Linda's first CMD test (A Fail!)11 Dec 2021 18:36
Mr. Market has marked Linda's CMD's strategy with a big fat F.
I believe she will have to re-adjust her strategy and deliver on different fronts before there is a major re-rate of the SP (>500p). Needless to say that among HBR, Tullow and ENQ, HBR is the one in better shape at the moment, IMO.
i) Tolmount: Projects that drag on forever acnhor a company's SP until they come to fruition. Unfortunately, Linda announced another delay. If production comen online in March then the high-prices season for gas may be over by then. And 3 months delay at 20Kboepd, is 1.8Mboe, which at unhedged prices at the moment would mean additional revenue of more than $250M in Q1 2022. This gas will still be produced but perhaps sold at $60 boe, which is less than 40% of current prices. Anyway, thse back of the envelope calculations are only illustrative. The bottom line is that she needs to get Tolmount to start producing gas. The downgrade of the reserves is also not good news.
ii) Dividend: Some poster compared HBR with RDSA and/or BP in terms of dividend yield. I think that was a very smart comparison. Linda cannot expect that HBR shareholders get a lower dividend yield than if they were RDSA/BP shareholders. She should have left the 2nd instalment of the dividend to be paid next year as "will be at least X", rather than stating the exact figure now.
iii) CAPEX and ABX will be quite high in the foreseable future. The priority should be to reduce debt faster (and earlier than 2025), but stop when it gets to $900M taking into account the needs of large investments. That is very much manageable for a company like HBR (and is less than the psychological barrier of $1B!), and would allow higher dividends.
iv) Mexico: Quite important to get to FID at ZAMA (25% WI).
v) Hedging: A different strategy is needed. 3-way collars with two puts or 2-way collars with a call being sold at a very high price (so costless 2-way collars never a good idea, especially when the volatility of the oil price pushes the sold call and bought put closer together).
In summary, while there is value in HBR, oil companies need to undertand they are the new tobacco companies, and so investors want dividend yields of >6% to own the shares.
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Oil,
HBR is better run than PMO. The latter always sailed to close to the wind with TonyD at the helm. But when the wind stopped blowing disaster struck. Tony D wanted to operate everywhere (U.K., Mexico, Falklands, Norway, Indonesia, Vietnam, you name it...). Linda seems to be more reasonable, having exited from several locations and licences.
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