The next focusIR Investor Webinar takes places on 14th May with guest speakers from Blue Whale Growth Fund, Taseko Mines, Kavango Resources and CQS Natural Resources fund. Please register here.
Romaron, hi
If you think this is a cert to double in short order, you might perhaps read pages 43 to 51 inclusive in the last annual report and accounts. I have no intention of selling: I see Marketscreener has us on a debt cover ratio of 0.37x by the end of 2024 so we might get a maiden interim in October or November 2024 or a buyback programme announcement then. Sounds good to me. But as always there are risks, the oil price in particular.
https://www.marketscreener.com/quote/stock/ENQUEST-PLC-6098532/finances/
"Getting debt down important ,but why not spend just 2m a month to buy shares back at this price."
Short answer: Doing buybacks at these low prices increases the risk of a covenant breach or a debt for equity swap, I wonder?
Faulty sentence.
With the denominator in that ratio (adjusted EBITDA) set to decline due to lower realised oil prices and lower production volumes in 2023 (unless we have some surprise new production coming on stream I don't know about, which is possible), so we need the numerator, net debt, to fall faster than the denominator (adjusted EBITDA) to hit that all important ratio of 0.5 times.
"Getting debt down important ,but why not spend just 2m a month to buy shares back at this price."
We have to get net debt down, but spending cash now on buybacks increases our net debt figure, making it harder to achieve the debt cover ratio of 0.5x, which we have to achieve before dividends or buybacks can be considered. With the denominator in that ratio (adjusted EBITDA) set to decline due to lower realised oil prices and lower production volumes in 2023 (unless we have some surprise new production coming on stream I don't know about, which is possible).
We need the numerator, net debt, to fall faster than the denominator (adjusted EBITDA) to hit that all important ratio of 0.5 times.
And if we achieve the 0.5x ratio, it must not be due to adjusted EBITDA being inflated because we are in the upper part of the oil price cycle. I can't see net debt falling much faster than $100m a year now (unless someone can quote some broker research to the contrary), so maybe we will get a maiden dividend in 2026. Here's hoping. I added 3 times my existing holding this week for my family. Yes, I have seen the low forward PE ratio, and I now see that value can be unlocked if we can use up our tax losses quicker: the reason I bought more.
i hope this helps. i agree it is wrong to use hindsight to **** off the directors because they have to guess what will happen in the future (they couldn’t forecast covid and an oil price crash), but our chairman said in the annual report not long after the buybacks:
“the company returned c.$100 million to shareholders through … dividends and value accretive share buy-back programmes”
they weren’t value accretive on 23 04 20 when our chairman said that. those buybacks may yet become value-accretive if we get a good outcome to the discussions going on now.
i object to the total boll*cks spouted by our chairman at the time and to the use of cash that was not surplus – we had debt at the time – which means you have to buy back shares at maybe an even bigger discount to fair value to come out adding long term shareholder value.
care has to be taken when doing buybacks, and they can’t be done at any old price. your “value-neutral distribution” narrative lets directors off the hook, and if it is correct for one second only, that is not a typical holding period for most investors.
as i said before, i think my relative benefited from the what we now know to be the unfortunately timed share buybacks (and now me) because the loss of cash at a time when it was needed to bolster the balance sheet would have made the share price fall further than it needed to, to price in the extra bankruptcy risk (no one knew then that a vaccine would come out and make the oil price recover, so gkp was just burning up cash putting in zero invoices for the oil produced, something i had to worry about at the time – no gain without pain and all that.
Putup,
On a 10 month investment time horizon, since the buyback to today, Serinius destroyed shareholder value: it bought shares at 9p+ and today they are worth 3.2p. The accounts hide that fact by making 3 deductions: one from the asset side of the B/S, from Current Assets for the cash that went out, one for the nominal value of shares purchased, on the finance side of the balance sheet and then another deduction on the finance side directly from total shareholder funds to represent the difference between the nominal value of shares purchased and the price paid – a deduction, which if not made would cause the sources of finance not to equal net assets.
The company's accounting policy makes clear that any profit from later reselling the shares back on to the market is not taken through the Income account but instead is added directly to shareholder funds, a backdoor method that would improve the book value; similarly if they are later sold at a loss, shareholder funds on the balance sheet are reduced (via the same backdoor method, i.e. not in a highly visible manner through the Income account, but by the backdoor method that helps to conceal botched capital allocation decisions by directors, but not invisible to people who care about these things, not you perhaps? - the truth is one would be hurting compared with if they had used the buyback money to pay a dividend instead because the NAV per share would be lower by a bigger amount than that caused by a dividend leaving the company). I am not invested in Serinus, but it made me giggle reading what the directors have done - the company seems to have a terrible track record of value creation: £1.60 to 3p in 5 years.
Serinus’ accounting policy on shares held in Treasury:
“The Group also from time to time acquires own shares to be held as treasury shares. Treasury shares are held at cost and shown as a deduction from total equity in the Consolidated Statement of Financial Position. Consideration received for the sale of such shares is also recognised in equity, with any difference between the proceeds from sale and the original cost being taken to reserves. No gain or loss is recognised in the profit or loss on the purchase, sale, issue or cancellation of treasury shares.”
Contintued...
Putup, something for you to reflect on:
Serinus Energy, an oil and gas producer/developer/explorer bought back 100,000 shares at 9.75p on 05 01 23 and holds them in Treasury. The share price today is around 3.2p. In its annual report for YE 2022, it said on page 4:
"The Company, under the authority granted by the shareholders at the 2022 Annual General Meeting, executed the
purchase of its own shares. The Board believes that the share price at the time of its purchases did not reflect the
intrinsic value of the business and will continue to evaluate the investment return of share buybacks as part of its
allocation of capital across the Group (note 17)"
So you think that was a value-neutral distribution, do you?
Further, the reason for the discrepancy between the sale price and the fair value of Abramovich's business sale to Putin's mates is being used as proof of a relationship that requires Abramovich to be sanctioned. I would be happy if GKP was ripping off my fellow GKP shareholders by buying back their shares below fair value, but I wouldn't be if it was overpaying them.
FGS the company isn't trading in its own stock.
From an accounting point of view it isn't, but if it buys shares back off GKP investors below fair value, it is ripping them off. And it is not going to show that in the accounts for the benefit of the remaining shareholders, but it is definitely a benefit for the remaining shareholders, perhaps not immediately, but over time it is. Did you see on the Newsnight investigation how Roman Abramovich transferred assets worth hundreds of millions less than their fair value to Putin's two long time friends (one is a musician)?
"We agree it adds share value over time". Yes, Belgrano, most people do, but Putup, to win his argument that buybacks are just value-neutral distributions and no more, insists on a highly unusual one second investment time horizon and throws up a lot of red herrings about some investors not getting the value added due to their holding period (therefore they are value-neutral distributions?) not coinciding with the period when the shareholder value created gets incorporated into the share price. Long term holders are likely to benefit of course, all other things being equal, which they often aren't.
I guess as there is nothing labelled on the balance sheet "difference between our buyback price and the fair value of income stream, aka the amount we have ripped off dozey GKP shareholders by buying back their shares below fair value and cancelling them", that Putup won't accept my argument (he is maybe an accountant who just sees cash leaving the B/S and a corresponding reduction in equity finance). He doesn't respect the arguments of Warren Buffet and of all CEOs who give careful thought to what to do with surplus cash in their asset allocation discussions at Board meetings. Anyway there are more important concerns about our future, and dividends and buybacks may yet turn out to be irrelevant depending on the outcome of the negotiations. I hope for a good outcome. Thank you for all your excellent, very knowledgeable posts on this company.
MR SpaceTomato, thank you for your post stating Warren Buffet is concerned about not overpaying in buybacks. I put all these arguments over 18 months ago to Putup, but to no avail. He hasn't changed his view. I give up.
"Putup, a share buyback involves the purchase of an asset, the shares. "
"Absolute rubbish. "
Thanks for that. A very clear description of your problem. Shares are a financial asset giving entitlement to a share of a future stream of profits. If you don't get that you shouldn't be advising Boards of Directors. I like all your other posts. Agree to differ. ATB.
Putup, a share buyback involves the purchase of an asset, the shares. The shares give an entitlement to an income stream (an expected income stream). Like any investment decision you can overpay or underpay for that expected income stream. When the shares are cancelled, the income stream purchased is shared out among the remaining shares in issue. A buyback price that is below the fair value of the expected income stream creates shareholder value; it is not a value-neutral distribution in such a case. Phil Oakley of Investors Chronicle explains it here with a mathematical example. You have declined to understand it in the past. You are in disagreement with Warren Buffet, Terry Smith and numerous CEOs. MP Evans even publishes its DCF value per share (fair value) in the Notes in its Annual Report and Accounts so one knows its buybacks are adding shareholder value as well as being a distribution. Why is purchasing one's own shares different from purchasing another company's shares? A prudent investor tries to buy below fair value. Your other posts are excellent, but not on buybacks. You are effectively giving our BoD carte blanche to spend my money on buybacks at any price with your wrong headed argument that buybacks are just a value-neutral distribution. Total boll*cks. It might be value-neutral in a one second investment holding period, the time for the money to go out the door - how many investors invest only for a 1 second holding period? I am not against buybacks but I am if they are done at the wrong price. A buyback is an asset allocation decision, just like debt reduction, capital expenditure, and price and investment returns matter.
https://www.investorschronicle.co.uk/comment/2019/03/08/buybacks-versus-dividends-which-is-best/
Putup,
“The shares bought are cancelled. £100 just went out the door. That’s it. It’s merely a question of who took the money (and reduced their ownership) and who didn’t (and so increased their ownership by not selling). That’s your responsibility not the company’s. If everyone sold into the buyback pro rata to their ownership then the £100 is distributed pro rata to ownership- just like a dividend.”
A purchase of shares is a purchase of a future expected income stream (eps, free cash flow or whatever metric you wish to use), and even you can’t deny that so a purchase of shares by the company is effectively an asset allocation decision (it also has characteristics of a distribution for the reasons you have stated). We agree, I presume, when the shares bought back are cancelled that the associated income stream is shared out with the remaining shares in issue.
The fact that different people don’t agree on what the lump sum value of that income stream is, is irrelevant.
With hindsight, the value of the actual stream of income delivered may differ from what was originally expected, and that too can be valued as a lump sum, which can be compared with the buyback price, albeit at a later date, long after the buyback.
In both cases, and you can’t deny this, value can be destroyed or created, by comparing the buyback price with the lump sum value of the income stream either expected or delivered.
WHEN the actual value created or destroyed is priced into the remaining shares in issue, and which shareholders benefit or are disadvantaged, are different problems.
Your arguments about buybacks being just a value distribution, and nothing more, only seem to stand up if you look at a very short investment time horizon, one second perhaps, "the time for a £100 to go out of the door", and if all shareholders have to trade their shares against perceived bad asset allocation decisions by our Board to compensate for the loss of value before it is priced in. Maybe that explains our difference of opinion. Buffet of course invests in businesses for very long periods and eschews trading them (the financial intermediation costs such as CGT are too high?)
"£100 out the door is £100 out the door." No, it's been allocated to buy something, the present value of an earnings stream, one that can be bought cheaply or expensively, depending on the share price at the time.
Agree value is in the eye of the beholder, but for many business models where earnings are not so volatile, there may be considerable agreement among professionals on what fair value is for a company's shares (but maybe not in our case).
Yesterday you said "better yet, buybacks. But these don't create value, only distribute it out of the company."
My contention is they add value if they are done at the right share price, difficult as that is to determine with our particular problems: contract sanctity - will it be respected, payment arrears, etc. Agree that calculating fair value for us is difficult, but if our Board isn't sure, they shouldn't be doing buybacks, and they definitely should not be doing them with borrowed money unless the share price massively undervalues our future eps stream. Agree to differ.
Putup, hi (after 18 month delay in replying. Sorry).
I strongly disagree with your characterisation of share buybacks as just distributions. Yes R&D is an company asset allocation decision, just as buying back your own shares is. You add value to the business by buying back your own future eps stream at a discount to its true value and sharing the discount to present value of that earnings stream with the remaining shares in issue. I agree the accounts can't show this and that the accounts do make it look like they just distribute value, but accounts have to be prepared using the prudence principle, so you can't have directors adding subjective amounts of value to the business according to what discount they think they bought their future eps back at : the accounts are not prepared with a view to showing shareholders every source of value added in minute detail; they are there primarily to help lenders decide how risky it is to lend to the business, I wonder? If shares are bought back for cancellation below fair value (aka DCF value per share, using reasonable assumptions about long term oil price, length of PSC and using a reasonable discount rate that reflects the risk) then the ROCE should improve in future years (not necessarily in the accounting period in which the buyback was done), all other things being equal, which they often aren't. I did reply yesterday but my post got wiped off probably because of FurensTaurus, one of Paul's numerous monikers.
In maintaining your position that buybacks are merely distributions of value, you are in disagreement with a lot of people: a lot of CEOs, Warren Buffet and Terry Smith. All your other posts are excellent, but if you continue with this nonsense, I'll have to conclude you are some sort of shill for the world's accounting standards Boards. :)
Stevo12,
Thank you for all that helpful information on the tax charges we suffer (both the cash outflow part and the expensed charge). I need to read more about how North Sea oil companies are charged tax (of all types), ENQ's accounting policies on tax, and on which expenses are allowable before I write to my MP. My impression is Jeremy Hunt has turned us into a basket case company (increased the amount of downside hedging we have to do – we need a minimum oil price to be sure we can pay the tax out of cash flows – raised our borrowing costs, caused us to throw away any plans to grow our production volume profile and halved our market cap (making even new equity finance prohibitively expensive), all to raise a small amount of money in the grand scheme of subsidising the electorate’s energy bills. The only reason I can think of to be optimistic, despite our profits being almost completely wiped out in H1 by tax alone, is that we can continue to generate cash to pay down debt – use non-cash outflow of our depreciation expense, not to maintain the size of the business with new stuff, but to reduce debt instead.
I did find Craig Baxter’s guidance on how to forecast future earnings encouraging (I have yet to use it to do my own forecasts – been too busy). The analysts’ consensus forecasts seem ridiculous: 8p for 23, 13.6p for 24 and 11.55p for 25 (source digitallook), but I presume our company does talk to them (the forecasts have changed over the last 6 months), but I am not going to be suckered in further in by director purchases or high forecasts until I’ve verified the forecasts myself (prima facie, they don’t seem credible, but WDIK? Nothing). If the forecasts had any credibility, I am sure our share price would be a lot higher. Thank you again for all your help.
Dumbly,
Thank you for all that useful background info on our company’s leader. On whether JH has the nerve to take on an electorate enraged by their high energy bills, I don’t know. Telling them if you want the economy to grow and produce more tax revenue you actually have to let rich serial entrepreneurs keep their wealth because removing it and giving it to the deserving poor makes us all poorer because the deserving poor can’t afford to invest it in businesses that are going to grow GDP, and when the government keeps this tax wealth for itself, it doesn’t make half as good investment decisions as the rich person deprived of their wealth because it isn’t the government ministers’ own money, and the government tends to spend it unwisely on vanity projects, ones with a negative ROI, or in the case of Labour, on job creation schemes for mates. JMV.
No, I don’t think JH will alter EPL. He perhaps unconsciously prefers to be loved by the electorate than to do good for the UK economy even if he thinks he prefers the latter. . Jeremy is too nice to people with wrong-headed views that need sorting out, never a problem for Liz Truss.
"Thanks to the tax credits - we are not paying 75% like some others."
AimOilKing, hi. But the tax we paid in H1 was 95% of our PTP probably because the tax man does not allow a lot of expenses to be deductible for tax purposes because of the way EPL is designed not to favour debt laden companies like us. The oil wouldn't flow without the finance, so the costs ought to be tax deductible as they would be in companies in other industries. Ditto past losses, but they don't appear to be helping us reduce our tax bill going by the H1 accounts. Yes, I know tax accounting is complicated, but still.
See the H1 figures for yourself: PTP $138.4m with Tax $131.8m taking 95%, not 75%.
I agree the EPL is not AB's fault. One of the questions I asked was about whether the value of the tax losses was contingent on other events outside the control of the Board happening first before the losses could be exploited in M&A transactions, which, as with all my questions, was one Craig didn't answer, leaving me sceptical about the narrative the company is promoting. The fleeting instruction appearing on my screen urging him not to answer was quite off putting - it is not as if I was asking for unpublished share price information, was it?
"Pleased to see the new Chairman bought a few shares, although I am now disappointed on three fronts:..."
Yes, so am I disappointed. Bought at 18.5p and Craig Baxter didn't answer a single one of my questions at the last investor event (a message appeared above all 8 or whatever of my questions saying "you might not wish to answer these", suggesting that a more senior person, who didn't want to face us, was guiding Craig).
I do now start to wonder if this is a lifestyle company purely for the benefit of the directors, who simply put out a narrative that the tax losses are worth a packet (the constant crap about our differentiated tax position and leveraging it in M&A transactions - I bet they are laughing their backsides off about that ) - I can't see how our tax losses can have any value in the current fiscal environment - their value is contingent up events outside our directors' control - our sky-high interest charges (made worse by bond yields rising and by our company being made less creditworthy by the EPL) and by past tax losses being useless against the EPL, as neither are tax deductible when it comes to ring-fence profits, right? It is maybe time to blast my MP with a letter about the EPL and the stupidity of it (sure, it pleases the voters - I get that) (not unlike confiscating White owned farms in Zimbabwe pleased the Black recipients - the value of the farm falls in the transfer process as it transfers from someone with technical know-how and access to cheap finance while the recipient is devoid off these things, which causes the tax revenue from the farm to plummet as the farm ceases to be run as profitably and efficiently) and how to deal with any come back such as "well, Labour will be worse if you don't vote for me": the correct reply is I am leaving for good": no more tax from me, and btw, I am changing domicile too, not just becoming not ordinarily resident, so its eff you for pandering to the least well informed voters, who not unreasonably connect their high energy bills with the wrong targets; you are supposed to effing lead, not watch opinion polls. To end on a positive note: I am pleased to see there is less selling off of the oil price upside going forwards.