Since 2006, NRG Energy (NRG) has repurchased over 71.1MM shares for $1.95B, or about $27.42/share.
This is a respectable amount considering they have to deal with bond covenants that restrict the amount of funds that can be distributed to shareholders. At the end of 2005, NRG had about 161.4 million outstanding shares. During 2006, NRG issued over 132.4 million shares for the acquisition of Texas Genco (TGN) and another 40 million shares via convertible preferred stock which has since converted. So, NRG has repurchased about 41% of the shares issued in 2006 and has about 100 million shares to go to get back to a pre-TGN share count.
NRG has almost $2 billion in deployable cash. The time is now to implement a much bigger stock repurchase program. It needs to happen before there is a recovery in natural gas prices … before the EBITDA from growth capex begins to show up in the income statement … before the final decision is made on the loan guarantee for STP 3/4 … before the stock price moves higher.
The company has been making a push into green energy. It is time for the company to invest in a different kind of "green" -- NRG common stock.
The cost to make this happen is around $200 million. This is the estimated redemption cost for $3.5 billion in bonds that contain distribution restrictions. This may sound like a lot until you realize it will still cost $100 million in February 2012 and $50 million in February 2013. How much will it cost shareholders by delaying a significant repurchase program to 2012 or 2013? Further, what’s the time value of having that much cash just sit on the balance sheet? The redemption and refinancing of those bonds would open the door to a stock buyback program of at least $1.5B and would:
- Increase the current FCF yield from the high teens to the high-20% range immediately.
- Provide the opportunity for the FCF yield to move to the high-30% range should NRG’s FCF return to 2010 levels. This is a low-risk way for leveraging the “dark spread” while still pursuing low equity, stable EBITDA in the other “green” portfolio.
- Maintain balance sheet leverage within their targeted range of 45-60% where current leverage of 43.65% increases to 54.7% with a $1.5 billion buyback program.
- Repurchase enough stock to reduce the share count close to pre-TGN levels.
Further, it became clear that they have reached their limit for maximizing the solar tax credit based on their comments during the Q4 earnings call. And, they also indicated that the price for buying CCGT's does not fit their high-return criteria during the same call. Outside of just retiring debt obligations, there is really only one option left -- NRG common stock.
< Consequently, it would be wise to buy and hold this stock until the company's management realizes a big buyback is the only path for rewarding its shareholders. Management has a history of making good risk-adjusted decisions on capital allocation and those decisions should begin showing up in the EBITDA starting in 2013 thus offsetting the risk of continued low natural gas prices.
The stock price responded favorably to the refinancing of the 1st tranche of RP bonds because investors thought NRG's management was making the move to eliminate the distribution restrictions. We will just have to wait to see what unfolds. But, it seems clear there is no better time than the present to use a large portion of that $2 billion for a big stock buyback program which would ultimately achieve management's goal of unlocking value.