Having slated Victoria Oil & Gas plc (LON:VOG) in a recent article following the publication of its final results, I was eagerly awaiting the publication of the company’s annual report, in the hope that it would answer some of the many questions I was left with after reading the final results RNS announcement.
Yesterday was the day, and I can now see why the firm might have chosen to delay the publication of the notes to its accounts for as long as possible: I believe the company’s funding situation is much more precarious than you might expect, from last year’s figures. In my view, Victoria will be lucky to make it through the next year without a funding call of some kind.
It’s worth noting just how badly this firm has underperformed over the years: back in 2011, Victoria was expecting to sell 8 mmscf/d of gas in the first year of operations, rising to 44 mmscf/d by the end of 2014. Production is currently running at a seven-day average of 3.2 mmscf/d…
Anyway, having spent some time poring over the accounts, here are just three of the reasons I believe the firm is a sell.
1. Where did the RSM $20m go?
My first question was about the $20.4m in actual cash Victoria received from its partner RSM during the year. I couldn’t find any reflection of this on the cash flow statement, and the annual report still doesn’t include a detailed reconciliation between the $20.4m lump sum and the cash flow statement.
However, there is an explanation, which makes it clear — if nothing else — that without the RSM payment Victoria would have reported an operating cash outflow of $6.8m last year (my emphasis):
RSM paid the group $20.4 million during the year … Primarily as a result of this payment and the cash inflows from gas and condensate sales during the financial year, net cash generated from operating activities was $13.6 million, compared to a deficit of $13.4 million in the prior year.
I believe this makes it clear that Victoria would have needed another fundraising last year had it not lost the case to RSM, and thus been entitled to a payment.
2. Cash balance down 50% in five months
My feeling from reading the auditor’s notes on Victoria’s accounts were that it was a borderline decision as to whether they could be signed off on a going concern basis. The auditors included an Emphasis of Matter section in their report, drawing attention to notes relating to Victoria’s going concern status, the recoverability of some of its receivables and the valuation of various assets.
Note 3, Going Concern, highlights how fast Victoria continues to consume cash: cash at year end (31 May 2014) was $17.1m, but this had fallen by 50% to $8.5m by 21 October.
The notes make it clear that in order to fund its current exploration and development programme, the group needs rising gas sales and further cash from RSM. If these don’t materialise, the firm believes that only by suspending all exploration and development could “the Group generate enough revenue to fund its base operations for the 12 month period from the date of approval of these financial statements”.
3. Receivables and payables
I freely admit that my original guesstimates of debtor and creditor days was wrong — hardly surprising given the lack of information in the original results RNS. However, I now aim to correct this and explain Victoria’s working capital position in more detail.
Victoria’s receivables are divided into trade receivables, which cover gas and condensate sales, and other receivables, which is everything else. Trade receivables were $3.8m at the end of May, of which 23%, or $873,000, was overdue on the firm’s standard terms of 30 days.
Of this, around $380,000 was overdue by more than 120 days, begging the question as to whether payment is ever really likely. However, Victoria hates to impair debt, and says it prefers to leave the receivables unimpaired as long as the customer’s credit status has not changed. For context, just $11,000 of trade receivables were written off last year.
The situation is no better with other receivables: these include an $8.6m RSM receivable (subject to adjustment before payment is expected, therefore largely a guess) and $988,000 of customer debt. This latter was largely incurred when Victoria footed the bill for setting up some of its customers with the equipment necessary to burn gas, in order to hasten their commissioning process.
This wheeze is known as vendor financing and is something I’ve come across in a former life as an engineer for a large telecoms equipment supplier during the millenium TMT boom. That didn’t turn out well, and I don’t think this will either: 52% of other receivables (excluding RSM) are currently overdue, with 24%, or $237,000, overdue by more than 120 days.
Still, even if its customers never pay, Victoria has a solution to avoid impairments: last year Victoria decided that $866,000 of other receivables were “uncollectable”, but rather than writing them off, these unpaid bills were accounted for as “part of cost of pipeline”. Presumably no action has been taken against the defaulting customers.
Overall, my view is that Victoria is massaging its receivables to present a rosy picture when the reality is, at best, more nuanced than this — and at worst, is a bunch of bad debts waiting to be written off.
This article is getting long, but I cannot close without a brief look at the group’s unappealing payables and debt situation.
Trade and other payables were $12.4m at the end of May, but of this, $2.4m is overdue to drilling companies and is accruing interest at 5% per annum. The firm says it expects to repay these amounts from cash flow over the next 12 months. You might ask why the firm’s cash balance can’t be used to clear these debts — the answer, I suspect, is that Victoria would then be unable to file accounts on a going concern basis.
The average number of days Victoria took to pay suppliers fell to 116 days last year, down from an even more dire 137 days in 2013. Victoria says that its standard payments terms for suppliers are 30 days from invoice, but clearly has serious trouble meeting these terms. This might, of course, be one reason for the change of drilling contractor last year…
There’s also $10m of debt due within twelve months, although I suspect much of it will be rolled over somehow.
In my view, the quality of some of Victoria’s receivables is questionable, and impairments (and thus reported losses) should probably have been greater than they were last year. This is putting massive pressure on the firm’s cash flow and limiting its ability to pay suppliers on time.
I rate Victoria as a sell, but if you’re not convinced, I will return shortly with part 2 of this article, in which I will take a closer look at some of the enviable ways Victoria’s board has found to extract cash from the company, above and beyond their generous salaries.
Watch this space.
Disclosure: This article is provided for information only and is not intended as investment advice. The author has no financial interest in Victoria Oil & Gas. Do your own research or seek qualified professional advice before making any trading decisions.