Dana Gas - Restructuring of Nile Delta Sukuk on the Horizon

DG's Board - Ready to Continue the Show

Full repayment of DG’s sukuk is contractually due on 31 October.

As outlined below, barring a miracle, another rescheduling is “on the cards”, continuing the second longest running "play" without a real plot.

According to DG’s 1H2020 financials (note 16), DG has reduced the principal of the sukuk USD 70.7 million to USD 309 million via buybacks that took place after 30 June. 

Its reported cash balance as of 30 June 2020 was some USD 366 million.

However, USD 58 million of that amount represents DG’s 35% share of Pearl Petroleum’s cash, meaning that amount is (a) in PPL’s account not DG’s and thus (b) not immediately available to DG. (Note 13). The “miracle” of consolidated financial statements.

On that basis DG’s 1H2020 cash is really USD 308 million. Of which it used an amount to fund the Sukuk buybacks.

How much?

On page 5 of its 1H2020 Investor Presentation (IP), DG says that the buybacks will result in “overall cost savings in profit and repayments at maturity of USD 10 million.” 

The “profit” rate on the Sukuk is 4% per annum paid quarterly (January, April, July, and October).

Let’s assume half a year of interest on USD 70 million or some USD 0.7 million.

That would mean that most of the remaining savings was discount on principal.

So very roughly a 14% discount on principal USD 70 million “retired” at the cost of USD 60 million.

Investors in the Sukuk probably rightly considered the discount a small price to pay to exit given the likelihood of another restructuring and the company’s continuing weak financial position and performance.

That likely leaves DG with a cash balance accounts lower than the principal balance of the Sukuk. If it has been lucky with cash inflows cash outflows, perhaps the amount is equal to the Sukuk.

In any case the amounts are so on the edge that it is unlikely—barring a miracle—that DG will have sufficient cash to both repay the Sukuk and maintain a minimum operating balance.

Other than the sale of its Egyptian Assets—whose value DG was trashing not so long ago—DG doesn’t seems to have have a lot of options to a rescheduling.

Perhaps the remaining Sukuk investors will take comfort in this statement from DG’s IP:

“Any proceeds from Egypt will go to paying this down. In case we don’t sell Egypt, we are considering various options”

AA will leave it to you to contemplate whether the options will be religious or financial. Or perhaps some combination of both. 

As an indication of where things are likely to be headed, DG has engaged the good folks at Houlihan Lokey to provide financial advice on the Sukuk.

If you don’t know, HL has quite a reputation in debt restructurings. Less so in “miracles”.

Turning to financial performance or perhaps more accurately financial “results”, DG had a loss of USD 19 million for the first six months of 2020 versus a USD 140 million profit for the corresponding period last year. 

As allowed by the Sukuk, DG paid a cash dividend of some USD 104 million in April. Money that might come in handy right about now.

In addition to their firm religious convictions, DG’s board is known for its financial prudence and acumen.

Despite those negative comments, DG apparently actually had a good half year as per their Chairman. 

The Company has demonstrated a strong and resilient financial and operational performance in the first half of 2020.We generated an operational net profit (before impairments) of $18m, which demonstrates our ability to operate successfully in low-cost environments.

I’m sure you agree that Elon Musk couldn’t have put it any better. Sadly, DG has no tax credits to sell to “manufacture” a positive bottom line.

As to the ever promising (but not necessarily delivering) future, things are apparently equally rosy.

We remain focused on strengthening our balance sheet to better position the Company for the future and we plan to press ahead with certain strategic actions regarding our asset and Sukuk which will benefit all our stakeholders alike.

DG’s shares are down some 25% over the past 12 months.

This could be the opportunity of a lifetime, but it probably isn’t.