RE:What i do not understand.
Coolson wrote: The same I was questioning the sense of cannabis legalization and why people buy at store if they can grow it home at low cost. The same here. I do not understand why all of those oil players pay down debt as a priority. Is there any financial specialist who explain it in a rational way. Why paying down debt will trigger such enormous cash flow to the investors. Does it remind stick and a carrot strategy? CJ generates almost 350m fcf why they want to pay down 50m to zero it is against the normal business conduct saves almost nothing...
It opens up options:
lower cost finacing - because you are not already tied to any lender you can have them compete to offer you the best rate to get your buisness in the door once again
new investors/funds - there is a group of investors out there with the mentality that they only want companies with little to no debt as a mandate of interest, getting interest and bids from this group of investors has potential to drive up share price as you've opened up you company to a wider audience
looks more attractive to possible M&A candidates both ways - if your listed company being purchased by a company with little to no debt that's a pretty attractive prospect to vote over your shares, it's also less of a burden to be taken on by a bigger fish
Those are pretty basic points off the top of my head quickly...
I personally have no real interest in being debt free, it's nice, but if you can make money on someone else's money I'm all for it. Currently it doesn't seem like there are enough attractive options to put money to use at the moment.
If internal growth looked like an attractive option you would see a much more significant investment in capex, but currently they seem to just be content with working on lowering the decline rates and replacing the decline. Makes sense because if they flood the market others will follow and that will drive the price down and you loose attractive margins for quantity. Also who are you selling to? There is a capacity issue on the pipelines and to put more capacity on rails adds costs hurting margins.
If they found some private or public M&A options to consume at a good price, I'm sure they would jump on it and throw out this debt free idea away for a little while at least.
There does become a point at when we become debt free and we start to have cash sitting around, what do we do with it? The point has been made by everyone's favourite energy analyst that with the current free cash flow they could take themselves private within 2-3 years or or something. It's one thing to buy back shares and increase value to shareholders, its anouther to completely pay them out and have all that FCF going forward going into a private owner's bank account while we all go look for other options.
Personally I don't want to sit on an abundance of cash in the buisness for too long as sitting on cash gives me next to no returns on itself and it increases the likelihood I have to work on finding anouther golden goose which increases the risk to my portfolio in my opinion. I would rather up the payout ratio and collect my share of the buisnesses profit until they find a better way to grow my investment at which time if they needed to cut the payout or take on debt to grow I would be all for it... but that is my perfect world and it's not likely to go down that way.