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Sustainable buybacks or dividends can only happen with production growth. That is by way of acquisition, mergers or organic growth. There will be natural depletion of wells hence the need to replace reserves.
So buybacks might be one strategy in the future but they can only be implemented with continued growth
The intrinsic value of a business is the discounted cash flows that can be extracted from the business over its eternal life. By using retained earnings to buy a piece of the business at a price way less than what it’s worth increases the intrinsic value per share for continuing shareholders. iamnotananalyst yes, this means continuing shareholders would be entitled to a greater share of the company’s earnings. Should a dividend be announced after the buyback as a way of shareholders extracting cash, the cash stream will be greater than before the buyback executed under such conditions. The share price will reflect the change in intrinsic value over time
Bandit - surely you acknowledge that in respect to buybacks the resulting share price isn't the only factor?
A key metric will be the dividend, which could be increase or would he cheaper to maintain with fewer shares in issue. In theory that should raise the share price, but not necessarily.
Tom8080- I may be misguided, in your opinion, but as someone who has allocated capital in the real world, in public companies I am very comfortable with the process with which a company decides to do so rather than just talking about it on a bulletin board. This is a public forum and all opinions are welcome but suggesting that others like Maverick7 and I ‘misunderstand’ and are ‘misguided’ suggests to me that you believe that your opinion is the only opinion that is worthy which simply means that I will not waste my time in engaging with you. I have been around long enough to know not to waste another post discussing this. Best of luck with your investment if you bought in recently expecting a share buy-back.
This is a informative topic of conversation for a fairly new investor like myself.
Thanks!
The company could theoretically buy in 50% with £70m at today’s prices. Yes it would move the share price and mathematically yes, shareholders would receive the double the current dividend per share. I think you misunderstand a buyback. You can’t compare a buyback that BP made years ago. It depends what price they bought back at relative to the intrinsic value of BP at that time. Your comment is like dying “can’t see how acquisitions have done for BP over the years”. Exactly the same from a shareholders point of view. Buybacks are often misunderstood so apologies for thumping my point done. It completely depends on the price you’re buying back at and what you’re getting in intrinsic value.
Cancelling just over 1m shares would put AA over 30%, not a lot of room here
Can’t see how share buybacks at the likes of BP & RDSB has done in recent years apart from keeping the share price in check. We need share price growth, increase in production and the dividend to be sustainable.
I agree buybacks show a lack of strategy and management being risk averse. Will buying back say 10% of shares really have a massive jolt to the share price. Can’t see it personally, we are already at a massive discount to cash on hand. The company needs to attract investors and the only way to do that is by increasing production and pay more regular dividends
bandit. Thank you for your reply and i respect your opinion but I do feel your understanding of capital allocation is misguided. Managements decision to allocate capital to cancel their own shares versus deploying the capital to purchase external assets should be based on price and value. The math governing each course of action is the same. What is smart at one price is stupid at another. Its a matter of what are you getting for your money. At RRE's current share price, i think we all agree management are getting a lot (instrinsic value) for very little (£10 a share). The share price reflects intrinsic value so if company cancelled shares, the earnings per share for continuing shareholders will absolutely increase. That is simply mathematical and not up for debate. If you agree share prices and the market cap of the company reflect intrinsic value over the long term, RRE's intrinsic value will be worth less in the future if they choose to allocate £70m (for example) of the company's existing capital on an external opportunity that is worth less than £70m of RRE today.
Tom8080- AA is an ex-investment banker turned oil executive as you know and will no doubt be spending a fair bit of time comparing returns from different strategies. In fact he will have a clear base case which may be to do nothing more in the short term other than to deliver current plans and to build cash reserves up a little more as investment in the business is curtailed pro tem due to the oil price drop. I am never that convinced about share buybacks as they almost imply that the BOD are bereft of opportunities or are risk averse none of which I can be convinced is the case in the current market to be a true reflection of reality. They will assess any potential transactions against other strategic options and decide to proceed based on a combination of potential economic returns, execution risk and market outlook. To undertake a share buy-back will only happen IMO should AA feel that all other opportunities including the base case are non-starters. He has no idea what impact say a £100m buy-back programme will have on the share price. If it only rises a little it will be seen as a waste of £100m. So, IMO I prefer to wait for one of the other strategic options to present themselves when the time is right and we should trust AA to do that.
AA stated he wants RRE at £50/sh. Didn’t mention market cap. Watch this space !! .....;0)))
Actually this makes great sense, repurchase shares will also increase the SP at the same time, it does not take much to move the SP here as such a small free float therefore need to be careful not to spike it so needs to be controlled if they want to get a lower repurchase price.
Why are we discussing acquisitions for AA. If AA is reading this, you already have a great business to buy at a price significantly below its intrinsic value. Its called ROCKROSE I.E. your own. This following course of action is the best use of shareholders funds held as cash on the balance sheet. Its exactly the same for Serica. You have two great businesses priced at ridiculous levels. Share repurchases make total sense.
Rockrose has met the needs of the business and the stock is under-priced and therefore buybacks make nothing but sense here. For continuing shareholders, repurchases only make sense if the shares are bought at a price below intrinsic value. Today, it is highly probable that Rockrose is priced significantly below its intrinsic value. Oil and gas prices have stabilised and significant blocks of supply have been cut off as evidenced by falling rig counts and capex reductions around the world. We have significant 2P reserves priced very very cheaply. If this rule is followed, the remaining shares of Rockworse will experience an immediate gain in intrinsic value. Using a simple analogy, if there are three equal partners in a business worth £3,000 and one is bought out by the partnership for £900, each of the remaining partners realises an immediate gain of £50. If the exiting partner is paid £1,100, however, the continuing partners each suffer a loss of £50. The same math applies with corporations and their shareholders and in this analogy the exiting partner is losing his shirt in Rockrose's case. Ergo, the question of whether a repurchase action is value-enhancing or value-destroying for continuing shareholders is entirely purchase-price dependent.
On that basis, just like the Board would consider price when purchasing an outside business, many in the North Sea are not as good as Rockrose and are more expensive, I urge the Board to evaluate and consider the current price of its own company. Through a significant share repurchase at these levels, the Board can reward long-term shareholders by buying something for far less than what it is worth, which is the best capital allocation policy of all. I do not believe this is a complicated equation. The Board can buy a significantly undervalued business today, which is far superior to dividends, even without listing the tax benefits to shareholders of a share buyback over dividends.
These times dont come around very often where you can gobble up a great business for a stupid price. AA please take advantage of Mr Market and make good use of your capital allocation skills.