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Much appreciated Porschefund. Top Man ! And that impresses me a lot this time round too.
NtoM- My post following publication of the 2019 AR was:
“As an accountant I take great comfort that Grant Thornton have signed off on the Expected Credit Loss (calculated in accordance with IFRS 9) of less than 1% of current debts. A very positive sign of their belief in future cash collection.”
This is an excerpt from the interim accounts:
“During the period, there has been an overall improvement in customer cash collections as management have employed stricter credit control procedures. As a result, the basis upon which the expected credit loss was calculated, was re-assessed such that the underlying provision percentages were adjusted and as a result there is no charge for six months ended 30 June 2020. A further assessment will take place during the second half of the year.”
The interim accounts will not be subject to the same audit sign off as the full year accounts but at face value the cash collection and consequent bad debt risk appears to be improving.
It's in effectively nobodies interest for the Nigerian Government to go technically bankrupt HS and my bet is it wouldn't be allowed happen, however.
PS: I hold a medium term small bet in VOG too HS ( now extremely small obviously ) VOG was an extraordinarily badly run company for such a long time as witnessed by the extent they let that debt accumulate so much in first place ...and a multitude other things besides.. drilling fiascos etc.. I believe this is/will be an extremely well run company by comparison .. and while I get you high level analogy comparison I think it's an apples and pears comparison in practice.
Generally, maybe new management can indeed save VOG, and it wouldn't surprise me f they do one way or other, but the fact I averaged down here and just wrote off my VOG bet summarizes my views on one versus the other in a nutshell.. and much chance involved in this game whatever I FULLY understand.. and everyone places bets they see fit.. etc.. ( and I do of course get that VOG only a small punt bet of yours and TXP etc are your big bets.)
N2M - Yes, agreed guarantees are very important - but not sure how effective they are. (Somewhat had this discussion some time back since Feb). SAVP did take the first step in having them called upon with their letter reported by The Cable last November. It seems to be a kind of bluff going on? If SAVE do call upon the guarantee they may get paid eventually, but they will lose the goodwill of the Nigerian government and, imo, will then have to exit Nigeria. Basically neither side wants to see the guarantee called upon - but if the Nigerian government can't pay (and if they can't pay, they will lose their credit rating anyway) then they can't pay, regardless of any guarantee.
VOG are in a similar position. Their main offtaker won't pay ($9m?). However, the government/banks are about to provide about $136m to ENEO. VOG has taken a harsher line, taking ENEO to court for the unpaid monies. We wait to see how effective this is. VOG do not have the money to continue with their work programme until paid by ENEO, could go bust. Will the government order ENEO to keep VOG afloat by paying at least $3m so VOG can continue with its work programme; all will they allow VOG to go bust and lose the whole gas infrastructure to their main industrial city? Sounds familiar?
Did they give a price target ?
HS.. Those World Bank guarantees are huge in my mind.. while I never want them to be called upon and guess they won't be; if ever called upon, not only would the World Bank then have the Nigerian government on the line for this debt anyway, also, very importantly, it could end up effecting Nigeria's credit rating.. given Nigeria's general borrowing requirements and the interest rate implications of a credit rating downgrade it seems to me, for that alone, abundantly in the Nigerian Governments interest to just continue helping out with payment of Savannah's Calabar invoices as needs be.. ( and that's not even factoring in Save.l also key energy provider to national grid status and the Nigerian Governments core strategy of facilitating the building out gas provision largely to under pin their national grid development strategy.. etc )
Hence why the invoices are being well paid so far and the CEO's forward looking confidence too.. all imho
PS; Was it PorscheFund who noted that the Auditors in the fairly recently released 2019 accounts had an extraordinary high degree of confidence in Save.l getting their invoices paid in a reasonably timely fashion going forward.... if someone else apols.. please quote that per cent confidence again as I almost fell off my chair with joy when I read it ?
Sorry, Mr B - jumped ship because of SAVE possibly not getting paid (70% of my holdings). Moved my money into TXP and JSE. (might move some profits back here - if the payment issue gets resolved as much as I think necessary).
VOG is a small recovery play; and a bet on some big positive events coming in in the next 6 months - high risk; boom or bust - but, yes, does have similarities with some aspects of SAVE.
happy- with respect, they are in a far stronger position than VOG for which you jumped ship :)
'...More importantly, Savannah now has World Bank guarantees covering its gas sales, so getting paid shouldn’t be an issue....'
Has he done any research?
Plenty of flexibility then to manage the balance sheet and consider distributions.
Outside of nonspecific ‘Nigeria’ anxiety (the population and industry still need gas and power!), investors biggest concerns have revolved around the lack of communication and debt levels. In reality, Savannah’s extended close period was not of its own doing and since FY19 results it has put out a bumper Annual Report and delivered H1 results and a trading update, all within the last two months. With the Seven Energy transaction behind it, expect this recent trend to continue.
Current debt stands at around US$511m (net debt US$427m) – remember the debt was negotiated down from over US$1bn during the Seven Energy transaction. This debt is linked to the Accugas midstream gas assets, so is non-recourse to Savannah. More importantly, Savannah now has World Bank guarantees covering its gas sales, so getting paid shouldn’t be an issue. The debt is also falling (down US$18m in H1) and Savannah can comfortably manage the interest payments. Ultimately the ambition is to refinance the debt, the majority of which is paying 10.5% over US Libor. In the meantime, Savannah gets to enjoy the benefits of a US$1bn gas business in a high growth market.
These results are not in keeping with the stock’s performance in recent months. Prior to yesterday’s 12% bounce the shares were down over 50% on the year and the worst performer amongst its Nigerian peers. As the market wakes up to the cash emanating from the Seven Energy assets, that will change.
Management are certainly backing themselves, with the Directors buying 11m shares (>1% outstanding) as soon as the company came out of its close period in August. Not to leave any stone unturned, it has also published its first sustainability report and intends developing and implementing a new ESG performance reporting framework.
Oh, and I haven’t even mentioned Niger, where they have a 100% exploration success rate and 146 additional leads and prospects. Yeah but, no but…
Savannah Energy – Back on the front foot (SAVE, 10.7p , mkt cap £94m, EV £425m)
- H1 results demonstrate Savannah’s transformation into a highly cash generative business
- 8M revenue hits US$133m and is on track for FY20 guidance of over US$200m
- Gas sales volumes and prices are rising, with US$ gas contracts underpinned by World Bank guarantees
- H1 pro-forma EBITDA more than doubled to US$67m
- Strong free cash flow generation allows debt reduction and, over time, distributions.
Savannah’s latest update should go some way to assuaging investors that have been frustrated by the lack of communication over the last several months. Yesterday’s interim results and trading update clearly demonstrate the promised transformation following the Seven Energy transaction. Savannah is now a highly cash generative business with US$133m (+28% y/y) of cash collections in the 12m to end-August from its Nigerian gas business, on track for its reiterated its FY20 revenue guidance of US$200m+.
This is not a passing fad either. Over 94% of this revenue is derived from US$-based gas sales agreements that are underpinned by World Bank guarantees and have an average contract life of 15 years. Moreover, gas sales to new customers are expected to start before year-end and additional contracts hopefully signed, so there’s growth to come too at minimal cost – there’s plenty of spare capacity in the gas infrastructure.
H1 cash collections in Nigeria jumped 48% to US$82m helped by a 22% y/y increase in gas production alongside higher average gas price realisations (+8% to US$3.9/mcf). Accugas’ market share increased too as other gas suppliers struggled to meet nominations after OPEC oil quota restrictions impacted associated gas production. This helped H1 EBITDA more than double to US$67m relative to last year’s pro-forma result.
Savannah also re-iterated its FY20 guidance for G&A and opex (US$68-72m) and capex (up to US$45m). DD&A guidance has been cut to US$35-37m from US$43-45m due to an increase in the estimated useful life of the infrastructure. This points to a business that will throw off material free cash flow, which can be used not only to lower debt, but also pay distributions in time.
This was certainly supported by the H1 results. Operating cash flow of US$59m was reduced to US$46m after working capital moves. But, there was minimal H1 capex (
It would be wrong to annualise this as capex during the period was minimal and will ramp up materially in H2 (FY20 guidance up to US$45m), while interest was artificially low due to payment timings. Still, back of the envelope calculations suggest Savannah can generate over a 10% free cash flow yield. Moreover, this should improve going forward as infrastructure utilisation rates rise and unit costs reduce.