why i am shorting linc, page-3

I wrote this elsewhere a while back, some of it's relevant to the statements "Debt levels - Linc's debt levels are unsustainably high, $547m at 30 June" and "even in an optimistic scenario I see them running out of cash in ~6 months".

I have some similar concerns, as does Al, but the debt situation is more complex than simply saying "we have $547m outstanding that we can't pay back". That ignores hedges, convertibles, exchange rates, non-recourse agreements and so on. You should also be asking why the last Linc Gulf Coast quarterly report hasn't come out yet? Those reports are a product of the Notes issue, so has something changed about the Notes? If so it could only positive if the Company is no longer required to report periodically. Clearly that's speculation, but I wouldn't be short.

Thanks for the thoughts and sorry about the LONG post.

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Something has been badgering me about the quarterly and I think it should be known by the members who are less able to read balance sheets – I don’t expect it will be well received.

Linc has made the statement that the estimated cash outflows for next quarter of $74m “excludes oil & gas revenues, clean energy revenues and other funds inflows which are expected to maintain or ‘improve’ the current cash balance at the end of next quarter”. There’s only one way this is possible, the devil is in the detail, and outlined here (from page3):

[The]“Progressed Alaskan rebate funding [of] (~$27.5m) and potential Reserves Based Lending uplift [of](~$44m) supported by improved production, [are] Expect[ed] to close during next Quarter.” This statement is very important.

The “NET” effect of the Alaskan state rebate is that the company will spend $4.9m on development, it is important however not to simply deduct $27.5m from the expected outflows of $74m – that’s already been done.

So we need to make some assumptions if the cash balance is to remain the same or improve.

We will earn:

$45m from oil and gas sales (a guess), and:
$20m from Exxaro.

That’s a total of $65m for the quarter which is $9m short of the projected spend and therefore against the Companies guidance. So where do we make up the difference? And how can the total cash balance be maintained at $79.7m if we’re short?

Importantly it should be recognised that while the cash balance is shown as a net asset, the $79.7m was contributed by the recent bond issuance and is therefore actually a liability. You will see at item 3.1 (page 3 of the appendix) that the total amount of debt available is $547,465m, you will also see that the amount “used” is the same. What’s happening here is that the notes and bonds, which are not like bank lines of credit but rather paid in full to the value of their capital amount minus fees at the time of issuance, are correctly shown as fully drawn. It is not possible to ‘not’ have drawn that money, but you should be aware that the cash on hand at the bank is actually a debt obligation. You should also note that the $547,465m is just the value of the bonds and notes after conversion into AUD (they’re paid in USD though so this is just an accounting necessity – it should also be noted that the bonds have a fixed FX rate $1.0463 AUD/USD, and can also be converted to equity nullifying the need to pay out the debt).

Anyway, there are two ways the cash balance can be maintained. One, an increase in sales – which of that magnitude is unlikely. Two, the Reserve Based Lending Facility increases in value allowing the Company to make a withdrawal to the tune of the shortfall and subsequently maintaining ‘cash’ on hand, albeit with more debt.

Although we all surely agree that Cedar Point is a good thing, you should all be aware that the increase in 1P reserves allows the company to access more debt.