Monday, September 22, 2008

USEG Expands Share Buyback; More of Mark Cuban on Buybacks

U.S. Energy Corp (Nasdaq: USEG) expands its share buyback. It had already bought back about $3.1 million worth of its shares under its previous $5 million authorization, and now USEG's board has expanded that authorization to $8 million.

Separately, on his blog last week, Mark Cuban reiterated his opposition to buybacks ("The AIG-Lehman-Merrill Link"),

3 Companies facing cash crunch oblivion. A bankruptcy, an desperation sale and pure desperation. What do all 3 companies have in common ? Share buybacks. Billions and Billions and Billions in share buybacks over the last 18 months.

[...]

Can anyone say “financial engineering” ? think all 3 companies could have used that cash they spent trying to pump up their stock prices ? All that cash going to people who sold the stocks, huge losses going to those who held the stock. Thats why dividends are far better than share buybacks. At least in this case all shareholders could have gotten something back other than “the bag” remaining shareholders continue to hold.


In the cases of AIG, Merrill, and Lehman, I doubt the shareholders would have been much better off if they had received dividends in lieu of buybacks over the last 18 months, and I doubt the money used in the buybacks would have been enough to materially affect the outcomes there. It certainly didn't help though.

I wonder what Cuban would think of USEG's share buybacks. USEG has plenty of cash, so it's not facing a cash crunch; it doesn't have current earnings, so it's not engaging in 'financial engineering' to boost earnings per share; and it's buying back its shares at well below book value.

6 comments:

J K said...

Mark's quite cynical (which I like) because of his own obvious history in the dot-com bubble. I'd agree with him that dividends are preferable to share buybacks. In USEG's case it might be engaging in share buybacks as opposed to dividends so that it can support its PPS somewhat, since the PPS is quite low. I'm not saying anything is wrong with that tactic, but some companies make it really obvious, in which case you often can see the spike happen in the last hour/half-hour of trading.

J K said...

...In USEG's case any dividend would be a "special dividend" since as you noted they don't have consistent earnings. Perhaps they view keeping the PPS at reasonable levels a more effective way of preserving sharholder value than issueing a special dividend and letting the PPS continue to erode.

DaveinHackensack said...

USEG did issue a special dividend last year (10 cents per share, IIRC), after its huge windfall deal with Uranium One, and a shareholder asked on the last conference call if the board would consider another. The answer was that they'd consider it, but given the difficulty in raising money in the current environment, they thought it was best to keep most of their cash as dry powder. I think that makes sense.

I agree in general with Cuban on dividends versus buybacks, and I think the best use of USEG's funds is obviously in investments that can lead to revenue and eventually current earnings, such as its junior participation in the wells with PetroQuest. But given that the company generated some cash this quarter with its sale of most of its stake in Sutter Gold Mining, and the option to Thompson Creek, and given that it has so much cash, spending some of it buying back shares below book value seems like a reasonable use of cash. Certainly a lot more reasonable than some firms that have borrowed money to buy back overvalued shares.

Anonymous said...

Cuban may end up being right. If you look at the burn rate, mostly driven by SG&A, and most of that driven by disproportionately high management compensation, its fairly easy to envision a scenario where the cash gets burned out over the next 5-6 years, or possibly sooner if the PQ success number is more like 30% than 70%. In such a case, they'd be forced to raise additional capital to finance the moly mine. Dilution and destruction of book value leading to a way lower PPS.

Anonymous said...

Oh, and even though I'm clearly more bearish on this stock than you are, I think your posts on USEG have been excellent.

DaveinHackensack said...

Thanks, anonymous.

Regarding the financing of the moly mine, my sense is that if the mine ends up being feasible, Thompson Creek will finance it, and if not, no one will. We'll see though.