Member Info for Nobull

"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.

Unpublished share price information = unpublished share price sensitive information

"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.

"we are making large profits $500m"
New shareholder here - bought on Friday at 18.5p approx. Sorry, but I can't believe that unless Hunt corrects the problems with the EPL tomorrow. At the EBITDA level, sure we must be absolutely coining it in. But after tax, surely we could be making nothing - if I've understood the EPL right (and I haven't read the legislation), past historic losses can't be used up so quickly to reduce the EPL, so if we have any deferred tax assets, they may have to be written off under accounting rules that require prudence, the write-off of anything that can't be used in the foreseeable future, I wonder? Harbour Energy's recent announcement suggests this. I hope JH does something about this tomorrow. The other thing is the falling production profile (because we can't invest using internal funds to stop it) doesn't help either, I wonder?

Thanks JL. It seems to be up even more than I thought. On a merger between REA and MPE, somebody told me, can't remember which thread it was on, maybe it was on the AEP discussion thread, that the foreign controlled oil palm cultivators can't have more than 100,000 hectares. That figures because if there are any profits to be had from economies of scale, the Indonesians want to reserve those profits for themselves, just like they don't allow foreigners to earn risk free profits from rent scraping (the reason our coal equity interest was converted into a loan interest, I wonder, all so that our profit potential would be capped if coal prices rocketed, which they duly did - the profit we should have got has been, in effect, re-directed by regulation to an indigenous company, perhaps?). Still despite that, it is all looking good for a target price of back to £2 except for their change of capital allocation plans - I thought they were going to prioritise net debt reduction, but now it seems maintenance capex and expansion capex are more of a priority: the latter two objectives will maybe deliver slower share price appreciation, I wonder, compared with prioritising net debt reduction - I'll have to ask about this at the next AGM and the reasons for the change of heart. Maybe the priorities change as palm oil prices move all over the place, making one strategy better than another?

"the rise being due to net debt reduction." could have been better stated as "the rise in market cap of the ords being equal to fall in net debt"

Disappointing net debt isn't coming down as fast as they previously expected (no figure provided, so it can't be good?). No. of coal shipments exceeded my expectations. Prospect of sand sales is a nice surprise. There could be a write-back of some of the interest previously written off on the loans to the stone and coal interests, I wonder? Really good news they produced more CPO despite the replanting programme. I won't be surprised if these go up 10p on this. I expect these will be back to £2+ in about 18 months' time, assuming enterprise value remains the same, the rise being due to net debt reduction.

The share price ought to recover simply because of the coal and stone interests becoming strongly cash generative. The palm oil levy seems a tad excessive as after the recent palm oil price falls, not such a big levy should be needed to subsidise biodiesel production, given Brent crude is still high. The high export tax ($288) is presumably to try to bring down domestic cooking oil prices, but palm oil has fallen a lot recently so maybe the three export deductions (export tariff, export tax and export levy) will reduce due to a lower cpo reference price being used to determine which taxation band applies - unfortunately our current ex-mill gate price probably reflects one that is suffering taxation for a reference price set far higher than the actual palm oil price, so we are having a very bad month in terms of the amount of tax being taken, but I would hope the authorities would adjust things to be a lot fairer - in the past they have done this when the levels of taxation have been excessive, but WDIK? In the longer term, the company's financial position has moved from being on a knife-edge to a much better place, and despite things not being so good just this month, the longer term looks quite bright: for example a debt repayment of $70m over the next 20 months could add £57m to the market cap, giving a new share price of about £2.50, I wonder? JMV. AIMO. DYOR. Yes, I do think the share price will recover.

"Nevertheless I'm not being shaken out due to a few months of weak prices and output. A mrkt value of £59m
is hardly representative of Nav and H2 on target for another profitable year."
I agree. They must be getting those coal loans repaid what with coal at $390 and production costs of about $110. The same will be true with regard to the loans to the stone interests - the andesite could sell for $16 a tonne, and I would hope their productions costs are not more than $10 a tonne, and they have an awful lot of it but I suppose that is irrelevant as their profit is capped due to only having a loan interest rather than an equity interest. They could also spend about $6m on another biogas plant to convert their vehicle fleet to run on gas, making savings in diesel costs of about $2m a year. CPO futures are up a bit this morning helping to negate yesterday's horrendous price falls. Panmure Gordon has price target of about £4, but I'll be happy if net debt gets down to $100m and we have a share price of £2.50 by end of next year. The days of "material uncertainty as to going concern" are hopefully long gone. ATB.

Morning JL.
According to MPE there is a new export deduction on top of the two you have listed called "export tariff". According to REA this is only payable if you don't want to comply with the DMO requirements and want to export. What I can't understand is why the introduction of such an additional fee should cause the MPE ex-mill gate price to drop $300+ over the last ten days or so. Yes, I get that CPO prices have dropped a lot, but I can't see that why firms can't still export without paying the export tariff by just applying for the export permit in the normal way, proving they have complied the with the DMO requirements. $688 of deductions to export is horrific. I guess the export tariff ceases in August and that it all means REA will just take a bit longer now to get to net debt of $100m, something I was hoping they would achieve by the end of next year.

It was maybe more interesting for what it didn't say (extension planting progress or lack of, reasons for slow certification of mills, detailed reason for flat production such as evacuation problems during rainy season/flooding/trees taking a rest/yields on older trees falling etc.)

"The Board
uses the AGM to communicate with private
and institutional investors and welcomes their
participation."

That, to me, sounds like they don't want to be cross examined about the buy backs in the past and the awarding of options to the HR director. If I get probate before the AGM, I will vote against all the resolutions. Video conference AGM is totally unacceptable. The deployment of a narrative on these boards that it doesn't matter what price buybacks are done at, in contravention to common sense, to what educated CEOs believe (Marks and Spencer 2006), to what experts believe, and thus shielding our BoD from criticism, only adds to my rage. The grotesque portrayal of the buybacks in the 2019 accounts as merely a distribution (the accounting techniques used) couldn't be further from the truth (the accounting standards are written by complete morons, at least as far as informing shareholders correctly what is going on). Buffet, Terry Smith, Phil Oakley are right: buybacks need to be done at the right price, not at any old price. It doesn't matter what valuation metric one uses: DCFs per share (discount rate needs to change if cash goes out of the company and changes the risk), PE ratio (the shares need to trade on a lower PE if cash goes out of the company and changes the risk, and the de-rating can have a bigger effect downward effect on the share price than the opposing concentration of earnings effect) or price to book (stupid buying one's own shares above a price to book above 1?). JMV.

Putup,
I hope to answer your last post in reply to mine about buybacks over the weekend. Travelling today.

Agree it is palm olein and not palm oil that is banned from export. Today's mega price rise in ringgit on the front end of the palm oil price curve e.g. the June contract up 678 rinngit to 7,465 must have occurred for a good reason, so maybe the Indonesians are going to restrict the export of CPO. John Lewis, the main poster on REA, points out that there is limited storage capacity for CPO, so even if they are going to ban its export, they can't do it for long. Maybe the futures market is anticipating a further rise in the export levy and export tax charges.