Consolidation gets rid of the penny dreadful status and narrows the spread which will be a positive for a number of investors, less so for pip traders.
One of my patients, who is a private stockbroker, said he would not recommend BRK to his clients, regardless of the fantastic fundamentals and deep discount to valuation, until the shares were consolidated. Most of his clients would not invest in a penny dreadful share.
In early 2023 after the release of the independent reserves report at a BRK Sydney luncheon presentation, I spoke to a fund manager who said he loved the story, but his mandate would not allow him to buy the stock because of the penny dreadful status. He agreed BRK wasn't a speculative stock because of its reserves, cashflow and profits . He said he would buy if they consolidated. I hope he is still around.
On the other hand, I have spoken to a microcap fund investor who said the penny stock status was not an issue for him, but when I asked about a consolidation, he did admit that for "regular" institutional investors, having a low SOI base and higher share price would be more of a positive, rather than a negative for the stock in the long term. His reasoning was it would pass further through the "filters" and more institutions would actually be able to look at the stock.
My personal history for consolidations has been negative, as all those stocks performed worse on a relative share price basis after the consolidation. But, they all were speck stocks without cashflow, and they raised capital post the consolidation. The purpose of those consolidations were to restructure and to raise capital.
The difference here is BRK is not consolidating to raise capital. The share price might fall in response in the short term, and in a perfect world, I would like to see BRK take advantage of that and buy back shares. But BRK have stated they won't buy back unless they have excess capital, which is very unlikely at this time , especially with the current price of oil.
People are talking about delaying FFD drilling and using that time / cashflow to fund a buy back. But here is the rub, BRK are already effectively delaying the development of the next DSU to Feb, March 2025 to allow for a cash build, with the purpose to fund the next DSU.... there will be at least 4-6 months of production, most of it flush/ peak production from the FMDP before they start looking to spend on the next DSU. If there is a delay in drilling the next DSU, IMO it will more likely be on the back of low oil prices, not to fund a BB.
If low oil prices fall further , remain depressed through 2025, BRK may decide to slow the FFD and delay the spend. There is little point in BRK going hell for leather starting the next DSU if the POO is at US$ 50-55. Once the oil is produced and sold , it is gone. So BRK will be crazy to spend the significant capital to produce oil ( and gas/ NGL's also at low pricing) in a new DSU just to give the hydrocarbons away.
The flipside on a price induced delay will be a cashed up BRK in the middle of 2025, and there will be opportunities to buy reserves, producing or PUD, or development acreage which will be primed for development when the inevitable price rise returns.
This is the advantage of being a nimble operator having existing low cost producing assets, low cost new production and being debt free. BRK are not wedded to FFD timing regardless of conditions, and have the financial and operational flexibility to chose the best path, to react to changing circumstances. Currently, the capital spend priority is to build the asset base and business to have significant, sustainable cashflow. BRK are not at that point yet so the bias will go to investing capital rather than returning it to shareholders .
Having said that, I am very keen on buy backs where the company is trading at a significant discount to intrinsic value, and BRK are certainly at that point. Additionally , there will be a BRK equity price point, where the best use of capital in terms of return on funds invested would be buying back shares, rather than investing in drilling, or buying assets, I'm just not sure where that is but BRK must be pretty close.
In terms of a US listing, at this stage I"m not well enough versed in USA exchanges and the mechanics of ADR's to discuss the pros/ cons .
I will say this, the US market is more adept in valuing companies like BRK that operate in the US, of which there are many listed peers to compare . If BRK are truly trading at a discount to those peers, then it makes sense to expect that gap on the US exchange to close to approximate those peers at some stage. That will flow through to the ASX listed price and market cap.
BRK Price at posting:
0.9¢ Sentiment: Buy Disclosure: Held
(20min delay)