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Noble's Q4 losses 'extremely shocking': Goldilocks

It also questions timing and quantum of impairments and says remaining business is 'still hemorrhaging cash'

Goldilocks Investment Company, a major shareholder of commodities trader Noble Group, expressed shock over Noble's profit warning and stirred up questions over the timing of Noble's impairments.


GOLDILOCKS Investment Company, a major shareholder of commodities trader Noble Group, expressed shock over Noble's profit warning and stirred up questions over the timing of Noble's impairments.

In a note released on Tuesday, Goldilocks said: "These figures are extremely shocking."

Noble, which is releasing its four quarter and full-year results on Wednesday, warned on Feb 19 that it is expecting a fourth-quarter net loss in the range of US$1.7 billion to US$1.9 billion, bringing full-year net loss to between US$4.8 billion and US$5 billion.

Noble's fourth-quarter loss comprises:

  • an adjusted net loss of between US$50 million and US$100 million for its continuing hard commodities, freight and LNG operations;
  • a net loss of US$225 million to US$275 million from its discontinued global oil liquids and North American gas and power operations;
  • and exceptional items - including significant non-cash mark to market losses due to reserves and adjustments - amounting to a loss between US$1.45 billion and US$1.55 billion.

Goldilocks noted that Noble's estimated non-cash net losses alone represent a 50 per cent increase on top of the cumulative US$3.051 billion net losses it has already booked for the first nine months of 2017.

Furthermore, some 64.5 per cent, or US$0.9 billion to US$1 billion, of the US$1.45 billion to US$1.55 billion non-cash net losses were attributed by Noble to increases in the discount rate used to value its mark-to-market derivatives portfolio.

The fund said: "This seems to suggest that Noble has consistently overstated the value of its derivative contracts over this financial year. It also leads one to question why these adjustments were not made earlier given that Noble has already revised its valuation approach to its commodity contracts and derivative instruments on several occasions in 2017."

Goldilocks added that the timing of the release - less than one month after it unveiled its proposed restructuring plan - leads one to suspect that Noble's management may be deliberately releasing "exceptional" losses to pressure stakeholders to approve the plan.

The profit warning also shows that the remaining business is "still hemorrhaging cash", it said, questioning why the management should then be rewarded with up to 20 per cent shareholding in the restructured company.

Questions are mounting for Noble over the losses expected to be announced on Wednesday, as many see the estimated loss pushing creditors to accept the debt revamp deal.

Alex Turnbull, managing partner of Keshik Capital, a Singapore-based hedge fund that used to own Noble's 2018 notes, said the recent loss is "somewhat suspect".

"It is very common practice when trying to do a restructuring to mark down the value of assets so you can claim before a court that certain equity holders and creditors should not have a vote because they have already been wiped out," he said. "Normally this would require audited accounts which the company does not have at this time for this recent write-down." Concurring, Craig Pirrong, professor of finance at University of Houston who conducts research on the economics of commodity markets, said the additional US$1 billion loss due to the discount rate change is "particularly shocking".

"Did they all of a sudden come to the realisation that they'd been discounting inappropriately? That strains credulity past the breaking point, especially since valuation of these contracts has been the main issue for months now."

Noble's shares closed 0.2 cent lower at 17.7 Singapore cents on Tuesday.

Additional reporting by Rachel Mui