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I wouldn't trust my own forecast in a million years on this stock: the combined leverage is so high that one small mistake in the revenue figure could leave the eps figure out by miles; also, the size of the pref div arrears chosen to be paid is a finance cost that reduces eps attrib to the ords, so you might have to guess right the amount of pref. arrears they will pay too, I wonder, to be anywhere near close to getting the eps attrib to the ords right.
One poster on RE.B thinks they might pay all £12.24m (72m x 17p) or $16m of arrears this year. With a $1700 CIF Rotterdam price, one would hope we were getting $1,000 ex-mill gate after the dreadful $375 Export Levy and $200 Export Tax and $100 imagined freight cost to Rotterdam, which would be higher than the average ex-mill gate price we got for FY2021, and yes, this high ex-mill gate price might make it possible to pay off all the pref. arrears at once, but I can't imagine they could turn a profit on the ords if they do that. Fingers crossed they are exploiting the high coal prices and have started to sell andesite.
"Personally I'd be much more in favour of management getting a lot more options but with an at the money strike rather than nil cost. They'd have to be a lot more because the inherent value at the time of grant is much lower but at least then if the stock doesn't perform versus the level at grant they expire worthless. Currently, the LTIP options always have value (outside of bankruptcy). It may be less at exercise than the value at grant but management can more easily shrug that off."
An interesting and thoughtful point of view. Thanks.
"(I haven't checked but I would fully expect the LTIP and VCP plans to protect holders of options against the effect of dividends (and buybacks, splits etc etc). All else being equal a dividend causes a lower stock price. A lower stock price would lower the value of a nil-cost option unless they're protected.)"
Yes, that makes sense if the idea is to protect the value of the award from the time of grant - but then the dividends should be locked up until the vesting date, and only handed over if the performance criteria, where applicable, have been met, I wonder?
"When they are issued the recipient is entitled to all the benefits ascribed to them. They are never issued but not allotted."
Putup, many thanks for all that info. My fault for not reading the documents you mention. I struggle to understand why they should be entitled to dividends prior to the vesting date, but as you say, the answers will all be in the documents I ought to have read and understood. It's as bad as HMRC taxing dividends at 40% (instead of at 7.5%) because the shares were xd on the date of death . How grasping can these people get? I agree with most people that almost all the value created has mostly been due to oil price movements rather than anything the Board has done. Many thanks.
"The shares will be issued fully paid and will rank pari passu in all respects with the existing issued Common Shares of the Company." So who gets the divdends on these shares on 13th May if they are issued but not allotted to anyone and if they rank pari passu? I am heartily sick at hearing this news. It reduces my dividend on 13th May. And the Board has delivered nothing.
correction:
rather, it will be the forward looking statement about whether our company is able to obtain these high international prices or their equivalent less export deductions THAT MATTERS
"Incoming before results ??" Yes, it is possible, but I think the most likely reason is the clue in the palm oil price curve (front month, March 2022 dropped today after an utterly mega rise of about 500 ringgit yesterday, but the whole of the rest of curve out to back month, March 2023 has risen quite a bit today, pointing to good profits, previously unanticipated, for the rest of FY2022). I wonder if most of the palm oil price curve has risen due to an anticipated short supply of sunflower seed oil from Ukraine later on this year? I am not expecting any surprises when FY2021 results are published; rather, it will be the forward looking statement about whether our company is able to obtain these high international prices or their equivalent less export deductions: new rules require a permit to be obtained to export CPO, I wonder, and the permits are probably only granted if the exporter agrees to make a decent amount available to the domestic market. JMV.
What is your issue? If you bought in 2020 then you are DEFINITELY IN THE MONEY.
My issue is I'm maybe not better off than if I'd bought physical oil instead of GKP shares (I stupidly didn't understand the PSC when I bought - I didn't realise I'd be giving the KRG 84% of my share of the oil sale proceeds). I do not like our board giving away some of my rewards to the new HR director and I do not like being told a load of complete b*llocks by the chairman about the buybacks being value-accretive (they maybe soon). My other issues are with my fellow alleged shareholders and the seemingly daft requirement only ever to post positive thoughts on these forums. I post how I see things. Yes, I have a large unrealised profit here, but not enough, and I am mindful I could have a big loss if the title risk goes bad (30p share price say for a binary litigation play with no revenue) - I don't know yet what the uninvested dividend stash I've got will be taxed at, but if I am taxed lightly on those, then title risk going bad wouldn't be so detrimental - I'll have got back a good deal of my/my relative's entry price if I only have to pay 7.5% instead of 50%.
Straycat, I have never had any connection with this company prior to April 2020 (My relative/now me are new investors here). FY2022 will be a very good year, revenue and profits wise. But profits and eps are forecast to drop off in 2023, but despite that we trade on only 4.2 x FY2023 profits. A PE of 7x , at the risk of boring everyone to death, is a 14% earnings yield, and that's about right for the risk taken investing in Iraq (tenth from the bottom of Transparency International's table on corruption perceptions?) so there is scope for our share price to go to £3.50p, at least until or if there is an forecast eps upgrade (the falling R rate makes things a bit heavy going next year, I wonder?). My guess the reason we don't trade on 7x 20203 eps is we are waiting for the PSC validity issue to be sorted out and for SH-13 and S-14 to be more productive (I can't see any reason why the remedial work that is being done on those wells won't work so I expect renewed higher production volume guidance before final results). Personally I don't want buybacks at the wrong price or dividends when I don't know if I have to pay 50% tax (trust rates) or 7.5% on them, and I don't like value destructive acquisitions and I worry about entrusting the BoD to make value accretive acquisitions when they have bought so few of our shares with their own hard earned cash (the Chairman is particularly bad). Yes, I am impossible to please. I get that. I value shares on future events, not on what has happened in the past. And, no, I don't like seeing a useless cash mountains diluting the ROCE. Yes, I probably need to see or shrink or get out of this stock, but I'm locked in for now. However, I am right about buybacks:
Even the Lex column got buybacks wrong, so Putup is in good company on that one:
The press gets it wrong
“ The way in which cash is returned
to the shareholders is irrelevant.”
8 January 2010: FT Lex
This is wrong – Buying back shares
when they are not cheap destroys
value for remaining shareholders. (Terry Smith)
and The Sage of Omaha would seem to agree with my view:
Buffett on buybacks being needed to be done at the right price:
“ When companies with outstanding
businesses and comfortable financial
positions find their shares selling
far below intrinsic value in the
marketplace, no alternative action
can benefit shareholders as surely
as repurchases.”
Warren Buffett
Berkshire Hathaway 1984 Annual Report
Straycat, I am in full agreement with you about the last buyback being incompetently managed.
Putup, re your 21:47 post yesterday on buybacks: maybe it is that you don't like me expecting our BoD to have an outcome as an objective. If outcomes arise from things that are often outside our BoD's control (oil price movements, exchange rate movements, changes in growth rate due to FDP being approved/rejected, change in quality and size of earnings stream due to title risk changes) then I get that it is reasonable just to see a buyback as purely a distribution like a dividend.
I see buybacks as bets on future events that materially affect the outcome, and that buybacks can leverage the effect of those outcomes, both up or down, so I prefer buybacks to be done below intrinsic value (DCF value) and never above. The fact that the risks can change after a buyback (perhaps requiring a different discount rate to be used) , and this changing the intrinsic value to be below the price that was paid for the cancelled shares is unfortunate, but it happens.
Terry Smith has a paper here on the subject "buybacks - friend or foe"
https://www.fundsmith.co.uk/media/pnbnh5we/share-buybacks-pdf.pdf
"One of the most important facts that is continually overlooked is share buybacks only create value if the shares repurchased are trading below intrinsic value and there is no better use for the cash which would generate a higher return. Most buybacks destroy value for remaining shareholders, and management is able to get away with this as the current accounting for share buybacks conceals their true effect."
My simple view is that if a stock re-rates and £100m needs to be added to the market cap (because the PE ratio has, say, doubled), the £100m extra market cap is spread more thickly over the remaining shares in issue if there was a buyback before the PE ratio doubled. I hope this helps explain our differences. If not, I'll have to think again and revisit your post. ATB.
"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?
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.
"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?