YOU CAN'T SQUEEZE BLOOD FROM A TURNIPWell it's quite obvious really. peyto has not bought back a SINGLE share. it was a bluff to get a bid under the stock price. And it has not worked very well. they have not and will not be buying back stock imo. here's the thing. peyto needs to generate cash to pay operating expenses, pay interest on borrowings, pay cap ex, pay HIGH DIVIDENDS, and pay back money it has borrowed, like it will have to do in early 2019, and again in late 2020. oh yeah, and it has to do all this with the prices for the product it sells at HISTORIC lows. did you ever hear the expression you can't squeeze blood from a turnip? I can't think of a better way to describe this predicatment. When you run a capital intensive business that pays out MOST of its earnings to its owners, AND where you have already BORROWED a lot of money, in the hopes of generating that cash to pay to your owners, you CAN NOT mess around with using cash to buy back shares, can you? There just isn't enough cash to go around. Let's explore WHY it would be foolish to do a buyback right now the answer is a FOUR LETTER word. RISK. there is all kinds of risk associated with operating the peyto business plan. One risk is ever lower prices for the product it sells. Another risk is FINANCING the business. How has PEYTO financed its business in the past? By BORROWING a lot of money. And SELLING more SHARES of the company to investors. The last 9 years has been an exceptionally FAVORABLE time to ask "strangers" for money. A fantastically GOOD Time to do that. The problem is, there may be times, that stretch from MONTHS to years, where peyto may not have access to the "kindness of strangers". BNN would say the capital markets are "shut down". the last time this happened was 2008/09. Investors can get very depressed at times, and simply decide they don't want to loan money to PEYTO, or buy NEW shares of their stock. this can go on for years. Now is a RISKY time for the Peyto CEO and CFO. nat gas prices have collapsed. And as they have disclosed, they need to write a BIG check in January. They HAVE to have money available with CERTAINTY. The credit line is always an option. But that's the Rainy day fund. and the rate floats. It's riskier to use the credit line. What if rates spiked? The credit line can also be contracted if business goes south. It can be REDUCED. And then you would be forced to sell assets. Many in Canada have been forced to sell assets when their credit line was redetermined. It's not likely to happen to Peyto. But relying on the credit line represents a greater risk to Peyto shareholders, than selling long term debt would. Yes wouldn't it be EXCITING and THRILLING to see Peyo buy back stock and "support" the shares in a time of need? It would certainly be a SHOW of STRENGTH! Wouldn't THAT be a topic for discussion on this forum? There is a REASON that CEO of peyto has not bought back a SINGLE SHARE of stock, and will not imo, until things change for the better. And that is because of FINANCIAL and BUSINESS risk. You see Peyto borrowed way too much money in the last few years right before nat gas prices Collapsed. That has LIMITED the financial flexibility of the business. It is WHY CEO has put PEYTO into a SHELL, reduced the dividend, and cut CAP EX to the bone. It's because DEBT is coming due and you better be in position to pay it back. You have to prepare months and years in advance. All you have to do is compare what Peyto is doing in 2018, to what TOU is doing in 2018. TOU managed their business and balance sheet in such a way that 2018 is pretty much "business as usual" for them. They are still growing production, building facilities, INCREASING their dividend, and maintaining cap ex. In fact, they are investing OVER $1b this year. Because peyto borrowed too much money over last several years, it has been forced to essentially "run in place" for a while, as peers like tou continue to march forward. in 2018, Peyto is basically on a treadmill going nowhere. All because they borrowed too much money. It's time to pay the piper. Lets get into specifics. Why is CEO paying down his credit line NOW, instead of buying back stock, or putting up fancy gas plants, or buying liquids rich assets? Let's look at his STATED intentions for paying the $100m in January, documented in the SEDAR filings, which I excerpted earlier. CEO plans to REFINANCE the debt coming due in January, by floating a $100m BOND OFFERING to private investors, just as he did in early January 2018. This is the CONSERVATIVE thing to do right? because he can do a bond offering that won't MATURE for 10 years. That's a GOOD THING. That is conservative. More conservative than using your credit line. capital markets have to be open when the time comes though. If they aren't, he will tap his credit line, which he has been steadily paying down. He has a plan "B". Put yourself in the shoes of those who intend to loan Peyto money. The creditors who are most interested in this new $100m offering coming up want to see some ACTION before they say "yes". Before signing on the dotted line, they want to see Peyto make some real PROGRESS towards reducing their debt, so they can feel POSITIVE about loaning money to them for 10 years. You can't make progress reducing debt if you are busy giving money to shareholders, which is essentially what a buy back amounts to. If I was thinking of loaning Peyto $100m, and I saw CEO initiate a $100m share buyback, I would say "WTF? I aint giving you a freakin DIME". Think of it like this... It's like, if you want to buy a house in 9 months, and you know you are going to have to borrow a lot to buy the house. what would you do? would you try to REDUCE debt now, before asking a bank for a big loan? Or would you max out your credit cards and go on a long vacation? If you reduced debt now you might qualify for a BETTER INTEREST RATE, because your balance sheet is better and you are a better credit RiSK. Peyto is paying down their credit line now because they want to look as PRETTY as possible for when they need to go to market, and borrow that $100m at a low fixed rate for 10 years. They want a LOW interest rate. YOU CAN'T SQUEEZE BLOOD FROM A TURNIP.
Even peyto CEO realizes that. And that's why 2018, barring a stunning change in fortune, is going to be extremely BORING for peyto shareholders.