To understand Mart's Q2 Earnings focus not on 18% pipeline losses but the $USD 10.3M loss from the "Underlift".
You need to skip next to bottom of post and fully understand the underlift issue by reading the MD&A extract in italics. When you understand it, skip back up here and continue.
Ignoring 18% losses which are easy to quantify, here is what Q2 would of looked like if Mart hedged their big Q1 delivery that was not paid for (i.e. "Underlift") until Q2.
Q2 CFOps as reported:
Net Income: $ 2.3M [A]
Other Adjust's: $10.9M
Change in WC: $13.7M
CF Ops: $26.9M
CF Ops before WC Changes: $13.2M [A + B]
Everyone who was new to Mart at $1.60-$1.70 and didn’t understand cost recovery or underlift/overlift is looking at Q1 $13.2M in CFOps before WC Changes and freaking out because they think that ~$17M quarterly dividend is unsustainable but that is an incorrect analysis.
Q2 CFOps if underlift hedged (no $USD 10.3M loss - say $CAD 10.5)
Net Income: $ 2.3M + $10.5M = $12.8M [A]
Other Adjust's: $10.9M
Change in WC: $13.7M
CF Ops: $37.4M
CF Ops before WC Changes $23.7M
You will see that Change in WC did not change between two scenarios. This is why:
Only focusing on 373k underlift barrels Mart would of booked this non-cash accounting entry for Q1 (assume $CAD 10.5M as above) to recognize revenue and A/R @ Bonny $126/bbl
Dr A/R $10.5M
Cr Revenue $10.5M
Assuming the sale was hedged and Mart got cash from AGIP in April at the same bonny price as they booked A/R ($126/bbl(, they would of booked this:
Dr Cash $10.5M
Cr A/R $10.5M
In reality they booked this to write off the difference between bonny $126/bbl and $96/bbl a difference of $30 x 338,000 bbls = ~$USD 10.3M or $CAD 10.5M
Dr Revenue $10.5M
Cr A/R $10.5M
The only difference between the two entries is the reduction (Dr or Debit) to Revenue – hence my exhibit above.
In light of the underlift the normalized way to look at Mart’s net income is:
Q1: $38M - $10.5M = $27.5M
Q2: $2.3M +$10.5M = $12.8M
If Mgmt hedged the underlift (which in hindsight at record high bonny prices would have been prudent) then net income would have been:
Q1: $38M
Q2: 12.8M
The key factor is that Mart effectively took an adjustment in Q1 revenue in Q2 which made Q2 look horrible. $CAD 12.8M in Net Income is the more appropriate way to look at earnings. Yes, this $12.8M is net of 18% pipeline losses but it's not bad. What other $440M MC companies in your portfolio earned $12.8M in Q2?
Note that Mart reports in $CAD so all numbers above are $CAD unless I specify $USD
From MD&A:
At the end of the first quarter, Mart was in an under lift position of 373,552 bbls, the receivable of which had been recorded at the oil price in effect at March 31,2012. Under lift oil is oil that had been produced and delivered in the first quarter of 2012 but had not yet been nominated and paid for. The realized sales price per bbl for the under lift oil was lower than the amount recorded at March 31, 2012 due to lower oil prices in the second quarter. The price of oil on March 31, 2012 was USD $124.48 per bbl, but the price at which the under lift oil was realized was at the price of the June, 2012 liftings, which averaged USD $96.94 per bbl. This issue, related to the timing of payment for the Q112 under lift and the significant decrease in price between March 31, 2012 and the liftings in June, 2012, had the effect of reducing Mart's stated income in Q212 by approximately USD $10.3 million