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.