Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

What's a couple of years between friends?

That's how long Noble Group's long-suffering shareholders may have to wait to see the commodities trader return to profit, according to founder and chairman Richard Elman. Getting the company to "the right size and to profitability will take between one and two years" and it's still possible that a strategic partner may come on board, he told Javier Blas of Bloomberg News.

On the Mend
Analysts have been betting that the worst for Noble Group is already behind it
Source: Analyst estimates, Bloomberg
Note: All figures after Dec. 31, 2015 are based on analyst estimates.

The fact that the stock promptly rose 3.9 percent is an indication of how anxious Noble's shareholders have grown. Analysts have been expecting to see the company back in profit by December, and estimate more than half a billion dollars of Ebit in fiscal 2017. It shouldn't be good news that this forecast may be missed.

A strategic partner is hardly a pain-free option either: To the extent that such a player might help reduce Noble's $4.1 billion in net debt, aid would probably come at the expense of less generous investors.

The next few months are likely to be crucial. Noble is hoping shortly to finish the sale of North American Energy Solutions, or NAES, an electricity-retailing business that it's told investors could fetch a premium of more than $900 million above book value

It's not a strategy without risks. NAES provided an average of $174 million in annual pretax profits over the last three years -- a number that's "stable and resilient," according to Noble, and uncomfortably close to a group interest bill that's averaged $180 million over the same period.

Assume that Noble gains $900 million in cash from the sale, and the company would be reducing net debt by about 22 percent. But it would be reducing the profit available to service its remaining borrowings by a still-more significant amount. There's a reason that former Chief Executive Officer Yusuf Alireza refused to sell the business just weeks before his departure was announced in May.

Of course, life in commodity trading has always been uncertain. Reduced volatility in U.S. electricity markets meant NAES wasn't looking quite such a peerless jewel in Noble's most recent results. It wouldn't be a surprise if that $174 million profit becomes harder to sustain. Meanwhile, other parts of the group may start firing harder -- spot coking coal prices have doubled since the start of August, and traders such as Noble are best-placed to capture the benefit.

Through the Looking Glass
Noble once used finance cash to spend money on investments. Now it's selling assets to pay down debt
Source: Bloomberg

Still, Elman is sailing close enough to the wind to justify the 94 percent decline in the company's share price from its 2011 highs. When commodities were on the rise, Noble was able to raise cash from financing and invest it to provide fresh revenue streams. That path has more or less been blocked now that investors have gone cool on commodities and Noble's debt has been downgraded to junk.

In response, Elman has sold off divisions acquired in Noble's pomp to pay down debt. But the divestment path to cash flows is closing, too. Looking purely at long-term tangible assets -- on the assumption that short-term assets should be netted off against short-term liabilities, and intangibles are worthless to potential buyers -- there was only $2.08 billion left at the end of June.

Selling the Family Silver
Noble has been able to reduce debt by selling assets, but the cupboard is starting to look bare
Source: Bloomberg

There's still an important lever in the hands of Noble's management. A leaner trader with fewer assets and less access to finance can still raise cash the old-fashioned way, by making operational profits. Indeed in the long term, it's the only sustainable route.

Underwater
Noble Group trailing 12-month cash flows from operating activities
Source: Bloomberg

The trouble is, it's also a path that Noble has struggled to follow for many years. Commodity traders tend to operate on wafer-thin margins, and the pattern of Noble's operating cash flows over the past decade has tended to see persistent negative results in normal times punctuated by outsized profits when prices spike.

Historically, it's been able to walk that high wire with the confidence that amenable creditors and a substantial balance sheet gave it a safety net should things go wrong. In the future, Noble's going to be on its own.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Not including NAES and other units already marked for sale.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net