Iceberg Research

Comments on the PwC review and Noble’s Q2 financial results

August 12, 2015

PwC review

As expected, PwC has not challenged the realism of Noble’s assumptions. It is very clear from the two PwC reports that this firm merely answered the question: are Noble’s mark-to-market (“MTM”) processes formally in compliance with accounting standards? EY has answered the same question for years. Enron was largely in compliance with accounting rules. The PwC review fails to address the market’s concerns. Investors want to know the real value of these MTM, not whether Noble successfully exploits accounting loopholes.

We note these remarkable sentences even by auditors standards:

  • “This report may not be relied on by you” (underlined)
  • “Management is responsible for the measurement of the individual valuations and the overall valuation of the Contracts.”
  • “Our review of the valuation models was based on the Excel spreadsheet outputs produced by the Finance (valuation and product control) team.” PwC has not worked directly with the contracts.
  • “None of the contracts was a liability”. PwC has not reviewed the negative MTM, which are future cash outflows.

The former CFO of Enron, Andrew Fastow, recently commented on this review in the FT (“Attacks on Noble Group’s accounting take their toll”): “It appears that the company is trying to satisfy the “Market’s” desire for this information by commissioning an accounting review by PwC. I do not know what the scope of PwC’s work will be. If it is a limited exercise only to determine if the company is complying with accounting rules (which I assume they are), I think that the “Market” will not be satisfied. Equity investors and creditors understand that accounting rules allow a company a wide degree of latitude when valuing contracts/investments. I think that the question is not whether Noble follows the rules, but rather, whether the company is making assumptions that are sufficiently aggressive that those investors and creditors will feel a need to maintain the increased risk premium now attached to Noble.”

In this article, the FT investigated a mark-to-market recognised for a long term deal in 2013. This profit has been recorded although the petrochemical plant had not been built yet (and will probably not be built). Noble has refused to answer questions on this deal. If PwC does not have any problem with this kind of MTM, investors will not give much credibility to the PwC review. During the conf call, Mr. Alireza refused to give any information on this MTM arguing the terms were confidential. This deal was not done in a remote corner of an emerging market. It was done in the United States where the Securities and Exchange Commission has jurisdiction. If the SEC asks Noble questions on this deal or other deals, this company will have to answer.

Cash outflows and fair values

Once again, Noble bled cash: their operations burnt US$386m in one quarter and more than one billion in six months. Since 2009, Noble’s operations have burned $2.3b. Whether commodities prices are high or low, Noble burns cash. When Noble starts contango deals or when these deals run off, the company records cash outflows.

Net fair values have declined by $487m since Dec2014 to reach $4.1b. However, the run off of oil contracts did not generate substantial cash. The reason is that these positive mark-to-market positions were already financed by brokers. During the Q1 conf call, the CFO explained :“The decline in fair value gains was primarily due to the run-off of some futures contracts. This was offset with a corresponding decrease in liabilities to brokers, which appears in the trade and other payables line. Total impact was about [$0.5 billion]. This impact was cash flow neutral.”

Most questions during the conf call revolved around Noble’s operating cash outflows, not the anaemic profitability. Some factors can affect one particular quarter. For example, the development of some businesses can have a negative impact on cash flows because they require additional working capital. But this effect will be seen over a limited period of time. Poor cash flow generation has been a structural and long term issue for Noble. A more fundamental reason behind this poor performance is that Noble has struggled to realise its MTM.


Debt mechanically increased to fill the hole. Net debt is now $4.7b, up from $3.4b at the beginning of the year. We exclude the perpetuals and the corporate guarantee extended to Noble Agri (see below).

Mr. Alireza said: “We are a mark-to-market firm”. This followed his previous statement: “We don’t manage our business to an operating cash-flow target.” Bank credit committees will not be impressed. If Noble continues to record deep operating cash outflows, many banks will pull the plug.

In terms of liquidity, Noble is vulnerable to a rebound in commodities prices since receivables days (21) added to inventory days (13) are now longer than payables days (27).

We would also like to come back on the deleveraging argument around the Agri transaction. Noble regularly forgets to mention a few important details about this “deleveraging”. The $1.86b intercompany payable to Agri was not repaid in 2014 with Agri’s internal cash. It was repaid by raising additional debt at Agri’s level. This new debt was obtained against a 49% corporate guarantee issued by Noble Group. If the banks who finance Agri are no longer comfortable with this corporate guarantee (a risk that is no longer remote), this will create a major headache for Noble. The problem with off balance sheet commitments is that nobody pays attention to them until things go south.


Noble always puts a lot of energy in defending its valuation of Yancoal, an asset they should have impaired a long time ago. Once again, Noble explained that a stake worth US$12m on the Australian exchange should be valued US$322m on its balance sheet (previously US$522m). Why should we believe this? Because Noble’s forward curves would be more conservative than broker consensus. We have no idea what the obscure concept of “broker consensus” refers to. After using these “conservative” forward curves, Noble ends up with a valuation 27 times bigger than the stock market valuation. This does not make any sense.

Noble refuses to disclose its forward curves and other key assumptions. Yancoal’s misfortunes are not simply the consequence of low coal prices. Its level of debt is unsustainable and it is hurt by expensive take-or-pay contracts. Noble does not mention these important factors.

In the coming weeks, management will have to explain to potential investors that what is worth $12m should be valued $322m. They will do this for Yancoal. Then they will have to do it for every major MTM on the balance sheet. If these investors conduct serious due diligence, this will be a tough job.

Agri and palm oil assets

Agri continues to perform poorly. In February, we wrote that the problems of Agri were structural and that no significant recovery could be seriously considered in the short term. Noble attacked us for writing what was only common sense at that time and turned out to be correct. We also wrote that Noble would struggle to sell their palm oil plantations in Indonesia. Six months later, this asset is still held for sale on the balance sheet.


  1. will noble go bust is what i want to know as a new investor who invested in noble bonds 2020 in APRIL 2015 ? do i pull out and take a loss of 30k or do i wait for things to get better ? please advise guys

  2. Dear Readers,

    Hong Kong Financial place by any standards, is very corrupted and only concerned by its well-being.

    The role of Financial Analysis Research is misunderstood by firms and maybe also by young people who dream to get a foot in the financial industry.

    An Analyst has to be independant and be allowed to express an opinion, even if it’s negative.

    To me the Iceberg case has focused attention on the risks that financial analysts face in candidly reviewing companies accounting.

    Many Regards,

    Simon Jacques

  3. Regardless of how Ali Reza & Ellman (Randall, Mr. Hard assets coal guy who helped engineer this mess, is conspicuously quiet) posture in the media, Noble’s core business is coal & energy–two very depressed commodities for the foreseeable future….with no cash flow to pay debt, and tightened credit, this company looks like a critical cancer patient..a corpse on the forward curve..

    Any White Knight will be looking to cherry-pick whatever gold fillings are left in Nobles teeth…that’s the only value because the body is dead..

  4. The harder Noble fights to defend itself, the deeper is the hole into which they are falling. Iceberg, in the words of Lloyd Blankfeld, is doing God’s work.

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