Iceberg Research

Second Report on Noble Group, a repeat of Enron: Fair values and Operating Cash Flows

February 25, 2015

Iceberg Research released its second report on Noble Group.

Summary of findings:

    •  The divergence between Noble’s net profit and operating cash flows (“OCF”) is striking given its status as an investment grade company. Noble has recorded a combined $2.7b net profit since 2009. However, its operations have lost $485m in cash in the same period. OCF have continued to deteriorate since 2011, e.g. ($620m) outflows in 9M 2014.
    • We believe the OCF would have been even worse without the help of inventories repos.
    • The reason for the divergence between the paper profit and the OCF is the remarkable increase in the fair values of unrealised commodities contracts (or “mark-to-market”). These contracts surged from near zero in 2009 to an unprecedented net $3.8b ($5.8b assets and $2b liabilities).
    • The level of Noble’s fair values has become incredible. They now dwarf all of their competitors (e.g. Glencore). They are 3.5 times the level of Enron’s contracts at its peak, eleven months prior to filing for bankruptcy.
    • Similar to Enron, Noble recognises the entire profit for long maturity contracts the same day these contracts are signed.
    • We explain how the valuation of commodities contracts leaves ample room for manipulation. The auditor’s opinion on the fair values listed in the annual report is as realistic as its opinion on Yancoal.
    • There is very little information provided by Noble on these fair values. We uncovered a few examples of suspicious situations.
    • We analysed Noble’s OCF and working capital over the past few years in depth. The group has been largely unable to realise the mark-to-market that matured during that period. Based on this analysis, we believe that at least $3.8b in fair values are overstated and should be impaired. Impairing these fair values dramatically impacts Noble’s performance indicators.
    • Like Enron, Noble is now engaged in a vicious cycle: the group needs to constantly print more mark-to-markets to achieve any return on equity targets. There will be no miraculous recovery for Noble: the market will progressively realise that its fair values are largely fabricated.

Click here to download and print the second report: Report 2- Fair values and OCFc

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  1. Check out Yancoals shareprice now. Only $35m market cap. So noble must be in real trouble as no bank can risk a position with this business without putting their own balance sheets at risk. This will have big impacts on australia, Hong kong, and Singapore if noble go down. Asia looks to have all their eggs in the one basket here.

  2. Enron on repeat! From the marking to market of long term contracts, the recognition of bogus fair value gains and down to the inflated revenues with negative FCF.

    I wonder if management will soon start buying the stock up like Kenneth Lay and Jeff Skilling did right before the SEC came knocking on their doors.

  3. Perhaps to prevent a complete crash of the price and to let “tempers” cool over a few days. The market tends to deal ruthlessly with bad news and even rumours. It does not wait for confirmation.

  4. If these fresh Iceberg allegations are rubbish as Noble claims them to be, makes me wonder why the company halted trading of its stock??!?

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