RE:RE:RE:RE:RE:Good, the bad, the ugly from Q1You reduce debt for four reasons.
1. Your lender requires you to do so
2. You think your lender may require you to do so soon
3. You can't pay the interest rate
4. You think you may not be able to pay the interest rate in the near future.
OBE is not concerned about any of the above four reasons. We know this, because they spent more than their incoming cash flow in Q1.
What does this mean?
It means OBE won't be selling any productive assets to pay down debt - ie they won't be selling Viking. If you see OBE sell anything that is not a legacy asset they'd like to be rid of (most of that has been prevously disposed of), it will be because they were offered a price that was too high to ignore.
A recent example is the Whitecap operated block. You can be sure that Whitecap offered to purchase OBE's minority interest in this block. OBE didn't sell. ie, they decided they would rather have the land than the money.
Every company has an optimal debt ratio.
OBE does not think their optimal debt ratio is zero. We know this, because they are working on locking in a certain amount of debt into debintures. Debintures typically have a five year term. OBE's probably will too.
OBE could be debt free within a year if that were their goal. The fact they are working on locking in debintures means being debt free is NOT their goal.
The fact that all along they have stated they would be locking in debt at the end of Q2, means that their anticipated debt at the end of Q2 is what they consider to be their optimal debt. It looks like that number is around $300 million.
What does that tell us?
It tells us that at about $300 million (or whatever debt they lock in at the end of Q2), is their intended long term debt rate. At that debt level, they will focus on redirecting debt to places other than debt reduction.
What does that mean?
It tells us that Q3 and Q4 cash flow will be going to capex, shareholders and working captial.
The extra working capital they accumulated in Q3, was likely paid down in April (last month). In my veiw it is irrelevant at this time. It tells us OBE is good at negotiating terms with its suppliers. There must be at least 30 days of no interest built into their payment terms. That should be no surprize. During Loukas leadership, OBE has consistently negotiated excellent terms on its contracts - from reducing lease obligations, to extending loan terms, to the terms of the PROP pruchase etc. That is a critical success factor - its why he is important to this company. I expect equally good terms on the debintures.