SGX-listed, Hong Kong-based Noble Group warned on Wednesday that it is set to post a devastating loss of USD1.8 billion for the second quarter. The shock loss surpassed the full-year loss of USD 1.6 billion back in 2015 and brought to light the significant challenges faced by the commodity trader.
The market reacted immediately on Thursday morning, with Noble Group share price plunging by as much as 49% to $0.295. The counter recovered to close at $0.395 at the end of the trading day.
The amount certainly blew me off and made me blinked twice. USD1.8 billion is a colossal amount of money. We are talking about losing USD1,800 million for one single quarter. Translated into Singapore dollar, that would mean SGD2,400 million. Make no mistake, founder Richard Elman has previously warned that Noble Group is likely to suffer losses until 2019. But nobody could have foreseen losses of such magnitude.
Compared to the second quarter loss, the first quarter loss of USD130 million seemed like peanuts. But the announcement of that loss back in March had bombed out Noble Group stock price. With the gigantic loss in second quarter, the share price is likely to experience another bout of carnage. In this regard, shareholders should brace themselves for another plunge in the shares in the coming weeks.
Based on the sickening financial results, fresh questions would be raised among investors on Noble Group’s management ability to revive the company’s fortune. Thus, of interest to many investors should be the outcome strategic review under the direction of the new Chairman Mr. Paul Brough. Broadly speaking, the plan consisted of reduction of debts through asset sales, improving financing for short term liquidity and cost reduction.
Outcome of strategic review
Below is a list of actions announced by Noble Group:
a) Formal sales process of its Global Oil Liquids business with a short list of potential buyers. The sale of the Global Oil Liquids business is expected to significantly reduce the Group’s reliance on trade finance lines and overall bank funding as it is the Group’s most working capital intensive operation.
b) A binding stock purchase agreement for the sale of its wholly-owned subsidiary Noble Americas Gas & Power Corp to Mercuria Energy America, Inc. for a total consideration of US$248 million. The sale is subject to, amongst others, approval by Group shareholders.
After the above sales are completed it is anticipated that the USD 3 billion worth of debts will be retired and net proceeds will be available to reduce the Group’s remaining debt.
c) An asset disposal programme has been devised to release more capital in the next two years. An expected cash of between USD 800 million to USD 1 billion is expected to be generated from the asset monetization. Noble Group revealed that the asset group comprises certain assets held outside of North America.
d) Cost reduction programme would see a head count reduction from 900 to 400 staff. The shrink would result in a number of retrenchments but since Noble Group is based in Hong Kong, the impact should be minimal to job market in Singapore’s context.
e) Of great interest to investors should be the implementation of a more conservative balance sheet valuation. The strategic review concluded that “the adjustments would include, but may not be limited to, reserving of the entire Hard Commodities Level 3 net fair value gains on commodity and other derivative financial instruments balance along with applying additional reserves against certain Level 2 net fair value gain positions.”
To put things into perspective, Noble Group’s troubles began two years ago when it was attacked by Iceberg Research over aggressive accounting practices. That episode led to ferocious attacks by short-sellers feasting on the wide-spread fear over the health of the commodity trading giant. Subsequently, Noble Group engaged PwC to review its account and it was verified that the accounting practices complied with relevant accounting standards. Nonetheless, there were still lingering doubts over its accounting methods. With this new balance sheet valuation, hopefully Noble Group can set the records straight once and for all.
Investing in Noble Group has been a treacherous journey for many shareholders. I am not vested in this counter but has been monitoring the company’s development for the past few years. Once a blue chip in Singapore stock market, this is a fallen angel that has been plagued by a series of unfortunate events. However, in spite of the relentless troubles, Noble Group has a knack of attracting suitors looking for a slice of the global commodity trading market.
Noble’s partnership with Mercuria Energy Group Limited could offer a lifeline for the embattled commodity trader. Although it is too premature to claim that Noble is out of the woods, the latest development vindicates that there is still value in Noble assets.
The search for a white knight
In early July, Middle East investment fund, Goldilocks Investment Co., emerged as a surprise shareholder, having increased its stakes in Noble to 8.19%. This made Goldilocks the fifth-largest holder, after China Investment Corp (CIC), which has about 9.61% holding. Goldilocks’ move briefly restored investor’s confidence and halted the slump in Noble Group share price. However, having two major shareholders from China and Middle East would come as cold comfort as Noble Group is given an extension of just 120 days from June for its USD 2 billion credit facility by its creditors. There were reports that Noble Group is required to seek a strategic investor to shore up confidence.
At the moment, Noble Group is hanging on to its dear life as it searches for a white knight for survival. It remains to be seen on whether Goldilocks may turn out to be Noble Group long awaited white knight. Of utmost priority now is to raise cash through bond issuance, capital injections from CIC or rights issuance. The first option is ruled out as credit ratings had been slashed to junk bond level by credit agencies. It is also unlikely that CIC would risk pumping in more capital without any positive financial results. Thus, the most feasible route to cash would be through another round of rights.
Last year, Noble had raised USD500 million from a largely successful rights exercise. So, shareholders have every right to be angry if the company decided to ask them for money again. But let’s face it. Do shareholders want the company to file for bankruptcy or pump in more cash to salvage the company? If Noble collapsed, investors would get back nothing at all. On the other hand, subscribing to the potential rights do not guarantee that it would not be throwing good money after bad. Thus, this could be a dilemma facing investors.
Previously, founder Richard Elman warned that it would be until 2019 that Noble Group would become profitable. But clearly, bank creditors ran out of patience and set a deadline of 4 months for Noble to buck up. Can Richard Elman turn the tide for Noble? I certainly hope so but even if miracle happened, it will be a completely different Noble Group by then. Till then, enjoy the ride.
Read my articles on Noble Group:
- Noble Group new white knight?
- Will Noble Group shares see daylight again?
- Collapse of Noble Group share price
- Meltdown of Noble Group shares
- Noble Group will sink or swim?
- Is Noble Group doomed?
- Will Noble Group do an Osim or Swiber?
- White Knight for Noble Group
- Mayday for Noble Group!
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