RE:RE:RE:Capital allocationIf the are going to explicitly focus statements on the debt, I think they need to detail a formal allocation in $$, like 10mm or 20mm or whatever figure they decide - i.e a plan to pay off X amount over the next 12-24 months, out of cash flow.
Personally, the more i have been running figures, the less i feel the debt really has an impact to the extent the market beleives it does.
$2.99 /boe for interest service at 300mm was Q3 figure,
So if they were to halve the debt to 150mm, they would boost margins by $1.50 / boe.
On a share basis the amount is somewhat material, $8mm a year in savings, or 6 cents a qtr if debt was 150mm.
But when you look at the company's fixed cost structure:
~21 /boe for cash operating costs ex interest
~12.50 / boe sustaining capex
an extra 1.50 on top of a $34 cost basis, given then volatility of oil, isn't all that incremental.
The real risk here is operational leverage, before financial leverage.
If the company owes 150mm or 300mm, the realization price only has to drop from $37 to $35.50 and the impact is the same - the debt becomes unserviceable.
The real killer is operational leverage, because if your cash flow stop point is 50 instead of 25 for example, It doesn't matter if you only have 50mm in debt - you still can't service it below 50.
The problem is, that many people just focus on debt to EBITDA, or the nominal amount, and don't consider the operational side. We saw posters on this board making remarks to this effect. The dividend wasn't cut because of the debt. The debt only eats another 1.50 in cost margin beyond where it was before. Oil traded that span in a day in December.
And prices are's so tight to operating cost that it is material. Oil can go from 40 to 60 or vice versa easily and often.
The div would of been cut with or without the debt because prices were below operational margin.
I think that George and crew understand this facet keenly, hence their choice to use entirely debt financing in the frist place. Oil prices then in April 2015 were not far off what they are now.
Perhaps getting the debt down to 250 mm over the next 2 years is a reasonable target, or they could lay out a range with targets connected to oil realizations.
I think part of the reason they havn't talked pointedly about it, is because it hasn't, in reality despite market fear mongering perceptions otherwise, been that much of an impact. Price vs operational margin is far larger driver of risk.