Member Info for Nobull

"But your undervalued argument hinges on a perception that buying back at one price (an 'undervalued' one) might create value whereas buying at another (an overvalued one) destroys value. "

Yes. Exactly. I think we are talking about different time intervals: you, an infinitesimally small interval, and me, a typical holding period longer than a financial year. If the company needs to re-rate for some reason, then the re-rating that would have applied to the cancelled shares is an additional bonus to be added to the other shares left in issue; that is, the money that has gone out of the company on shares that would otherwise have re-rated, but for their cancellation, is working to deliver a bigger re-rating on the remaining shares in issue than would otherwise have occurred. - yes the money that has gone out has worked to the advantage of the remaining shareholders - it's been value-accretive. Well, that's my take on it, and I think that is Phil Oakley's view. Money spent on a buyback in a hundredth of a second is neither value accretive nor value destructive, because there is no time for a change in the rating: it's value-neutral then, which is your point, I presume?

talking out = talking about
for the remaining shares issue = for the remaining shares in issue

Putup,
"Nobull, think about the value if the company pre and post a buyback (or special dividend). In that split instant, the only thing that has happened is that $x million left the company. Nothing more, nothing less."

This sounds like an argument being put by a calculus teacher talking out integration: "now you divide the area under the curve into infinitely small lines of zero width, and you add up the area represented by the lines..." Sure if you make the time interval infinitely small, there is no time for a re-rating or a de-rating of the shares to occur, only for the money to go out and buy the shares (which are instantly cancelled at the time of purchase) and for the remaining shares issue to increase in value by the amount of money that has left the company, keeping the market cap the same. Yes, I agree a buyback then is just a distribution and nothing more. But people like me keep their shares longer than the time interval you have in mind, so re-ratings or de-ratings after the buyback matter to me, if not to you! Agree to differ on this. ATB.

“When it comes to valuing GKP, I think a simple PE metric is far too simplistic.”

Okay. But it’s one of several valuation methods, and it is quite handy for checking if the value thus produced agrees with a DCF valuation, a method that some say is “tell me what valuation you want, and I’ll plug in the numbers to get that” (isn’t that how most investment analysts operate?)

“Also, a $50m or $100m buyback isn't going to affect the bankruptcy risk of the company one dot”

If you put it like that, yes, it won’t. However, when I bought for my relative, I was frankly terrified of the cash pile being used up in no time. Well, Brent crude was hovering around the $20 mark then (I didn’t know how long it was going to stay at the level, and we were losing money then). Yes, the market cap was hardly different from the cash in the bank. To me there was loads of dilution risk priced in, and, as you know, bankruptcy is just the special case of 100% dilution. Sure it is easy to look back now and say the company was a steal then, but that wasn’t how it looked then.

“Most importantly, buybacks just distribute value. They do so in just the same way as a dividend. “

I get that. But that’s not the whole story. If they are going to do buybacks, they need to buy back undervalued shares. Yes, it is a difficult task to get right, and things can happen after the event, outside the control of the BoD, to make the shares they bought back look overvalued. It happened last time (not the BoD’s fault but telling us it was value-accretive was factually incorrect).

“GKP has tons of excess capital. Worse it is paying $10m a year for the privilege. They have a lot of excess capital to distribute this year.”

Yes. But things can change suddenly. It seems like that now. And yes, the dividends (before tax) have helped me recover a good deal of my investment. We have title risk and capex blow-out risk (the FDP) to contend with now. We can disagree on how much capex blow-out risk there is: you presumably none, and me scared witless by it. Okay!

Other things

There is nothing else I disagree with in you post!

Straycat, I am long. There are two possible outcomes to title risk I can think of: we re-rate to price in a massive reduction in that risk e.g. our PSC smoothly transfers, without any loss in value, to a new authority more powerful than the KRG or we are stripped of the legal right to extract oil, making our cost recovery pool cease to be a debt to us (loss of say $400m), making our plant and equipment have scrap metal value less transport costs to the nearest scrap yard (probably to be purchased off us (if we own it at all) by the Federal Govt. oil minister at scrap metal prices) only for a new bidder for the PSC to be forced to buy the plant and equipment off the oil minister at its value-in-use (thousands of times more than its scrap metal value) as a condition of getting a new PSC. Sure, it will send a message to the world that Iraq is an uninvestable country but the oil minister will be very rich at our expense, and people in this part of the world don't go into politics to do good for their people even if they say they do - well, that's my experience of countries well down in the Transparency Corruption table.

I see Iran has a fully independent judiciary according to the Iranian constitution; it's anything but. The Iraqi constitution might be similar in what it says for all I know. If we do a buyback now and things go wrong, we will have bought back overvalued shares by miles (just as our BoD did before): we need a share price of, say, 40p if we are to be turned by sleight of hand into a binary litigation play with no revenue and if we become totally dependent on our remaining cash pile to fund any litigation to get compensation (Genel isn't getting any compensation for Bina Bawi and Miran, is it?).

In deciding whether to do a buyback surely our BoD has to decide if it is buying back overvalued shares (the negative outcome I've outlined) or undervalued shares (the positive outcome as title risk comes out of our share price and we return to trading on, say, 7 times 2023 forecast earnings of 50p e.g. a share price of £3.50. JMV.

"Buybacks can genuinely concentrate potential shareholder attention because as the common shares shrink and the dividends increase, potential investors have to decide..."

With all due respect, Straycat, I don't think buybacks are just all about concentrating eps and being able to increase the dividends thereafter. It's also about NOT BUYING BACK THE SHARES BEFORE A DE-RATING. The de-rating effect can reduce the share price more than the eps concentration effect can increase it (see Phil Oakley's calculated example below from Investors' Chronicle for "Buyback plc").

In our case, last time, the shares were bought back before an unforeseeable oil price crash, which probably caused the bankruptcy risk (say, using interest cover as a crude measure of that) to rise and, if that wasn't bad enough, it spread the unanticipated losses that then ensued more thickly across a smaller number of shares (which I would argue caused further share price damage) - yes, value accretive in hindsight to my relative buying GKP then, but not to the poor sod who sold out then and to whom the Chairman described the buyback as "value-accretive" - it wasn't, and it's only about near value-neutral now.

I've had this argument with Putup before, and I get that Putup probably doesn't like Phil Oakley's invented metric "true value per share" - ffs, what investment analyst uses that?

But I can see that if Phil Oakley had used a more regular value term like "enterprise value", he would have had to have all sorts of qualifications about debt remaining unchanged to make his point, and he might have lost some readers in doing so.

Please note his conclusion:
"The lesson here is this: Share buybacks only make shareholders better off if the price paid for the shares is less than the company is actually worth. So what Buyback was doing was paying 160p a share for a business that was only really worth 80p a share (8p of EPS x PE of 10 before the buyback). In doing so, it reduced the true underlying value of the business to just over 71p, as shown in the table. If it had paid 75p then it would have increased the value of the business. The effect on EPS is irrelevant. By paying too much, Buyback has destroyed a large chunk of shareholder value just as many company managements do in the real world. " [Just as GKP did too]. Sure, dividends v buybacks are contentious. A de-rating would occur if we were stripped of the PSC. A re-rating would occur if our PSC transfers across to the Central Iraqi government without the terms being materially altered, I wonder. Buybacks are a sort of bet on the outcome of this too, I wonder, quite apart from any eps concentration effects. JMV.

https://www.investorschronicle.co.uk/comment/2019/03/08/buybacks-versus-dividends-which-is-best/

TM, hi
"What it has done is given the Federal Oil Ministry the right to pursue the nullity of the contracts.

Now just because you have the right to do something doesn’t necessarily mean it’s the smart thing to do now or ever."
I agree with you, of course.

although they = although there

"nobull - clearly the market doesnt care one iota for your bleak appraisal of the situation........"

I haven't sold a single share in GKP ever. The oil price is up this morning. The market probably distinguishes between enforcement of a judgement and a judgement. So no change in the title risk: it is still embedded in the share price as it was at the time the prospectus was published. Who are you to know better than what the prospectus says? The title risk certainly explains our anomalous EV/2P ratio, and maybe even why our BoD isn't doing buybacks although they can be many other reasons for not doing the latter.

"Oh blah blah contracts are illegal, KRG can’t export its own oil blah blah... they have been saying that for 13 years.
They are just trying to add a bit more pressure to make the KRG come to a deal."

Yes, but this time it's the Supreme Court saying it, and there is no higher court to appeal to. Sure they can strip us of the legal right to extract any oil, and it is warned about in the prospectus (title risk) so we don't have a leg to stand on, and our share price can go down to a substantial discount to net cash per share (say 50% of net cash per share) - it wouldn't be a nice scenario. Yes, enforcement of the ruling is something else. Okay, so Baghdad might not send in the army to enforce the ruling, but Baghdad can cut off the civil servants' salaries, etc. And this all makes a bit of a nonsense of the FDP. Not great news, is it?

Thanks Clangers and CCC for that info. That might explain why we currently trade on an FY2023 PE of 4.2 when really if a 14% earnings yield is reasonable we should have a share price now of £3.50 (PE of 7 x FY2023 consensus forecast of about 50p eps). It would also help explain why we are an outlier as far EV/2P ratio is concerned. A case of efficient markets and all that?

Hops, thank you. I hope you have a profitable day too.

Hops, I did all my own research, my own calculations and my own forecasts. Kindly post a link to any magazine you claim my info comes from. You can't because it didn't come from any. My MPE FY2021 forecast is far below Finncap's, and I expect I didn't use a reliable method - I computed the EBIT figure from a forecast revenue figure using a previous accounting period's degree of operating leverage, maybe not the most reliable forecasting method. See you at the AGM.

"Many crooks once resided here." And still do - observe the MO of the multi-avatar Paul on Twitter and ADVFN, pumping out conspiracy theory stuff: proxy buybacks, leveraged recapitalisations, secret private auctions, undisclosed concert parties - it's hard not to laugh.

"but utterly" should be "but with utterly".

"no collusions"? Sorry, you've lost me. There have been no write-ups in IC on REA for a number of years (too speculative?), and the company does not calculate degrees of operating, financial and combined leverage for its shareholders, so I don't know what you are talking about, and there is no recent broker research on the company, so I don't know what you mean about repeating info in the public arena. I have forecast 8p eps attrib to the ords for FY2021 for REA, but utterly massive combined leverage, the scope for forecast error is also massive, so my forecast is as good as worthless. What's your forecast for MPE and for REA?

REA Holdings (Epic code "RE.") is an old rubber company that is now, principally, like MPE, a palm oil producer. It's over a 100 years old, and the main shareholder, when the preference share dividend arrears are paid off and the pref shareholders consequently lose their right to vote on matters concerning the ordinary shareholders, will have approx. a 29% voting interest in the company.

REA has masses more leverage (both financial and operating) than either MPE or AEP. That makes it potentially more capable of rocketing or plummeting than AEP or MPE. Yes, it's has a speculative risk rating, whereas MPE and AEP have "adventurous" risk ratings. REA has a huge amount of debt, but if it can pay that debt off, a good deal of the approx $500m of its total assets could then become more the property of the ordinary shareholders than that of the debt financiers, were there to be a liquidation. With a market cap of about £60m, there is plenty of scope for the REA ords to multibag if, (and it's a big if), the palm oil price stays high for a long period e.g. 5 years. REA also has an interest in some non-cash generative assets, which should soon generate cash and strengthen the balance sheet and get its excessive debt down to more manageable levels, viz. the coal mine and the andesite quarry (andesite needed for road bedding material?). As to which you should buy (REA, AEP or MPE) depends on lots of things including things that are specific to you: attitude to risk, investor experience, wealth, temperament, etc. to say nothing of things like your view of the palm oil price outlook, etc. AIMO. DYOR.

A different temperament is required for investing in AEP: value investors need to be ultra patient. It's not good that AEP is piling up the cash doing nothing with it - it dilutes the ROCE. Of course if AEP came out with an announcement to make an acquisition that was going transform the company's growth prospects without adding excessive risk, sure, the share price would rocket. Mdm Lim could have used the cash to buy in the shares for cancellation in April 2020, but she didn't - for me, that's a bit of black mark (sure, she runs the company well, apart from the grumble over all the cash piling up). Additionally, MPE qualifies for BPR, but AEP doesn't. Finally, AEP doesn't do a lot to promote itself (no broker forecasts, although it maybe isn't difficult to do your own). I'm in REA and MPE, but I was once a shareholder in AEP before the takeover offer by Mdm Lim (in the 80s, and I vaguely recall taking up a rights issue at just over £1 after Mdm Lim took over). Yes, I get that Mdm Lim doesn't need divs, and I get that she doesn't need higher capital growth (the idle cash pile) so I do wonder what she is planning - I wouldn't want to be taken out at a derisory price. MPE is fine as long as they get plenty of extension planting done, which they have hinted they will do. I really hate seeing non-cash generative vacant land: AEP has loads of that. Hope this helps. AIMO. DYOR. - No, I don't like eps growth that reduces ROCE, so I am a bit of a fuss pot about what I like. I sold an OEIC invested in FANG stocks to buy into MPE. The OEIC had a CAGR of about 14% net of expenses over 10 years, helped by a depreciating £. I hope for that sort of CAGR with MPE. (The discount rate used, to produce the DCF valuation in the last MPE annual report of £10.99 a share, was higher than 14%.)

"[Share buybacks] can be bungled or have their true purpose hidden from holders. "

Too true, especially if the LTIPs and VCPs are based on a threshold eps growth rate being achieved. Not all eps growth adds to shareholder value (shareholder value in broadest sense i.e. that includes quality of income stream and the risks to it) if the growth reduces the ROCE and or if it adds risk (e.g.from gearing up, a point that is way too subtle for the multi-avatar conspiracy theory propagator, Paul, on ADVFN and his multi Twitter personalities to grasp).

Putup, thanks for that. Very interesting. Agreed about the dividend.