I'm against paying down debt when inflation is reducing the real value of that debt. Inflation destroys fixed rate debt value and transfers wealth to bond issuer's. What matters is that on debt payment day the company has the cashflow to support new debt at higher interest rates. Any competent finance man should easily be able to set a debt level to achieve this target.
Best to return cash to investors now while it is devaluing at 9% per year. Love my fixed 3% 30 year mortgage! So should every company.
Remember the M-M theorem tells us at zero tax it does not matter how the company is financed. Corollary is that debt finance increases the value of the firm if t>0 due to the tax shield.
Great comment. Nice to see I am not the only person who has read Modigliani-Miller or William Sharpe's work. The so-called "irrelevance theory" was a brilliant piece of work - I called it a blinding grasp of the obvious in my 1975 MBA course.
WTI @ $44 seriously? Knowing what we know about supply restraints and Saudi putting a floor of about $90, SPR ending in a month time and China re-opening.
You are making yourself sounding more and more like Josef Schachter now
MEG is in fact paying back a lot of debt. Long MEG.
Good comment Sam. I often laugh at Josef Schacter's pessimism and now I am equally guilty. I wasn't forecast WTI at $44, just pointing out that a serious recession has a dramatic impact on commodity prices and this one may be no different.
If the company is buying back shares, every share you own has a greater claim on FCF of the firm. So you are adding shares. If you want a dividend sell shares in proportion to the buyback to keep constant your FCF share of the firm.
A company rule that returns FCF via buybacks every month increases the flexibility of the shareholder to increase decrease or keep constant claims on FCF at tax advantaged rates. Far better than dividends paid QTR.
fewer shares is better, buyback 25% of the float, then announce a massive dividend on the remaining shares. This is much preferred than paying dividends and not buying back any shares
I presume you mean when the shares can be repurchased below fair value, when the company has surplus cash and when there are no better investment alternatives for that cash - then that approach might see a spike in the share price which will benefit those wishing to sell at an inflated price at the expense of those who believe the company has longer term merit and those who buy at the inflated price, and at the risk of an action by the SEC or OSC for market manipulation.
SEC or OSC market manipulation for a stock buyback?
Please take off that tin foil hat
Sheesh, you really don't seem to have an appreciation for capital allocation and think dividends are the best return of capital even though its quite clear buybacks are much better in the long run assuming the industry continues to generate profits
Oddly enough, in the early 2000's I spent $300,000 defending an OSC action alleging just that. Fortunately, Kelley McKinnon was my lawyer and she had the case dismissed. You can make any capital allocation decision the "best return of capital" if you make the right assumptions but the market doesn't know what you have assumed. Cyclical industries based on global commodities don't always "continue to generate profits". Sixty two percent were either unprofitable or just breaking even in recent years. https://www.rigzone.com/news/most_oil_companies_unprofitable_or_breaking_even-17-feb-2022-167955-article/
Did my small homework - since 2000 average year oil price adjusted to inflation was in 70% of years LOWER than today. Means statistically we have only 30% chance to keep the price at current level or higher.
Anything is possible but imo some caution and modesty in expectations is grounded.
Do you follow the coal sector which is somewhat similar to O&G. Particularly BTU (Peabody) which had a fantastic run. Subject to debt covenants they plan to do buyback and or dividends at some point since they are awash with cash and generous FCF. Thanks for any thoughts you can share
Coal prices are up 600% in just a few months and likey to stay high. Peabody is probably the best vehicle. I like Teck as well, although their coal is metallurgical coal primarly.
I'm against paying down debt when inflation is reducing the real value of that debt. Inflation destroys fixed rate debt value and transfers wealth to bond issuer's. What matters is that on debt payment day the company has the cashflow to support new debt at higher interest rates. Any competent finance man should easily be able to set a debt level to achieve this target.
Best to return cash to investors now while it is devaluing at 9% per year. Love my fixed 3% 30 year mortgage! So should every company.
Remember the M-M theorem tells us at zero tax it does not matter how the company is financed. Corollary is that debt finance increases the value of the firm if t>0 due to the tax shield.
Great comment. Nice to see I am not the only person who has read Modigliani-Miller or William Sharpe's work. The so-called "irrelevance theory" was a brilliant piece of work - I called it a blinding grasp of the obvious in my 1975 MBA course.
WTI @ $44 seriously? Knowing what we know about supply restraints and Saudi putting a floor of about $90, SPR ending in a month time and China re-opening.
You are making yourself sounding more and more like Josef Schachter now
MEG is in fact paying back a lot of debt. Long MEG.
Good comment Sam. I often laugh at Josef Schacter's pessimism and now I am equally guilty. I wasn't forecast WTI at $44, just pointing out that a serious recession has a dramatic impact on commodity prices and this one may be no different.
If the company is buying back shares, every share you own has a greater claim on FCF of the firm. So you are adding shares. If you want a dividend sell shares in proportion to the buyback to keep constant your FCF share of the firm.
A company rule that returns FCF via buybacks every month increases the flexibility of the shareholder to increase decrease or keep constant claims on FCF at tax advantaged rates. Far better than dividends paid QTR.
Agree with first sentence but not the last. I think the argument is more nuanced than that.
fewer shares is better, buyback 25% of the float, then announce a massive dividend on the remaining shares. This is much preferred than paying dividends and not buying back any shares
I presume you mean when the shares can be repurchased below fair value, when the company has surplus cash and when there are no better investment alternatives for that cash - then that approach might see a spike in the share price which will benefit those wishing to sell at an inflated price at the expense of those who believe the company has longer term merit and those who buy at the inflated price, and at the risk of an action by the SEC or OSC for market manipulation.
LOLOLOL
SEC or OSC market manipulation for a stock buyback?
Please take off that tin foil hat
Sheesh, you really don't seem to have an appreciation for capital allocation and think dividends are the best return of capital even though its quite clear buybacks are much better in the long run assuming the industry continues to generate profits
Oddly enough, in the early 2000's I spent $300,000 defending an OSC action alleging just that. Fortunately, Kelley McKinnon was my lawyer and she had the case dismissed. You can make any capital allocation decision the "best return of capital" if you make the right assumptions but the market doesn't know what you have assumed. Cyclical industries based on global commodities don't always "continue to generate profits". Sixty two percent were either unprofitable or just breaking even in recent years. https://www.rigzone.com/news/most_oil_companies_unprofitable_or_breaking_even-17-feb-2022-167955-article/
Did my small homework - since 2000 average year oil price adjusted to inflation was in 70% of years LOWER than today. Means statistically we have only 30% chance to keep the price at current level or higher.
Anything is possible but imo some caution and modesty in expectations is grounded.
Do you follow the coal sector which is somewhat similar to O&G. Particularly BTU (Peabody) which had a fantastic run. Subject to debt covenants they plan to do buyback and or dividends at some point since they are awash with cash and generous FCF. Thanks for any thoughts you can share
Coal prices are up 600% in just a few months and likey to stay high. Peabody is probably the best vehicle. I like Teck as well, although their coal is metallurgical coal primarly.
a very well written article ...thankyou for sharing