Mart´s 2014 Cash flow projectionI tried to figure out what level of production would be necessary in 2014 (after giving effect to anticipated increases in royalty and income tax rates) in order to preserve the annual dividend (US$ 70.000.000 per year) and capital expenditures recorded in 2012 (US$ 70.000.000). After modelling the income and cash flow statements, I found that a gross production of 24.000 bopd (based on producing days) will provide an annual cash flow (net to Mart) of US$ 141 millons, enough to afford the 2 above mencioned items.
Here are my calculations to arrive to that conclusion:
1. Production numbers
Projected gross production (based on production days): 24.000 bopd
Mart´s share of production: 67% (similar to 2012)
Production net to Mart : 16.080 bopd (before considering downtime and pipeline losses)
Downtime: 92 days per year (25% of the year) (similar to 2012 levels)
Annual production before pipeline losses (net to Mart): 4.389.840 bls
Pipeline losses: 16% (level of pipeline losses estimated by Mart for Q2 2013)
Production net to Mart (after pipeline losses): 10.103 bopd
Total annual production net to Mart: 3.687.466 bls
2. Consolidated statement of income
Revenue
Petroleum sales: 10.103 bopd
Annual sales: 3.687.466 bls
Sales price: US$ 105/b
Total gross sales: US$ 387.183.888
Royalty: US$ -92.186.640 (note 1)
Community development costs: -US$ 756.850 (note 2)
Net petroleum sales: US$ 294.240.398
Costs
Production cost: US$ -47.273.309 (US$ 12,82 per barrel, similar to 2012)
G&A cost: US$ -16.297.000 (similar to 2012)
Tax benefit contribution: 0 (see note 22 to 2012 FS)
Interest: US$ -5.000.000 (note 3)
Depreciation (of fixed equipment): US$ - 4.083.000 (similar to 2012)
Depletion (of oil properties): US$ -52.730.758 (US$ 14,3 per barrel, similar to 2012)
Income before taxes: US$ 168.856.331
Income tax expense (note 4)
Current: US$ - 84.111.948
Deferred: US$ -25.644.667 (note 5)
Net income for the year: US$ 59.099.716
Consolidated Statement of cash flows
Net income for the year: US$ 59.099.716
Depreciation: US$ 4.083.000
Depletion: US$ 52.730.758
Deferred income tax expense: US$ 25.644.667
Operating cash flow for the year: US$ 141.558.141
NOTES
Note 1: royalty
Royalty rate for 25.000 bopd production: 20% (see Mart April 12 presentation, page 6)
This rate applies on annual producton before pipeline losses (4.389. 840 bls)
4.389.840 bls X US$ 105/b X 20%: US$ 92.186.640
Note 2: Community development costs
Similar to the amount paid in 2012. See 2012 MD&A report, page 7
Note 3: interest charge
I assumed (prudently) an average net debt for the year of US$ 50.000.000, and an interest rate of 10%.
Financial debt at the end of Q2 2013: US$ 23 millons
Note 4:Income tax expense
According to Apr 12 presentation (page 5) the income tax rate, absent the Pioneer incentive status, will be 65%.
Regarding the chance of offsetting future taxable income with loss carryforward, Mart informed that “The Company has a variety of loss carryforwards that are available to offset future taxable income in Canada and Nigeria” (see note 21 to 2012 FS)
But, in spite of that, Mart hasn´t recorded any deferred tax assets in the balance sheet.
In my oppinion, this situation casts a doubt about the possibility of Mart offsetting future taxable income with accumulated tax losses, taking into account what is stated in note 3 to 2012 balance sheet:
Deferred tax assets:
are recognized to the extent it is probable that taxable profits will be available against which the unused tax losses, unused tax credits and deductible temporary differences can be utilized; and
are reviewed at the end of the reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
So, until new evidence is provided regarding the amount and viability of potential loss carryforward, I didn´t consider them in my projections
Note 5: deferred income tax expense
As some poster repeatedly stated, estimating Mart´s tax liabilities is one of the most difficults tasks when trying to model the company´s future cash flows.
I understand that Mart´s deferred income tax expense is produced basically by the difference between the accounting and tax values of fixed assets and oil properties. In the particular case of Mart, I understand that the Deferred Income Tax Liability is strongly related to the different treatment of annual capital expenditures (capex) for accounting purposes (capex considered as an increase in fixed assets) an tax purposes (capex considered as an increase in taxable loss for the year). This can be inferred from the following assertion written in MD&A report for Q3 2012 (page 17): “The Petroleum Profit Tax is based on oil receipts less royalties and community development costs, production costs, general and administration costs related to production, capital allowances and investment tax credit
For that reason, I estimate that, for each given year, the amount of the Deferred Income Tax Liability increases in direct relation to the amount of capex of that year, due to the fact that those annual capex are treated in a very different way for accounting and tax purposes, as was explained infra..
So, assuming a level of capex for 2014 similar to 2012 (US$ 70 millons) I calculated the amount of the increase in the Deferred Income Tax Liability for 2014, taking into account the increase in the liability recorded in 2012 (US$ 11.836.000), and adjusting that number to reflect the increase in the profit tax rate for 2014 (from 30% in 2012 to 65% in 2014).
So, the increase in the Deferred Income Tax Liability for 2014 (recorded as Deferred Income Tax expense in the Statement of Income) will be:
US$ 11.836.000 X 65% / 30%: US$ 25.644.667