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.

Can Noble Group Ltd. make it through the next 12 months? With the Monday announcement of the sale of its oil-liquids business to Vitol Group, it's getting easier to work out.

Once upon a time, Noble's most important trading assets were its inventories of oil, gas, coal, metals and grain. Now, the crucial deals relate to the collection of once-core businesses that it's attempting to sell to pay down its $3.8 billion of net debt.

These fall into three basic categories:

  • The sale of the Noble Americas Gas & Power unit to Mercuria Energy America Inc. was completed last month for $102 million, plus whatever amount gets handed over from an $83 million escrow account.
  • The oil-liquids sale to Vitol, combined with the gas & power unit, could net as much as $578 million based on the value of its balance sheet at the start of July. But if trading since then reduces the value of working capital and increases debt, and Vitol keeps sums paid into escrow accounts, that could drop to around $404 million or less.
  • Beyond those, Chairman Paul Brough told an Aug. 11 investor call that there's another $800 million to $1 billion of assets Noble hopes to sell at some point.

Even if Noble achieves a miraculous turnaround in operating cash flows that haven't been consistently positive in four years, the amount it raises from these deals might mark the difference between survival and bankruptcy. Worryingly for anyone still holding its equity or bonds, the company's counterparties appear to be pricing their offers accordingly.

The Incredible Shrinking Business
The value of Noble Americas Gas & Power fell as the deal moved towards closing
Source: Company reports
Note: July 2017 figures are estimates provided by Noble based on working capital at the time the proposed deal was announced. The deal closed Sept. 29, 2017. Escrow payments are intended to cover any differences between Noble and Mercuria over the working capital and debt in the business; the figure at closing marks an upper and lower range for the final price.

Take the latest offer. On the face of it, this appears to be better for Noble than the gas and power sale to Mercuria. That transaction came at a $65 million discount to the value of its working capital.

Oil liquids isn't being sold at a discount -- but the fine print imposes an awful lot of conditions on Noble that highlight its weak negotiating position. About $121 million is being put in escrow to cover any disagreements about the value of its balance sheet. Another $38 million amount will be paid contingent on Vitol resolving certain "specified matters," which, despite the term, aren't specified in Noble's release.  

Then there's $15 million held in case Vitol fails to make as much money subletting oil storage tanks as Noble is paying to lease them. Noble will even make a $4 million contribution to Vitol's insurance costs in relation to the deal.

This sort of cheese-paring doesn't instill a lot of confidence that Brough's third-stage asset sale program can raise as much as he's hoping. Still, what do the amounts raised so far -- as well as Noble's separate forecast Monday of a $50 million to $100 million underlying net loss in the September quarter -- indicate about the company's ability to survive the next few months?

Let's start with financing. The coupons and payment schedules on Noble's bonds are public knowledge, and the busy trading in portions of its distressed loan facilities also gives us a fair bit of insight into what it can expect to pay on bank facilities. Let's assume, for the sake of argument, that it needs an average of $500 million drawn on its revolving credit facilities at any one time, and you get a picture a little like this:

Ebb and Flow
Noble's cumulative financing outflows will amount to almost $3.5 billion over the next five years
Source: Company reports, news reports, Gadfly calculations
Note: We've assumed an average interest rate of 5 percent paid on an average balance of $500 million in Noble's revolving credit facilities. We've also assumed that any reductions in the size of revolvers cover only undrawn portions of the facilities. We've not included outflows connected to the self-liquidating borrowing base facilities being retired in connection with the Mercuria and Vitol transactions.

Then there's operating cash, an area where Noble has consistently fallen down. Let's map out three paths for that. In the worst-case scenario, outflows are in line with their average level over the past three years, at $225 million a quarter. As a middle case, we'll throw in Noble's salad days around 2011 and go for the $39 million average outflow over the past decade, an amount that sounds pretty close to the operating loss on its income statement in the September quarter.

The best case is a little harder, because Noble's operating cash performance has generally been so dismal of late. But let's make the ambitious assumption that a radically slimmed-down Noble can repeat its peak performance in the five fiscal years through 2013, when it averaged a positive $46 million a quarter. That produces these potential paths:

Time for Change?
Noble's history offers few signs that it can start generating positive operating cash flows
Source: Company reports, Gadfly calculations
Note: Figures are cumulative. Low scenario based on average operating cash outflows over the past three years. Mid scenario based on average over the past 10 years. High scenario based on five fiscal years through 2013.

Finally, there's the amount raised from sales of assets. In the best-case scenario, where Brough gets the full $1 billion from his third-stage program and Noble is paid every cent in its Mercuria and Vitol escrow accounts, that could generate nearly $1.6 billion. The worst case is anyone's guess, but it's not hard to put together a case where the programs collectively raise less than half that amount.

Add those three sets of cashflows together and you have a decent picture of the calendar that's keeping executives up at night. It doesn't look pretty:

Strait Is the Gate
If everything goes right for Noble, there's a slender path that could keep it in the black
Source: Company reports, Gadfly calculations
Note: Shows paths for gross cash balances based on assumptions around cash flows outlined in article. We've not factored in the effect of additional debt issuance on the assumption that it's unlikely to be forthcoming. Increase in cash balances in June 2018 quarter represent third-stage asset sales net of operating and financing losses.

In the worst-case scenario, Noble gets only minimum payments from asset sales and, with ongoing substantial operating cash outflows, funds run out around the time it's due to pay its $400 million in 3.625 percent senior notes due next March. Assume that the cash outflows are smaller and about half of the escrow payments come through, and the group could hobble through to March 2020, when it would face a $1.25 billion maturity of 6.75 percent senior notes.

What's the path to survival? It depends on something that Noble really ought to be able to get right, but which has eluded it so far. Should operating cash come to a mere $46 million in inflows per quarter, even a disappointing final stage of its asset-sale program could provide a chance to repay the last of its bonds in 2022 and live to fight another day. But operating cash -- the engine of any well-functioning business -- has been misfiring at Noble for years, and there's never been much clarity about which divisions were responsible.

If the current disposals can turn that pattern around, Noble -- trading at just 21 percent of book value -- could have a brighter future. Given its history, though, that's a high-stakes bet.

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

(Corrects illustrative value of Monday's transaction in paragraphs five, 15, and 17, and "Strait Is the Gate" chart.)

An earlier version of this article mis-stated the illustrative value of the most recent transaction in paragraphs five and 15. Those paragraphs, along with paragraph 17 and the final chart, have been corrected to reflect this.

  1. The amount is "security for satisfying indemnity claims in respect of certain regulatory matters."

  2. Portions of its main revolving credit facility are selling for around 44 cents on the dollar on a margin of 95 basis points over Libor, Debtwire reported in August, which suggests a renewed line would attract an interest rate in the region of 5 percent.

  3. Underlying net losses from continuing operations were $50 million to $100 million, Noble said Monday. If we assume for the sake of argument that no tax was debited or credited and that about $50 million was paid out in finance costs, Noble's operating loss would have been in the range of $50 million to breakeven. Changes in working capital could lead to dramatically different operating cashflows.

  4. Noble hasn't laid out which assets could be included in the program, but there are some obvious units that will soon be non-core to its increasingly Asia-focused business. Its stake in a Jamaican bauxite and alumina operation was purchased from Alcoa Corp. for $140 million in 2014. Its 75 percent stake in Harbour Energy Ltd. would be worth $58 million based on its book value at the end of December,  although related-party transactions in the closely held company's shares over the past 18 months have implied a valuation nearly six times that amount. Meanwhile, the total value of long-term assets outside Asia and North America, where Noble plans to keep its existing holdings, comes to $242 million.

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