Tuesday, July 11, 2017

Dana Gas Restructuring: Full Repayment of Sukuk Threatened by Weak Cashflow

Looking for the Flow

In a previous post I looked at DG’s stale Trade Receivables, today let’s take a look at the company’s ability to generate cash. 
If the title hasn’t given away the plot, AA’s analysis is that it is likely to be insufficient to repay the Sukuk within five years absent a non-operating event. 
We’ll base the analysis on the “Consolidated Statement of Cashflows” in DG’s annual reports in lieu of developing a more formal model because the intent is to provide a directional rather than locational result.  
This is historic information.  
Why on earth is AA using past data? 
Well, there's nothing on the horizon to suggest a fundamental change in DG's existing business, collection of receivables, etc.  Zora would have to grow exponentially to make a difference.  If new business with better paying customers could be found in other countries, DG probably would be hard pressed to secure financing for a variety of reasons and such business, if finance were available, would take time to develop.
To set the stage a few words about accounting cashflow statements. 
  1. There are two methods for preparing / presenting a statement of cashflows.  One (the “direct” method) is based on actual cashflows both inflows and outflows.  This provides better information for analysis. 
  2. The second is (the “indirect” method) which begins with reported net income and then makes adjustments for certain non-cash items (e.g., depreciation, allowances for impairment, etc.) producing Gross Cash Flow from Operations (“GCFO” or “GO” in this post).  Then a set of further adjustments for changes in the balances of non-cash current assets and current liabilities, resulting in Net Cash Flow from Operations. (“NCFO” or “NO”).   An increase in a current account is a “use” of cash a decrease a “source” of cash.  It’s the opposite for current liabilities where an increase is a “source” of cash and a decrease is a “use” of cash.   Another issue net changes in account balances are used.  This masks actual cashflows, e.g., for receivables it’s the net of new unpaid billings and cash collections on all outstanding receivables.  It’s important to understand that GCFO does not represent cash collected by the company which it then “spends” to increase current assets (e.g., receivables).  What has happened instead is, for example, that some revenue included in accounting net income has not yet been collected.   
  3. There is a way to refine the information from an indirect cashflow using notes to try and disaggregate the “net” changes in accounts.  I haven’t done that for the reason noted above.  
The chart below shows DG’s cashflow over an eight-year period.  Note the “traditional” approach to presentation has been adapted to fit the margin constraints on the blog.  That is, years are vertical rather than horizontal. 
Dana Gas Cashflow Analysis  -  Amounts USD Millions
GCFO WC + Tax NCFO Invest Finance Net CF NO/GO
2016 145 -63 82 -111 -120 -149 57%
2015 345 -142 203 41 13 257 59%
2014 386 -284 102 -55 -67 -20 26%
2013 358 -233 125 56 -141 40 35%
2012 408 -231 177 -57 -67 53 43%
2011 434 -335 99 -93 -53 -47 23%
2010 285 -154 131 -126 -59 -54 46%
2009 176 -71 105 -31 -78 -4 60%
Total 2,537 -1513 1,024 -376 -572 76 40%
Average 282 -168 114 -42 -64 8 40%
Source:  DG Annual Reports
Some observations on the cashflow. 
  1. Over the period 2009-2016, DG has converted only 40% of its Gross Cashflow from Operations to “cash”.  The main culprit over the period is a USD 847 million increase in Trade Receivables.
  2. If the future is like the past, then NCFO is unlikely to be significantly different than the USD 114 million average over the past eight years.  Note:  NCFO does NOT include finance costs, e.g., "profit rate" (interest).  
  3. So USD 570 million is a reasonable estimate of NCFO over five-years.  That's before investments and finance.  
  4. If DG needs to maintain investment at average levels—USD 42 million per year—that leaves USD 360 million for debt service.    
  5. Assuming annual level principal payments of USD 138 million a year at a 9% p.a. interest rate total payments are some USD 876 million over the five years.  At a 3% interest rate total payments of USD 752 million. 
  6. At 9% the shortfall is USD 516 million (roughly 60% unpaid) and at 3% USD 392 million (52%).   
  7. Full repayment of the USD 690 million in outstanding sukuk principal and interest therefore appears unlikely (first euphemism of this post) absent significant new developments.
  8. One such development would be a fundamental change in cashflow generation from operations, e.g., Zora generating significant cash, Iranian gas sales finally occurring, highly profitable business in a new market.  
  9. Another would be a non-operating event or events that change this unhappy picture.  The KRG and Egypt could pay their past due receivables.  The KRG or IRI might pay DG all or some of the USD billions they owe DG according to arbitral decisions.   DG could sell some of its assets with the proceeds directed to creditors. AA is ruling out—perhaps prematurely—DG purchasing a winning El Gordo ticket given DG’s steadfast self-proclaimed adherence to Shari’ah.  Though I suppose a providential re-interpretation of   الميْسِر  and 2:219 by the Company's modern day Abu Yusuf might occur.  An event perhaps more likely than the others outlined in this paragraph.
With this as backdrop, AA is preparing a “What Then Is to Be Done?” post for the creditors chock full of "sage" advice. 
Because AA suspects that the probability of fundamental changes in operations or the occurrence of a non-operating event is low, AA is reaching out for readers' assistance.. 
Readers who know of an Islamic equivalent to St. Jude Thaddeus Patron Saint of Lost Causes or suitable دُعَاء‎‎ are invited to post details.  All five mathhabs are welcome. 
This could be an important pillar of the creditors’ recovery plan.  It would be shame if it was not included.


Arkad said...

We would propose that DG sells its receivables to another party that has a strong or systemically important relationship with the KRG and/or Egypt.

Though the sale would likely be at a discount, it would create a liquidity even that would allow DG to retire at least some of its outstanding liabilities. Some combination of repayment and a haircut is probably fair for creditors.

The new owner of these receivables should aim to use its relationship with the KRG/Egypt to get payment, the "systemic" nature of their relationship with said authorities preventing the authorities from going cold turkey (or T'beet) on them.

With DG's debt retired, the company's debt service burden goes away and it can focus on existing operations. If KRG/Egypt production going forward doing result in payment, then stop production. If all else fails just dial back the entire business to operating in proper markets.

Abu 'Arqala said...


Always good to hear from you.

That's an intriguing idea. I'm not familiar enough with the KRG or ARE to know who likely prospects would be.

One set would be obligors themselves. On a PV basis, each year the receivables aren't collected they are losing economic value so from an economic basis, a discount is warranted. That would eliminate the middleman's profit unless of course the middleman could extract a higher price than KRG or Egypt would be willing to pay directly. That seems unlikely unless key decision makers at the KRG or Egypt somehow were to share in the middleman's profit.

As regards the KRG, perhaps Baghdad would be interested as a way of gaining additional leverage over the KRG. A strategy not without risk.

Some other wrinkles:

KRG and Egypt would have to cooperate in the sale as these are almost certainly commercial receivables and not negotiable instruments. They're probably subject to counterclaims by the obligors for work not performed properly, other imagined or real violations of the commercial contract, etc.

The buyers would also have to be sure that KRG and DG would pay them and would have to know the amount of that payment so they could factor that into their bid for the paper along with their required profit margin.

One of the key problems the creditors face is that repayment is limited to the Trust Assets so to the extent that these are sold at a discount --and a sale of the receivables would probably take place in a "fire sale" atmosphere--a good amount of value could be lost.
But in this situation cash in the hand is worth twice a promise of cash, particularly given DG's previous promises and recent legal machinations.

More thoughts to follow.

See my post today on what steps creditors should/could take. Look forward to hearing your comments on that.

Best AA

Abu 'Arqala said...


Well, I've done it again --another ambiguous post (first euphemism of this comment). The "they" who are losing economic value are DG. As Egypt is not being charged interest for delayed payment, it is benefitting. Now that DG is charging the KRG Libor plus 2% instead of 9%, the KRG as a "high yield" credit (another euphemism) are actually gaining from delay as well. I would think the KRG would have trouble finding a bank adventurous (another euphemism) to lend to them at L+2% or lend to them at all.

More to come probably in a post and not a comment.

Best AA

Abu 'Arqala said...


Just a quick followup.

I've amended my Trade Receivables post to correct a "bozo" of omission re the Trade Receivables.