Dana Gas 3Q 2018 Earnings: "Woof, Woof"

Earlier this year, I took a look at DG’s 1Q18 earnings and made some predictions for the full year.  A best case 4.5% ROE or worst case a break-even year.  As you’ll note, the best case falls well short of what would be an adequate return given the risk profile of DG.  

So how does AA’s prescient prediction look with a full three quarters of data?  

Frankly, not so good.                  

DG reported USD 41 million in net income for the first nine months of the year.  Pro-forming this for the full year, would result in roughly USD 55 million for the full year or an ROE of 1.9%.  

But to get a sense of the return from ongoing operations, we need to exclude two special items.  Those are USD 8 mm in 2Q18 sukuk restructuring expenses and a 1Q18 reversal of 13 million in previously accrued expenses.  If we exclude both amounts—a net of negative USD 5 million--, DG earned some USD 36 million over the first nine months of the year.  Pro-forming this over 12 months results in projected full year net income of USD 48 million or an ROE of 1.7%.  

Inadequate when one considers what would be a normal ROE for a stock investment.  

Dismal indeed when considers the higher ROE that that a risky stock like DG should deliver. 

To boot DG’s ROE remains well below its current roughly 4% cost of borrowing which is artificially depressed from the appropriate risk adjusted cost by the restructuring.  

Of course, there could be a miracle in 4Q18. 

The hoped for settlement with NIOC could materialize.  The US Government could graciously facilitate Iran's payment of the settlement proceeds to DG and, perhaps, as well give DG a license exempting its transactions from newly re-imposed US sanctions on Iran.  

At this point, it appears that the best value creation opportunity DG has is to repay its debt in full.  That will result in a net "benefit" of some 2.1% per annum to shareholders.  Dividends are another option - as it might be expected that shareholders could find other investments to return more than 1.9% a year.

To end on a rare (for AA) positive note,   all things are relative.   

DG may be a “mutt” investment, but AA suspects that investors in Gulf One Investment Bank Bahrain might find it quite attractive. 

Gulf1 has not reported a profit since FY 2013 and appears poised to continue that "run" in FY 2018.  Over the period FY 2014 through FY 2017 Gulf1 “lost” (that doesn’t mean “misplaced”) some 57% of its total equity:  from USD 133 million at FYE2013 to USD 57 million at FYE 2017.  

It’s hard to say how FY 2018 will turn out, though the loss this year for nine months is larger than for the comparable period last year.  But as is well known providing an opinion on fiscal year audited financials generally concentrates the minds of auditors more sharply than the  signing off on interim unaudited financials.  In 2017, the bulk of G1's USD 27 million loss was booked in 4Q.

On another somewhat positive note:  Gulf1 is equity funded so there are no lenders with significant exposure and thus in significant danger.