Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
GGG,
Part of the problem we have is the stock count. It was grown so we could acquire the Canadian assets, fair enough at the time as we needed to save the company after the disastrous previous NS campaign where Liberator was outed as hot air.
As a company that now pays a Divi, it's important they manage that Divi yield by also managing the corporate paper. What the company wants is to attract markets interest. Divi's are one mechanism, relying on cash payouts - giving the holder a benchmark return (yield) they can compare elsewhere. The issue with divi's has always been - are they sustainable. The likelihood is no, in a falling oil price climate they will be unsustainable and lead to a cut - which will hammer the share price back down heavily.
Another way to improve that yield without increasing cash payouts is reduce the stock count - it has a similar effect on yield and ensures Divi payouts remain sustainable. Whilst many might not like that as a way of deploying capital - this is standard practice amongst oil majors and midcaps. It can be a variable as you describe in a mix of some Capex cutback and Divi increases.
Increasing Divi significantly short term is great - but is unsustainable longterm and will lead to a substantial fall in price the moment the market sees oil prices falling (they will sellout long before company announced dividends are cutback).
Warren Buffet started buybacks of Berkshire Hathaway stock lastyear as they were undervalued and paying a good Divi to holders. Quite simply, there are too many shares to pay those dividends out to. So let's get rid of some of those shares - which means a more sustainable return for remaining shareholders and higher yield for potential new shareholders who will be attracted to this higher yield payer. Imagine we could get the divi yield from 7% to 10% via buybacks - that 10% won't last long as new entrants would push the price higher.
Another factor to consider, with interest rates rising, bond yields are seeing improvement - so i3e must use every tool in the box to improve its yield and attract new investors.
Tony,
Agreed. The effect of buybacks are also perpetual. They allow a company to improve EPS and Divi yield without having to payout more cash. If the market won't value the paper properly because it's too abundant, then some of that paper needs to be removed from float. Quite happy if they just hold production for a year in order to do this. Really need to do some housekeeping here.
Hi Tony,
Brilliant well reasoned post.
The area's I agree with you; the discount on peer group is quite an anomaly. I think it's reflective of the companies lack of PR to some degree. Also they are just not doing enough marketing of the business in Canada.
Also, in full agreement re NS, one just has to look back under reporting segment of lastyears accounts and it's clear the millions spent on NS is just a black hole that will not payback anytime soon. The fiscal environment aswell as resource uncertainty make NS even less attractive.
I don't buy that it's fallout/hangover from Serenity - as that was not in the price anyway.
I do think they need to add alot more oil to the revenue mix and confirm an increase to nextyears Dividend. Also, consider buybacks.
Whilst there is a need to continue development drilling, they can afford to hold and slightly increase this year's production by chopping the Capex budget down.
They need to focus on shareholder returns - maybe even consider limited buybacks.
Without the above, I can see the share price sliding further.
From December Capex and Divi RNS:
"i3 has previously conveyed that it will distribute by way of dividends up to 30% of Free Cash Flow, defined by the Company as "Cash Flow from Operations minus Expenditures on Property, Plant & Equipment minus Expenditures on Exploration & Evaluation assets"
Tennyson note in September has I3E producing approx 21,000kboepd for 2023 using a blended price of just under $40/bbl and they arrive at $106million FCF . I would like to see a good chunk of that paid out to shareholders as an increase in the current dividend payout and the drill programme cutback significantly to grow and hold production around 25-27kboepd mark.
Its important to note, I3E also has LN's worth £25million to clear nextyear. Whilst expensive, I do think they can manage it.
I don't think it needs to be that bad. But given the open talk of 78% taxes on NS oil (or higher) we need to draw a line after Serenity failure and;
-farmout Serenity so no further cost to i3e
-Let NS licences lapse in a worst case scenario
What is clear to me after many years of investing in NS oilers is that I3E NS portfolio is not worth the effort at this stage (especially with all the fiscal uncertainties) and cannot be scaled into a larger production hub.
They really need to draw a line, farm it out or let it lapse.
Hi Tony,
Unfortunately, this is the appalling state of affairs with our management team. Most other companies our size have got their Q3 updates out, not this one. Leave it until the last minute so the data is all but irrelevant by then.
If there are reserves upgrades based on new wells now in production - they should be RNS'd separately. There is no excuse to hold up Q3 results because of that.
I am struggling to understand, for the outlay the company puts up for MS, what does he actually do. The Tain operators are taking it really really slow with allowing any other party into their infrastructure. I will put my neck on the line and say even if (big IF) Serenity gets to FID and single well tieback - it will be years before £1 of cashflow is ever realised from it.
Which again begs the question - is it really worth the time and value suppression NS uncertainty brings to this company. And do we really need MS - I would suggest we agree a big payoff and continue full speed ahead in Canada with some very good, reputable PR firms. Also focus on shareholder value delivery, not just shareholder value.
The indifference is because management are not conveying the merits of the company well. When they did that interview a few months ago, they couldn't even be bothered to update the presentation. When you look at the company website, you'd still think this company was heavily invested in the North Sea.
They need to sing the praises of Canada alot more than they have done, especially Clearwater and Montney wells. Really focus the effort into selling that story to the investment world.
As for the policy on cashflow, I would like to see an increased Divi and some level of buybacks if the price festers down around these levels. The Tennyson note for September indicates $106million in FCF nextyear, if they get close to that, they should have no problems with increasing dividend and implementing some opportunistic buybacks aswell.
Hi Tony,
I'm surprised you think we are not going to hit the production target. Have you factored in some wells are still 'cleaning up' and others only now being fracked?
I'm going to put my neck on the line and say they will exceed 24kboepd by year end.
As for oil price, just wait until the US SPR oil dumping ends post midterm elections - should put a spring back in pricing.
Cash
I think they should be leading with the Divi but also implementing some level of buybacks aswell - given the stockprice. Whilst the Divi delivers direct shareholder returns, buybacks in a Divi paying companies do enhance value, but it's not as clearcut as receiving a cheque or having Divi funds deposited in your account. Buybacks lower the Divi payout on shares cancelled, not just in year 1, but every year after aswell. Thereby reducing overall cash outflows and tightening the free-float. In theory, they should have a positive impact to divi's, although not as obvious. Generally it's not liked because many companies don't see much change. But is still worthy of merit.
To that end, major and midcap oil companies regularly use buybacks to manage yield and free-float.
The risk with just going for divi's is sustainability. It could lead to a significant hike in a certain year then dropoff if a downturn forces them to cut cash outflows.
A bit of buying back would be my preferred option, with a sustainable increase to Divi each year.
Cash
I agree NI and Tony,
Dividends do not always lead to a rerating, especially where investor sentiment and changing overall investment themes are involved.
Buybacks help to ensure that future Divi payouts will be maintained (at minimum) and actual cash payout on Divi will be lowered on account of 'boughtback' shares being put into treasury or cancelled. So whatever is spent buying back pays for itself under a leaner, meaner capital structure.
As you both say, what better time to do it than now, as the company is undervalued compared to its Peers plus ahead of major production growth spurt through 2023.
Cash
To a degree yes. It will immediately impact producers return rates and also change the project level economics of planned developments.
The market has already cooled down on North Sea producers over the last few weeks.
Genuine question, how is it Glencoe &/or previous operators missed this prospect given its very large aerial extent?
Also, between Mentorc and Sasanof, what studies have been done to ensure there are no faults?
Why has this not been corrected - perhaps it is accurate?
Brutal!
U.S. Natural Gas Prices Could Soon Hit $10 - Oilprice.com today
'Warmer than usual spring weather, expectations of a hotter summer, and record LNG exports to help Europe reduce dependence on Russian gas could send the U.S. benchmark natural gas prices to above $10 per million British thermal units (MMBtu) in the coming weeks, analysts say.
Earlier this week, the front-month Henry Hub benchmark price hit a 13-year high of over $8/MMBtu, as prices rallied amid increased demand for air conditioning.
As of 9:50 a.m. EST on Friday, the natural gas price was at $8.693/MMBtu, down 1.02% on the day.
Moreover, the levels of natural gas in storage across the United States are well below average for this time of the year.
The southern U.S. will be very warm to hot with highs of 70s to 90s, including highs near 100°F across Southwest deserts, Texas, and the S. Plains this weekend into the start of next week, according to an estimate from NatGasWeather of natural gas demand.
“Warmer conditions will spread across the Midwest and eastern US late this weekend into next week with high 60s and 70s,” NatGasWeather notes.
“Without production making significant gains, the market will not be able to handle things if this kind of heat sticks around,” Bespoke Weather Services says, as carried by Natural Gas Intelligence.
“If that pans out, we feel we easily can go over $10 in prompt-month [pricing] over the next several weeks, barring massive supply gains,” Bespoke added.
At the same time, higher demand for heating and record LNG exports left U.S. natural gas in storage at the end of the winter at its lowest level in three years, after larger-than-normal storage withdrawals this past winter, the Energy Information Administration (EIA) said last month.
The EIA’s latest weekly natural gas report showed that working natural gas stocks totaled 1,567 Bcf in the week to April 29, which is 20% lower than the year-ago level and 16% lower than the five-year (2017–2021) average for this week. '
If these wells can maintain low decline after initial month of flow and deliver per plan, with Henry Hub where it is ($8+), this will be a prime growth play for investors in the sector. The reserves, production and cashflow that a successful test of the Selma chalk could deliver are not to be underestimated. Big plans here with multiple development wells planned.
The reality is most oil wells fail to find HCs and shareholders endure the savagery that such a result brings. We don't know the outcome yet but clearly the market mood is telling us something here, a poor result and many will get hammered. I hope you all took some money off the table while the price was between 11-12p. Just remember, there are more important things in life than money and the markets.
They were casing at 2150m Monday/Tuesday. If that is complete and they are drilling ahead, target interval begins at approx 2340m so they should be about to enter that now, certainly over the weekend even at a reduced ROP.
The next update will be very interesting. Those who are uncertain need to mitigate now. Equally, those on the sidelines should expect something relatively soon.
Hoping they can confirm what's encountered next week.
Hi all,
Anyone have access to the most recent broker note for EME?
Cost of production was $24/bbl in H1 2021 figures. But production averaged around 11,000bopd.
I'd be comfortable with $30/bbl cost range taking into account production decline and higher watercut.
They've certainly turned a corner and remarkable to see the level of cash generation with 1 well and high oil prices. I was invested here from the recovery of 2014 OP downturn (in late 2016) through to Halifax discovery. It was a great time - picking up on oil price recovery.
I think Hur is now back at this point again.
Now that bondholder issue looks to be mitigated, is the plan for AM contract to be extended and another well into the attic at Lancaster?
What's the way forward with all that cash piling up? I would like to see them diversify away from the flagship mission statement of pursuing basement reserviors. So it's more than just a single asset or single play company.