Member Info for Nobull

BlackSteel, it probably has nothing to do with perfect markets: it's more to do with your investment time horizon. If your holding period is 1 nano second, sure, a buyback is a just a value-neutral distribution (the cash leaves the asset side of the balance sheet and the "sources of finance" side decreases the same amount regardless of whether the shares bought back are held in Treasury or are cancelled.)

A holding period any longer than that and you want to be concerned the company is not overpaying for the shares bought back (whether cancelled or not) compared with the present value of the cash flows associated with the shares bought back.

Future cash flows discounted by the WACC and shared out among the remaining shares not bought back are value accretive if the NPV is greater than the share price paid: you need to be sure you aren't paying more for those cash flows than they are worth.

Our previous Chairman called the buybacks value-accretive: they weren't when he said that, and they still aren't. I expect the statement was written for him by a half-wit with an accounting background, someone fixated on the similarity of the effect of a dividend leaving the company.

MP Evans buys in its shares for cancellation at about an approx 50% discount to the DCF or fair value shown on page 100 of the 2022 Annual Report and Accounts (Equity value per share = £14.98p) and also referred to in Note 25, a DCF valuation done by independent specialists, a valuation not used on the balance sheet of course (PPE stated at historic cost less depreciation), giving a far lower NAV per share, the reason the shares trade at a premium to book value. The buybacks there ARE value-accretive but they aren't going to close the valuation gap any time soon on their own, nor are they going to stop a fall in share price if the fundamentals of the market they operate in change suddenly. I am just reassured they allocate their surplus capital wisely. I am not sure the same can be said for GKP's past buyback program - the oil price crash and covid could not have been predicted, but using debt finance (not surplus cash) to fund buybacks wasn't wise and not when your business model has a high level of unpredictability, I wonder?

I think our Board was talked into it by their broker keen to make extra money, and because our Board had more money than sense they duly obliged, just like they issue free new shares like confetti to staff not working at the coal face, like the human resources officer, diluting the hell out of us. JMV.

You should take FCFY's comments seriously - from the questions he is asking he is a few pay grades above both of us in oil investing knowledge and experience. You seem not to want to think outside the accounting box with your line of thinking: "once the cash is out of the door, it's gone and it doesn't matter what price was paid in the buyback - it's purely a value-neutral distribution".

MP Evans has a choice between either buying new oil palms for its shareholders or buying in its own shares for cancellation that give shareholders more oil palms per share: sometimes it is right to use surplus cash to buy new oil palms directly and at others to procure them for shareholders by cancelling existing shares after a buyback. The surplus capital allocation decision the Board has to make is real as to which is better to do. The same sort of thinking should apply to our BoD, unless they are advised by you.

If you anyone is buying shares = if you or anyone is buying shares

that make sensible consider it = that make sensible people consider it

You are only right that a buyback is value-neutral distribution if ...= You are only right that a buyback is a value-neutral...

"The guy is a complete muppet"

You still don't get it. You do not borrow at 10% to earn 8% with the same money, unless you are stupid. So if you are discounting GKP's future cash flows using the WACC as your discount rate, if you don't get a positive NPV as a result, you are not adding shareholder value, by definition. The WACC is the discount rate you should use in a DCF calculation to compute fair value. If you anyone is buying shares, whether it is the company itself buying its own or an outsider, they are doing the equivalent of paying a £1.20 for a £1 if they are buying the shares above fair value because a DCF callculation is the only way to convert future cash flows into present value and you don't want to be paying £1.20 for £1's worth of cash flows adjusted to present value. You seem to be totally incapable of understanding this. I do not understand how you can be advisor to Boards of Directors on this sort of thing. All the best.

P.S. I understand a buyback looks like a dividend distribution in accounting terms (cash leaving the company and the NAV decreasing), but a buyback also has characteristics that make sensible consider it as a capital allocation decision that needs careful thought to add shareholder value. You are only right that a buyback is value-neutral distribution if you consider a time frame of microseconds, a holding period return that most investors aren't interested in except you proving yourself right.

"Give us an example...[ of what is wrong]"

Your idea that a share buyback is just a value-neutral distribution and nothing more.

The only thing I concede is that the NAV drops on a buyback just like with a dividend. But on reasonable timescale (investor's typical holding period) it matters whether you pay £1.20 for £1, and you still don't get it. Only a totally stupid person buys shares above fair value because you are paying £1.20, say, for £1. You have chosen to ignore the wisdom of Terry Smith, Warren Buffet and Phil Oakley of Investors Chronicle. Still, buybacks are the least of our worries here, more like whether we become a cash guzzling binary litigation play and suffer from all the aggression in the ME at present.

"is diluted out worse than before buybacks" = is diluted out worse than the stake in the underlying business owned by one share before the buybacks began.

"On the debate between dividends and share buybacks there should be no real debate."

No. You have to buy them back below fair value to add shareholder value (over a period longer than a few microseconds).

If you are the Putup (GKP thread) type of poster you will argue a buyback is value neutral because the NAV drops the same way it does when a dividend is paid, regardless of whether the shares are held in Treasury or are cancelled, which is correct on a microsecond investment time horizon. However, the point he doesn't get is most people do not have an investment holding period of a few microseconds and generally invest for longer. His argument is therefore contrived.

A share buyback is a capital allocation decision as between expanding the business, paying down debt or buying ones own shares below fair value: paying above fair value, regardless of whether the company does it or a new shareholder does it, is plain stupid. Why would you pay £1.10p for £1?

I get it that share buybacks , all other things being equal, which they often aren't, are more tax efficient.

A company that substitutes all its equity bar one share for debt finance instead (mad behaviour) increases the risk that in an oil price downturn, the lost cash used for the buybacks is no longer available to pay the interest on the debt, meaning the company's cost of new equity finance can be so extreme that the current one shareholder owning the one share left is diluted out worse than before buybacks by a disadvantageous debt for equity swap. That is, the cash used to do buybacks can suddenly have a very high opportunity cost caused by an oil price crash, a risk our BoD needs to consider carefully. Yes, as our debt falls, our share price will probably rise (for a given enterprise value), making share buybacks possibly less attractive, I wonder, but doing them now when we have a lot of debt risks having to have a debt for equity swap at prices we don't like later on if an oil price crash occurs. JMV.

Phil Oakley explains about dividends v buybacks here:

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

Putup won't change his mind despite the above, and despite Warren Buffet and Terry Smith agreeing that buybacks above fair value are a bad idea. I think the cash really does need to be surplus capital before doing buybacks. Using borrowed money to do them is more problematic especially when we are price-takers rather than price-makers.

"Record Xmas sales at Aldi and Lidl

Will mean more sales for mcbrides"

Yes, for Almat (Aldi?) but no for W5 products at Lidl's: I think Dalli make the own label W5 stuff. But we do make Morisson's and Tesco own label laundry liquids.

I hope for an early exit from the last financing agreement, maybe towards the end of calendar 2024. Falling interest rates, falling debt and a signal towards the possibility of dividends/buybacks in 2025 hopefully to keep the share price momentum up?

Sekforde, thank you for that analysis. Very interesting. What maybe has changed adversely is our WACC is now higher (we are paying a higher interest rate on our debt), so the shareholder value added (the sum of the present values of the cash flows, discounted by our new higher WACC), for a given forward oil price curve and forward production volume profile, is probably now lower.

It is not impossible our WACC can't fall later this year (falling gilt yields would lower the risk free rate, and a falling equity risk premium would lower our cost of equity) and for Jefferies to later issue a higher share price target. Changing the discount rate by a small amount often does cause big changes in NPV, so I don't think Jefferies are necessarily bonkers with their new annoying price target. They might well issue a new one later this year that is double their current ENQ share price target, for all I know - that's how the maths of discounting works, isn't it?

Offering a new line of business that may change the future eps numbers is not share price sensitive news, so we don't need to be told by RNS about the launch of a new game.

If it is a new money spinner, we will be told (or the broker will update the forecasts on new guidance), possibly when there is evidence that it is, not in advance that it might be.

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?

I have, but I don't recall it all - I've been reading FY2022 annual report and accounts in minute detail and working through the numbers.

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)?