Ann: Linc Energy CEO, Peter Bond, Buys More Linc , page-57

re: Ann: Linc Energy CEO, Peter Bond, Buys Mo... Theblackpearl,

You expressed an interest in my email discussion with a mate regarding the LNC tax position and what it might mean for the timing of the Teresa sale. Like you, the tax was bugging me because I could not get my head around it. I am no accountant -that is for sure.

This was my interpretation that I put to him and he agrees.

From the half yearly report:
1 Tax expense is $142,166,000 (ie accountants recognition of tax for current year profit)
2 A deferred tax asset of 48,425,000 (ie prior year tax losses) can be deduct from the tax expense leaving a total tax liability of $93,741,000.

3. LNC made a tax installment payment of $7,234,000 (as per cash flow statement and also recorded in Sept quarterly report).
4. A current liability (provision for tax) of $40,202,000 is recorded in the balance sheet.
5. A non current liability (deferred tax liability) of $46,308,000 is also recorded in the balance sheet.

Add 3 + 4 + 5 and you get $93,744,000 which broadly equates to the total tax liability in 2 above (ie $93,741,000).

The Linc quarterly report for Dec says they have a tax installment due in March of about $20m according to my estimate. By chance (??), this is roughly 3 months at $7,234,000 per month as per item 3).

Another $20m tax installment payment in the June quarter would account for all of the tax provision in item 4 by the end of the financial year.

So cash flow is affected by items 3 and 4 in FY2011.

Item 5 (the non-current deferred tax liability) will be deferred into FY2012 due to temporary differences (ie generous tax installment payment timeframes versus stricter accounting standards/recognition of tax liabilities which must be expensed against accounting profit in the current year). These differences are temporary and will unwind or new differences will be incorporated in 2012.

Cash flow will be affected by item 5 in FY2012.

The profit and loss will record items 1 and 2 (ie assume all the tax is paid in FY2011, even though it is not).

Hope the above is clearer than mud.

In my opinion, the Implications for the Teresa asset sale are threefold.
- There will be no prior year tax losses that can be used to reduce tax as per 2 above.
- a royalty/cash deal is highly likely if LNC wants to reduce its tax exposure (which could be $170m odd on a straight cash deal).
- LNC can announce a sale in FY2011, but a close in the new year is highly likely given the tax deferment benefits.

An earlier post by NeilN expressing a concern that LNC maybe spreading itself too thin is valid in my opinion. I am not overly worried yet, but there is worry potential that will ultimately depend on the cash flow. That is why the above tax issues are important, as are other potential cash flow factors like the recent acquisition and its development potential in the near term. Bond is guiding a rapid expansion in search of a stable cash flow. LNC staff have acknowledged this in presentations, so its nothing new. A period of consolidation will be required in 2013 at a rough guess if this is not to end in tears. It will be interesting to see if Bond can demonstrate this more boring, but necessary aspect of being a CEO. I suspect, for some strange reason, that it is not in his nature to slow down lol.

Cheers
Bleasby