Noble’s Palm Oil Investments Value Decreased by $60M As Credit Concerns Grow

Noble’s Palm Oil Investments Value Decreased by $60M As Credit Concerns Grow

As reported by Chain Reaction Research, on August 10, 2017, Noble Group posted a USD 1.75 billion loss for Q2 2017. Four days later, Moody’s, S&P and Fitch cut Noble Group’s credit rating one or two notches to Caa3, CCC- and CCC, respectively. S&P analysis suggests that Noble Group’s creditors may experience non-payment within six months. As shown in Figure 1 (below), these three credit ratings agencies have cut Noble’s credit rating four, five and six times this year, respectively.

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To shore up its financial situation and potentially avoid default and bankruptcy, Noble Group has a tight timeline to sell its assets to meet is Q3 2017 cash needs. Bloomberg reported (paywall) that Nomura estimates Noble Group’s Q3 2017 cash outflows at USD 387 million including its next bond repayments and coupon payments due in September 2017.

But the problem is that since Noble Group’s highest share price of USD 12.83 March 31, 2011 to its lowest share price of USD 0.33 August 17, 2017, in the intervening 26 quarters, Noble has 14 quarters with negative cash from operations and only 12 quarters with positive cash from operations.

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Figure 1: Credit rating agencies cuts to Noble Group 2016-2017. Source: Bloomberg.

What Does this Mean for Noble Group’s Palm Oil Investments?

According to Noble Group’s Q2 2017 statutory filing on the Singapore Exchange published August 10, 2017, as shown in Figure 2 (below), Noble has decreased the value of its palm oil investments by about USD 60 million. In the company’s investor presentation that same day, it stated that its Q2 2017 exceptional items include:

Non-cash impairments to non-current assets, including US$60 million impairment loss on palm asset held for sale.

On August 2, 2017 Chain Reaction Research reported that Noble Group’s palm oil valuation may be overstated.

Q2 2017 Financial Statements
USD ‘000
Q1 2017 Financial Statements
USD ‘000
Decrease in valuation of its palm oil assets
USD '000
Non-current assets, net of impairment 152,262 210,537 (58,275)

Figure 2: Noble Group’s Palm Oil Assets Decrease in Value USD 55 Million, Q2 2017 vs. Q 2017. Source: Noble Group.

Q1 to Q2 2017: Almost USD 60 Million Decline in Palm Oil Asset Value

While Noble Group’s Q1 2017 financial statement valued its palm oil assets at USD 210,537,000 (non-current assets, net of impairment). Its Q2 statement lowered that to USD 152,262,000 – a drop of USD 58,275,000 in three months. Developments tracked by Chain Reaction Research in the interim may explain that change. Note that the stated Q1 value specifically relates to the investments that the company retained following the sale of its remaining stake in Noble Agri Limited (NAL) to a Cofco Agro Limited (CAL) in 2015.

In June 2017 and July 2017, Chain Reaction Research showed that Noble Group’s oil palm plantations were under immediate threat of deforestation. The issues concerned PT Pusaka Agro Lestari (PT PAL) in Mimika, Indonesia, one of Noble Group’s two oil palm plantation estates in biodiverse and forested regions of Papua. It appears that PT PAL cleared most of its plantation from 2011 to 2014, and between 2014 and 2016 cleared an additional 6,500 ha of primary forest. PT PAL’s High Conservation Value (HCV) assessment failed to mention that the concession is 90 percent forested, instead claiming just 11 percent forested. Local Indonesian government officials had previously temporarily revoked PT PAL’s working permits in 2014 due to negative community impacts.

Now, PT PAL is beginning to deforest the remaining 18,000 ha of primary forest in its concession. In early July, at the urging of Noble Group’s creditor HSBC, the RSPO asked Noble Group to stop all development on the plantations while it investigates possible violations of its core standards by Noble Plantation Pte Ltd.

Taken together, this sequence of events implies that the almost USD 60 million decrease in the value of Noble Group’s palm oil assets could have arisen from the RSPOs action, meaning it could be the value of deforestation risk to Noble’s plantations.

Future Status of Noble Group Oil Palm Plantations

Noble Group has been trying to sell or reduce its ownership of its oil palm plantations since a planned 2013 deal to sell a majority stake of equity in them to Wilmar fell through for regulatory reasons. At the same time, the plantations were said to be under development in Noble Group’s 2014 annual report. Noble Group’s 2016 annual report is the third in a row that classifies these same subsidiaries as “held for sale” despite not yet selling these assets over the past four years.

If Noble Group’s plantations do not achieve RSPO certification, they may further be impaired, risking investor capital. These plantations could again be devalued again with further impairments.

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Gabriel Thoumi, CFA, FRM works as Director Capital Markets at Climate Advisers where he manages global financial analytics focusing on mitigating systemic climate risk while advising on “greening” capital markets. He has 18 years of experience managing and deploying frameworks to improve global capital markets sustainability through risk mitigation and return enhancement. Previously, for Calvert Investment Management, he valued global equity, index, and fixed income portfolios and their component positions in the utilities, energy, materials, chemicals, and financial sectors. He worked on quantitative index construction and asset allocation strategies. He engaged Fortune 500 CEOs on approaches to mitigating climate risk using financial risk management tools. He led initiatives to improve financial accounting of exchange-listed products and incorporated natural capital into financial tools. He has also worked at Morgan Stanley's carbon offset company, Wells Fargo Capital Management, and American Express. He is an adjunct at John Hopkins University.
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