I get a daily email for HFI reserarch and received this note yesterday. Curious on the board's thoughts. I've wondered and openly asked on the board why the stock is in the tank, doubly so given its FCF yield. Maybe the buybacks aren't as well received as the company and this board think they are
Share buyback in the energy investing world is widely debated. For many companies, share buybacks are just a form of financial engineering. Why would you spend capital on share buyback when you can invest that capital into de-risking reserves and increasing the reserve of the business?
For a business with low risk and long reserve life, share buyback is the only thing that makes sense. Because increasing reserves will not add additional value for shareholders (think Athabasca and MEG).
But for companies with high decline rates, constantly improving the reserve quality is the name of the game. This is why I think what Baytex is doing is not correct. Instead of spending capital on buying back shares, Baytex should improve the quality of the reserves and pay down debt. That's how you ultimately enhance shareholder value. Because if you don't improve the underlying quality of the reserves (increasing reserves and pushing up the reserve life index), buying back shares is like buying back a melting ice cube.
Financial engineering in energy investing only works if the reserves are low risk and have a long runway.