In previous notes, we’ve established that E&P multiples are likely to expand, when energy becomes more ownable (i.e. post recession, when funds can flow back into the sector to chase good businesses), and when that happens, the capital cycle is poised to look a lot different than today, and more similar to previous iterations of the oil and gas cyclical rigamarole. When we get to the point where you want to appease shareholders by improving your business, not just paying a dividend, well, you get into a precarious place when you have committed to a 10% yield. Dividends mute optionality. Period.
I call this the “dividend dilemma”. For most businesses in oil and gas, you probably should pay out some sort of cash yield, especially if this is your third cycle and you have done a mostly poor job of managing capital and assets the previous two times — investors need something to cling on to, a reason to own your stock. But there is a group of very good managers, that still are insistent on …