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.

Trading has always thrived on a degree of secrecy.

A used car that would normally sell for $10,000 might only get $8,000 if the buyer finds out the seller is three months late on her mortgage payments. If the buyer finds out she's just been fired, too, he might get it for $6,000.

Commodity traders, among the most secretive of financial businesses, have long been aware of this dynamic. That's why Noble Group Ltd.'s current predicament is so perilous to the company's survival.

Full Fathom Five
Noble's second-quarter net loss is close to being its worst result in a decade
Source: Bloomberg, company statements

The shares fell as much as 49 percent Thursday after Noble announced that it was expecting a $1.7 billion to $1.8 billion second-quarter loss, cutting the value of its net assets almost in half.

A major reason for the weak performance is that, following a $129 million first-quarter loss, everyone in the market knows that Noble is now desperate. As the company said in its market update late Wednesday:

Market and lender reaction to these quarterly results led to significant challenges for the Group in managing and supporting its supply chain and hedging activities, and in restoring the confidence of its lenders, suppliers, customers and other counterparties. These difficulties are reflected in the Group’s 2Q 2017 trading results.

Put simply, everybody that Noble is dealing with is driving a harder bargain. Lenders are worried that the company will default on its debts; suppliers, that they won't get paid; and customers, that deliveries won't arrive. Counterparties who know they're dealing with Noble are a still tougher case: In the full knowledge of their trading partner's plight, they will be merciless in extracting pounds of flesh.

Those problems are compounded by the fact that Noble is now selling not only its book, but its body.

With the operating units still failing to bring in cash -- net losses on underlying businesses will amount to $450 million to $500 million in the June quarter after adjusting for one-time items, Noble said -- and covenant tests looming on its debt, selling assets once considered core is the only expedient left.

Cash Is King
Noble's trailing 12-month operating cash flow hasn't been in positive territory since 2013
Source: Bloomberg

There are several problems with that path. One is that many of the assets are no longer worth as much as Noble had previously said. Fair-value impairments of hard-to-value assets were called out to explain the $1.25 billion to $1.3 billion in one-time losses in the second quarter, Noble said Wednesday -- a particularly striking writedown, given the long and bitter legal row between Noble and a group known as Iceberg Research over the valuation of that class of assets.

Another issue is that buyers of further bits of the business will know to drive a hard bargain. Mercuria Energy America Inc. should get a discount of at least $65 million on the net working capital of Noble Americas Gas & Power Corp. when it completes the purchase of the business, Noble said in a separate statement Wednesday. That's equivalent to about 20 percent of the unit's working capital at March 31. A further $40 million of the payment price will be deposited in an escrow account to cover any differences between Mercuria and Noble over the final price.

Trading Volatility
Noble's share price just took another major lurch down
Source: Bloomberg
Note: Shows share price one-day percentage change. All prices are for close except for July 27, 2017, which is as of publication time.

Noble is also selling its global oil-liquids business, and the buyer can be expected to push a comparably tough deal -- especially because Noble needs to clear out of both units if it wants to retire some $3 billion of working capital credit facilities that comprise the largest of its imminent debt maturities.

Is all of this survivable? Perhaps. But with each quarter of losses Noble's position grows weaker.

The worst thing to be in financial markets is a whale -- a trader whose substantial position is known to a horde of hungry counterparties, swarming in a feeding frenzy around the weakened leviathan. If Noble is struggling to make money from trading commodities and getting only discount prices for asset disposals, that's at least in part because it's become just such a whale.

Noble may plow on, but the company's debts and operational weakness have lodged a harpoon in its back. As it bleeds, the sharks are starting to circle.

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

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

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net