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...
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At current oil prices CJ is generating aprox. $ 350 million per year in cashflow. After the $130 million capex they are generating aprox. $220 million per year in Free Cashflow. That equals aprox. $55 million in Free Cashflow per quarter. The 5 cent monthly dividend costs aprox. $24 million per quarter. In the last quarter they bought back aprox. 3 million shares for aprox. $21 million. So they are bringing in aprox. $55 million per quarter in Free Cashflow and assuming they keep buying back shares at the same rate as they were are spending aprox. $45 million per quarter in dividends and share buybacks or aprox. 80% of their income so i would not say that they are exactly making paying down debt their priority. In fact if they keep buying back shares at the previous rate they will only have aprox. $11 million per quarter left over for debt repayments.
Why do oil companies want to be debt free? First of all as others have pointed out it gives them a lot of security not having to worry about debt payments. Secondly oil is a volatile commoditty as all long term oil investors know all to well. If oil prices were to collapse again as they always eventually do those companies with a lot of debt will be the first to go bankrupt.
Another major point that a some people seem to miss is that while CJ may be bringing in aprox. $220 million per year in Free Cashflow they are also burning up over 20 000 barrels per day of oil resources that eventually have to be replaced so some of that Free Cashflow should be saved for resource replacement.
And then we have to remember while we are throwing around these huge numbers of $220 million per year in Free Cashflow that for most of the last decade CJ was lucky to have $40 million per year in Free Cashflow. Those days can come back very quickly.
The best thing that ever happened for CJ was Covid. The company nearly going broke gave them a good scare and that is why they are doing what they are doing now. They payed off $85 million of debt in the last quarter and $116 million in the first half of the year. They went from near $180 million in debt at the beginning of the year to $62 million of debt by the middle of they year.
The high oil prices of the first half of this year have put CJ in a position where they have never been before. A 22 000 barrel per day low decline producer with aprox. $50 million in debt with Free Cashflow of aprox. $220 million per year.
Whether CJ pays off all debt by the end of the year only 4.5 months away or the end of the first quarter of next year does not matter that much. The main thing is that they keep paying it down while we still have high oil prices. The fact is that for many years CJs debt stood at over $200 million and never seemed to decline. In six months they have decimated the debt and soon it will all be gone and cash will be piling up in the bank.
And when the next crash in oil prices comes along as it always does CJ will be sitting there with no debt and piles of cash in the bank waiting to scoop up assets of some of the high debt companies that went broke for pennies on the dollar and await the next upturn in oil prices to make a bunch more money.
Its looking good. Good luck to all.