(Note: This article originally appeared in the May 21, 2022 newsletter and has been updated as needed.)
International Petroleum (OTCPK:IPCFF)(IPC:TSX) is a Canadian company that reports in US dollars. It is also part of the Lundin Group of Companies. The company has been buying back shares for some time. Management recently announced that more than 6 million shares have been purchased and withdrawn since the start of the buyback. Recently, the company announced an acceleration of this share buyback program through a Dutch auction. The the auction yielded more over 8 million shares purchased. Both stocks are expected to reduce outstanding shares by about 10% when the auction process concludes in June. This makes it one of the largest percentage reductions in the number of shares outstanding in the industry. Outstanding shares are now heading towards the 140 million count.
Management explained on the conference call that they could effectively buy the production (using the 2P measure of the reserve ratio) at a discount of around 40% (approximately) to its value. Therefore, it was a much better use of funds than increasing the capital budget.
The debt had already been repaid so the debt ratio was less than 0.5. Management really didn’t see the need to reduce debt more than that. This management, like many who bought projects when commodity prices were considerably cheaper, is not currently seeing the bargains that were once available. Therefore, this management will likely wait for deals to appear in the future that fit the strategic criteria.
The Lundin family is involved in quite a large corporate group. Much of this company’s management has prior experience growing and selling companies that are part of the Lundin group of companies.
This management has considerable past experience. There are also the considerable resources of the Lundin family interests that will help if needed. The Lundin family will control the companies that are part of the group through various interests and holdings.
Typically, a company like International Petroleum is built to attract a prospective buyer at a price that the major shareholder would consider a good price. Investors can invest alongside this major shareholder in a situation like this and benefit from this shareholder’s considerable experience.
These additional resources from the major shareholder give a company like this a competitive advantage. The majority shareholder has a reputation and a track record to uphold each time a business is created. So far management has been very conservative on debt. This eliminates a common new risk factor for the business.
As with many companies, management had announced a fairly disciplined capital budget that does not appear to increase with the strength of commodity prices. This could change in the fall, as many Canadian businesses reduce operations during the spring break-up. This allows for capital revisions prior to the resumption of normal operating activity once the lull is over.
This management is forward-looking enough to repay debt and issue bonds to empty the bank line. Any company that is part of the Lundin group of companies will increase production through purchases whenever it is cheaper. Much of the previous debt paid off represents acquisitions at a time when commodity prices were much lower and few buyers were able to buy the available bargains.
Therefore, management is able to show long-term production growth from these acquisitions without increasing the capital budget. It looks like management will have a stronger second half once trading begins after the spring breakup. But I think this management, like many in the industry, is waiting for the long-term outlook for the industry to “stabilize” before committing to strong growth.
In the meantime, this management will likely retain as many strategic options as possible through stock buybacks rather than initiating a dividend. During the conference call, management seemed to hint that there were far more (and better) uses for cash than launching a dividend.
Given that this group of companies typically has a strategy of growing businesses and maximizing company value, it makes sense that a dividend would be a lower priority than it is for many Canadian companies. of their size.
The company has a good number of recent purchases with which it can choose to increase production in the future. Management actually has several future plans to potentially increase production. But he’s not so committed to a plan that he blindly pursues it when market conditions change. This is best illustrated by the recent announcement to accelerate share buybacks rather than increasing the investment budget or initiating a dividend. Shareholders have a very clear signal from this management that it will do something positive for the relatively cheap share price.
International Petroleum has a variety of projects that produce everything from natural gas to thermal generation and then various weights of oil production. This thermal generation, in particular, will make revenues more volatile than is typical for the upstream industry.
The very strong balance sheet allowed the management to stop production, if necessary, without having to worry about finances. In fact, this management really didn’t worry about the decline in production in any of the projects when commodity prices weakened. Today, with a much better selling price atmosphere, this management is looking to maintain, and in some cases, restore production.
Real production growth can occur when other uses of cash are uncompetitive. Despite this strategy, the acquisitions have resulted in impressive growth in production per share over the long term. Investors can count on the company’s growth to continue in the future in one way or another.
The only project that will increase production beyond acquisition production levels is one of the smaller projects. This particular production, which was once Granite Oil (OTCQX:GXOCF), is a mid-grade oil that was becoming an increasing challenge for Granite as industry conditions steadily deteriorated.
Obviously, the project needed someone with deeper pockets than the small company had at the time. Now, the management seems ready to develop this resource which has a lot of potential. It will be interesting to see how this proposed strategy turns out after years of frustration.
International Petroleum is a Canadian company with some international exposure that has exceptionally deep experience through association with the Lundin group of companies.
Growth will come from what is cheapest right now. Right now the focus is on building a highly profitable business. Clearly, cash flow is excellent and the balance of production has allowed the company to participate in improving commodity prices in almost all commodity sectors.
The conservative debt strategy combined with the association with the Lundin group of companies reduces the risk of loss of principal over the long term. This considerable experience increases the chances of a considerably above-average appreciation. Management is often the most important asset or liability that does not appear on the balance sheet. This management is a huge asset for potential investors. The long-term prospects for this group of companies are generally excellent. This one is no exception.