RE:news release from a few days agoMgmt has already made their intentions clear.
Get to net debt of $225 million, and then use some free cash flow to return to shareholders.
They said that return to shareholders would be in the form of a share buy back (at current share prices).
Translation, if the share price is under $20, expect all return to shareholders to be in the form of a share buy back.
In Canada, companies need to get exchange approval for a share buy back. They can buy back upto 10% per year (some restrictions here, but basically they can by about 8 million shares).
Normally I don't care for share buybacks - because they amount bought back so tiny, and ends up being about the same as the amount given as stock options to mgmt - ie a nothingburger.
BUT, and this is one of the many reasons I am invested in OBE.
Because of the 7:1 reverse share split they did prior to covid, OBE has an unusually small number of shares outstanding (about 82 million) - when compared to their free cash flow.
That means they will be able to buy 10% of their outstanding shares with something like $80 - 120 million (probably something like $100 million on average - assuming the share price increases as they buy.
They probably ended last 2022 with about $300 million in net debt (thats the $325 ish they had at the end of Q3 less the $25 million ish they budgeted for share preformance bonus that didn't materialize). (ie this assumes no net debt reduced during Q4).
So that means they need about $75 million to bring their net debt down to $225 million.
Add another $100 million to buy back 10% of their shares.
That means they may be about $175 million in free cash flow away from starting a dividend.
AND,
It means that dividend will be distributed over about 75 million shares.
We can all run our own cash flow estimates for Q1 and Q2 based on our own WTI estimates for that period.
My own estimate has them spending aggressive capex in Q1/23 - something like $125 million (guess), and giving them about $25 million in free cash flow in Q1/23.
That means after Q1 they will be about $150 million away from having reached target net debt ($225 million) AND purchased back 10% of shares.
I think they can get most or all of that done in Q2.
The higher the oil price, the more free cash flow they will have to buy back shares. BUT the higher the oil price, the higher the share price will be, thus the more free cash flow they will need to buy back those shares. ie, even if oil prices remain on the low side, they should still be able to buy back 10% of their shares.
It appears they may be using 5 rigs presently. If that is correct, then they are drilling faster than we've seen them drill since current mgmt took control.
This looks like perfect timing to catch the China reopening impact on oil - ie with oil prices increasing from here, meeting much higher OBE oil production.
China is opening up fast (in China time - which makes Canada time look like sloth time). When China opens, its doesn't just impact China, it affects all of SE Asia - all those places go with it.
The second half of this year may be fantastic share price wise.
The second half is when OBE has lots of free cash flow (higher production and higher oil prices), with no more shares to buy back, and no more debt they want to pay back.
That means lots of Free Cash flow to pay as a dividend.
A dividend that will be 10% higher than otherwise, because there will be 10% less shares.
The question on my mind is do they retun 50% or 75% of free cash flow back to shareholders?
Look at OBE's prior 2023 tentative forecast based on $95 oil.
That forecast was for $660 million in funds flow.
If $300 of that goes to capex, that leaves $360 in free cash flow.
Now imagine yourself on July 1, 2023.
Net debt target of $225 has been achieved.
75 million shares outstanding (because 10% have been bought back).
Looking at $360 million in Free Cash flow over the next 12 months.
Imagine 50% is kept inside the company ($180 million - effectively reducing net debt), and $180 million is paid out in dividends.
Thats about $2.4 per share. At a 7-9% yield thats $26-34/share.
Now imagine 75% is paid out as a dividend.
Thats about $270 million, or $3.6 per share. At a 7-9% yield thats $40-51/share.
Thats based on $95 WTI. Change that to $100, or $110 or $120, or $150 and see what happens.
FYI, Birchcliff put out their "big" dividend today. Its 80c annualized. The market is pricing their shares today based on an 8.9% yield.
Thats 8.9% in a soggy market, with oil bouncing around $80, and China not yet back in action. The more attractive the future prospects, the lower the yield!