QA with Noble Group

Our core strategy is to be the best company in the world at moving the physical commodity from the producer to the consumer and managing the market, credit and operational risk associated with this.

To focus more clearly on our core competency – moving the physical commodity – we have reverted to a higher-return, lower-risk “asset-light” business model. In order to achieve that we have reduced our ownership of industrial assets such as sugar mills, crush plants and coal mines. This has reduced fixed assets from USD 2.9 billion at the end of 2013 (15% of total assets) to less than USD 900 million today (4% of total assets).

In focusing on an asset-light model, we recognize that our expertise lies in managing supply chains and the associated risk, while other companies have expertise in mining or oil and gas exploration.

We aim to partner, and complement, industry leaders in these allied production and consumption industries, allowing them to focus on their area of excellence while we manage the delivery of their products to our customers. Investing in partners limits our financial exposure, allows us to focus on our core competency of providing supply chain services, and secures us access to the key products we trade.

Our business is now separated into four segments – Energy (Oil Liquids and Energy Coal), Gas and Power (North America Energy Solutions and Gas & Power), Metals and Mining (Metals and Carbon Steel Materials) and Corporate (Logistics, Origination and Associates).

Under our Associates division we retain a 49% stake in Noble Agri, our agricultural partnership with COFCO, after selling 51% in 2014 resulting in a cash inflow of USD 3.3 billion. This followed the receipt of some USD 800 million in 2012 from the merger of our coal assets into Yancoal.

In addition, in the last two years we have partnered with new businesses such as X2 Resources and EIG in Harbour Energy. Both are cash rich start-ups, with industry leading management with proven track records backed by leading global investors. They have over USD 10 billion available to invest in producing assets, at what may well prove to be the
bottom of the cycle.

Noble has associate level interests in these businesses and is the preferred marketing partner for both. We will purchase their output, managing the supply chains, and delivering the products to customers.

This asset-light strategy has allowed us to diversify our business model and products. Five years ago, Noble’s business could be broadly categorised as a big-bulk commodities business. But, from negligible levels at the start of the decade, in the last twelve months our Oil Liquids, Gas and Power businesses have contributed 60 per cent of operating income from supply chains.

Noble has also diversified geographically, with North America growing from 12% of our volumes to 32%, and reliance on China reduced from 42% to 30% of our volumes, in just three years. In particular the operating income contribution from North America Energy Solutions, our U.S. power retailing business which was purchased in 2010, has grown to 18% in 1H2015.

In addition, we have adopted EBIT level segmental profit and loss disclosure and split our businesses (Energy, Gas and Power, Metals and Mining, Corporate) into four segments, instead of the previous two. During our 2Q2015 results, we released more information on Yancoal’s valuation, and provided background on the Gloucester Coal merger. These associates and investments are key to our asset-light strategy and increased understanding of them will help investors see the strategic role they play in growing Noble’s businesses.

We have also disclosed movement in Net Fair Value gains and losses, especially for Level 3 balances that make up only 7% of Noble’s total assets. This is because Level 3 represents valuation techniques where one or more inputs that affect the fair value measurement are unobservable.

To further assure investors of the robustness of our fair value measurement, we commissioned PricewaterhouseCoopers to evaluate how the Group values certain long-term physical commodity contracts as at 30 June 2015. The contracts reviewed represented 81% of the value of derivative contracts with a duration of at least two years and 98% of the value of the Level 3 net assets. This was performed in accordance with the Singapore Standard on Assurance Engagement 3000. We released the full version of the PwC review, not a redacted version, nor an abridged summary.

We also recently held an Investor Day that was probably unprecedented for a listed company because it had no restrictions on attendance (400 shareholders and members of the public in the audience, with over 1,000 online via a live webcast) and included a two hour question-and-answer session where every question asked was answered in full by management. Following that we posted a 136-page Investor Day presentation deck on our website, as well as the transcript of the question-and-answer session and a video clip of the presentation. The Investor Day was offered as a supplement to our usual quarterly earnings calls, which, since 2007, have allowed unrestricted toll-free access to any participant, with full transcripts posted on our website.  

PwC’s review examined the governance, organisation and policies that govern the Mark-to-Market (MTM) valuation models, while also examining the contracts themselves. For each counterparty contract reviewed, PwC also obtained the detailed valuation model and checked the application of the Relevant Criteria¹ to the construction of the model. This included an examination of all the inputs (such as volume, price, discount rates and reserves), as well as the construction of the model itself. PwC supplemented this with detailed discussions with the various teams that play a role in this process.

Overall, PwC concluded that Noble has adopted an approach to valuations that is consistent with the Relevant Criteria, in all material respects. Indeed, in some aspects of the model construction (such as the development of discount rates and development of counterparty credit risk curves), Noble has an approach which is more sophisticated than that of many non-financial companies. PwC also noted a strong segregation of duties between the different teams that provide key inputs into the models.

Over the past few years, Noble has deliberately repositioned the company. Our asset-light strategy has generated diversity, volume growth and core income running at US$600 million. Due to reduced capital expenditures and long-term assets, we are also lowering our funding costs by reducing long-term funding.

This enables our balance sheet to be further strengthened. We will continue to have a healthy balance sheet and the necessary liquidity to fund our business under all circumstances, especially in the toughest of times. Our debt to capitalisation has reverted to historically normal operational gearing levels, and we had an infusion of $3.3 billion of cash from the sale of 51% of our stake in Noble Agri. Our net debt after adjusting for readily marketable inventories stands at US$2 billion, as at 30 June 2015.