-face with regards your sentiment here. I won't be so brash as to remind you that I predicted that might happen.
You make some valid points, I ticked you up, but are you also not on record last year demanding the treasury shares be cancelled as to enhance shareholder value? Although I fully understand that so much has changed since then.
n.b. Some of the delusion on here is palpable. I make reference to a post the other day that suggested £4 being a good outcome and it being roundly lambasted by others, others that have been, like me, harpooned here for a decade or more. £4.00 per share is the very best, the VERY best, any of us should expect. A value that the SP here has only surpassed once in 14 years. That would be a loss for me, as it would most others, but please just give me one turn of events, on indication, one hint within those 14 years, that with the region we're in, the corrupt tribesman in silk we are prisoners to, the debt that they are in, the lack of asset and operational clarity, the state of the global economy, the price of oil, and lack of demand for it, all while our PSC and lack of any 2nd amendment or potential extension or enhancement of it, just whittles away, our investments in GKP single asset value with it, just tell me what makes you think we'll ever achieve more...bar your hope?
I understand that hope is sometimes all people have.
Inv,
Hence the shareholder revolt at the AGM.
Have to bow to the beancounters over this subject - but as a layman I only see a very highly paid management taking a strategic decision to spend a huge wad of our cash to buy up 19M of our own shares, at what turned out to be the wrong price, then sitting on them for months in the hope that the SP would climb above the net price they paid for them - before either deleting them to boost the value of the remaining shares or (if they could pull it off) awarding to themselves for continuing their unbroken record of failing to meet production targets.
Net effect - another eronious decision, and a loss of £45M if deleted now.
At least they bought them within their stated timeframe.
Maybe the money would have been better spent on hiring in some competent oilfield experts to drill a couple of wells and set up process equipment to handle increased production when the POO recovers.
The Major Holders must be tickled pink with this continuing level of performance.
Hi slings,
I wish.
If the board cancels those 18m shares then the share base will be 211m. Since year end net assets were c.£420m, each share will be worth c.£2 according to book valuations.
But the market only values GKP @ c.£212m right now, or .92p.
So on that basis we are clearly and massively undervalued as we all know.
SC yes but no but doesn't asset value per share compensate for that?
Stray, you are correct, as I am when I say, this dysfunctional outfit is going nowhere fast.
One word.....SELL
BD,
I don’t know why you think I’m angry. I’m not.
And I have no problems with either the dividend or the buyback in principle.
I do have a problem with PUTUP’s complete ignorance of what happens to the net worth of the Company when you cancel those treasury shares.
The Board have resolved to cancel c.18m treasury shares, so here’s what happens when they do that:-
1) They’ve used an asset ($50m cash) to buy another asset (common shares, some 19m of them).
2) As long as those shares remain in treasury there is no change to the net assets of the Company apart from the valuations placed on those treasury shares at year end, which will result in either a profit or a loss on those shares dependent on sp performance.
3) As soon as they issue any of them (under employee nil cost option schemes for example) then the net assets of the Company are reduced accordingly because GKP have given awarded an asset at nil cost to the employee, namely treasury shares.
4) Similarly, if the Board decides to cancel 18m treasury shares, their value is lost to the Balance Sheet forever. They no longer have any value because they are no more. In this case I estimate that cancellation cost/loss at c.$45m. i.e. the Company has made investments in an asset (common shares) which no longer exist, no longer have any value.
5) And howsoever you calculate that loss, wherever you put it in the accounts, one way or another the net worth of GKP is reduced by that decision to cancel.
That’s all BD.
IMO. DYOR.
Straycat
Why are you so angry ? Are you down on your investment ?
No management could have predicted the covid and the oil war between KSA and Russia with a barrel below zero.
H1970 is right and PUTUP is right when he says that « The company had excess liquidity and returned capital to shareholders. »
Just wait now that they changed the rules for the options to make them compatible with an amalgamation under Bermuda Laws.
Relax and average down your price.
BD