Oversold, 8.78% Dividend Payer Vanguard Natural Resources Is Thinking Long Term - You Should Too [View article]
I will add to this that management also needs this info without the noise of the unrealized appreciation of assets held for long term use. You want to set prices for your products (rent) based on your actual operating costs, without including what the long term assets can be sold for some 50 or 75 years down the road when they may be sold at the end of their useful income generating lives. The depreciation of these long term assets should be established, not based on tax depreciation guidelines, but on how long you estimate the assets will actually be used in your business (with maintenance costs to keep them in good condition).
A good accountant that knows what he is doing can make his boss money by helping to set prices based on accurate operating costs, establish gross and operating margins which are competitive, and aid the business in avoiding the pitfalls of rising operating costs in the wake of inflation and other causes. We aren't just bean counters. :)
Oversold, 8.78% Dividend Payer Vanguard Natural Resources Is Thinking Long Term - You Should Too [View article]
Surfgeezer,
I agree with you on depreciation on real estate, tax depreciation anyway. But, tax accounting is not what I am speaking of. I am talking about financial accounting, which was created to fairly measure the financial position and operating results of a company through its financial transactions. Depreciation for taxes and for financial accounting are two entirely different subjects with different periods for depreciating an asset.
One system, tax accounting, is created for the early write-off of an asset to encourage a business to invest and stimulate the economy. So, naturally such depreciation is going to write-off the asset sooner than when the asset is actually retired from service.
The other system, financial accounting, is created to fairly measure the actual life of the asset so that its depreciation is measured over or close to the actual life of the asset. Any material failure of this system to do this, in my opinion, is a failure of company management to accurately gauge an asset's useful life. I see this is an argument made with MLPs. That the financial accounting depreciation distorts net income/loss. Then why doesn't management change the period of depreciation for heaven's sake? I am not aware of any FASB pronouncement locking them into a set number or range of years. If I am wrong on this, someone please speak up.
The two systems are created for entirely different purposes.
The other problem with GAAP is that it requires some assets to be recorded at historical cost and remain there, while with other assets it requires that fair value be recorded with each reporting period. Apples and oranges.
So, for real estate, historical cost is the standard, even though it generally appreciates in value over time, land especially, but also buildings, provided capital improvements are made to maintain them in reasonably good condition. So, yes you are right when it comes to REITs, the failure to account for the appreciation in value, not the depreciation, seems to be a problem. But, allocating the cost of an acquired asset over its useful life, I find no problem with.
However, in order to obtain or actually realize the increased value of land and buildings, you have to sell it. So, we are speaking of unrealized gains/losses again, like those for derivatives. A company in the REIT business is in that business for rents. If they sell what is generating them income, then they go out of business. So, should the increased value of the real estate be included in income/loss from operations or in net income at all, as long as it remains your asset, and the asset is not considered inventory? I would argue that it should not be. The sales of the very assets from which you derive your profits from is a liquidation of the business. To include these periodic unrealized gains (assumed the value increases) in net income, in my opinion, would distort what a company is actually making from its actual operations. I might be in favor of adding the increase in value to the asset and to equity on the balance sheet, but less inclined to include it to the income statement, until the asset is actually sold.
Financial statement users need to know how much income/loss a business is making/losing from its core operations, without the "noise" of unrealized gains/losses from the assets it uses to generate those profits, IMO.
Oversold, 8.78% Dividend Payer Vanguard Natural Resources Is Thinking Long Term - You Should Too [View article]
I don't know about the operating returns. Net income is net income. That includes everything, not just income from operations. If they are trying to report income from operations, they should state it that way. Looks to me like they are simply trying to make the numbers look better than they are. There is too much liberty taken in massaging of the numbers these days. Thanks for explaining what the amortization of value of derivatives acquired was.
Oversold, 8.78% Dividend Payer Vanguard Natural Resources Is Thinking Long Term - You Should Too [View article]
J,
"The intention of the company is to let these puts expire worthless, thus that $10M is a "loss" on paper, but it's not really a loss since the $10M is actually the price of doing business."
The $10M is not just a "loss" on paper. The $40M is a real cash outflow and "loss" of cash. The fact that it is allocated or spread over a year makes no difference. It's an expense, plain and simple and should remain as such on the income statement for the period. VNR has no justification for adjusting for this. Their "real" net income is $14.2 million less than what they reported as "adjusted net income".
Cash basis accounting, btw, is not reliable for determining your actual net income/loss for a period. There are a multitude of reasons why. And that is NOT what VNR is trying to do in making these adjustments. Cash basis accounting would have to adjust for receivables and payables for the period also. They don't adjust for that to arrive at the "adjusted net income" number. I think they are simply trying to make the number look better than it really is.
It appears to me that net income actually declined in 3rd Qtr, 2012, versus 3rd Qtr. 2011.
Oversold, 8.78% Dividend Payer Vanguard Natural Resources Is Thinking Long Term - You Should Too [View article]
So, in your example, VNR would pay $40M to place a hedge, then amortize it over its life. So, they are paying $40M in cash for the hedge. Therefore, it is a real expense or cost of doing business and should not be taken out of the calculation of net income, IMO. It is a real expense is it not? It comes out of cash? Whether it is expensed (reduces revenues) initially or over time, it should be included in the calculation of net income. I don't agree with VNR's decision to "adjust" for this, assuming I am understanding correctly. Just like depreciation, it is a real expense, not just a bookkeeping formality. $40M in cash was paid for the hedge. That has to reduce your bottom line by the same amount, be it immediately, or over time.
To say it's not a real expense or loss, allocated over the life of the hedge, totally escapes my comprehension. Yes, it is a real cash outlay or cost and, therefore, should reduce your revenues over the same time period through allocation.
Oversold, 8.78% Dividend Payer Vanguard Natural Resources Is Thinking Long Term - You Should Too [View article]
MTMatt,
GAAP (generally accepted accounting principles) currently require some hedges changes in fair value to be included in the calculation of net income, while at the same time requiring the hedged item's value to remain at historical cost.
For example: VNR owns oil reserves. Those reserves were purchased for $X amount, let's say they were purchased for $10,000. VNR wants stable cash flows from the reserves, but knows that prices could decline in the future. So, it hedges the reserves (the hedged item) by shorting oil futures (the hedge). IF the hedge's value declines, due to increasing oil prices, that change in fair value, a decline in the unrealized value of the hedge, is reported as an unrealized loss on the income statement and reduces net income or increases net loss, even though the hedge has not been settled yet and no transaction has occurred yet which results in an actual or realized loss on the hedge. Since oil prices have increased, the fair value of the reserves has also increased, but under GAAP, that increase in fair value of the reserves is not reflected on the income statement. The reserves' value remains as historical cost.
What occurs here is a mismatch. The decrease in fair value of the hedge is included in the calculation of net income/loss, but the increase in fair value of the hedged item, the reserves, is not included in the calculation of net income/loss.
This occurs for any hedge which is not declared as a hedge and does not meet hedge accounting requirements. This applies to most, if not all, of VNR's hedges. So, the GAAP rule creates very material distortions in net income/loss. So material that the GAAP number, IMO, is pretty much worthless without making an adjustment for unrealized commodity and interest rate derivatives gains/losses.
In addition, any impairment write downs of reserves is probably only temporary, based on the decreased price of the commodity, so, I would generally adjust for those as well.
Oversold, 8.78% Dividend Payer Vanguard Natural Resources Is Thinking Long Term - You Should Too [View article]
What is the argument against depreciation? Produces distortions in net income/loss due to assets lasting much longer than period over which it is depreciated? If so, I'm not aware of any financial accounting standards requiring a specific period for specific assets. Is there one? Tax accounting doesn't count. If not, I view this as a management error, not a GAAP problem. Maybe someone can enlighten me on this. I'm simply trying to learn why GAAP depreciation isn't relevant. Depreciation is a real cost, irregardless over what time frame it is allocated. To get an accurate measure of real profit, you have to deduct all costs which helped to generate that profit, and depreciation is one of them.
At the same time, it appears that for MLPs the balance sheet is considered more important or just as important as the income statement. Assets acquired can be sold, if need be, for more than their cost, hence lenders don't mind lending more money for MLPs to make more acquisitions and grow distributions? As long as growth continues everyone is happy with distributions growing, whether much net income is actually made or not? Am I getting the jist of why MLPs are popular? The debt can be managed since the assets are worth more than what was borrowed to acquire them. So don't worry about net income. As long as you are breaking even or making a little, and can keep growing through debt and equity and keep distributions growing then everyone is happy? Am I getting it?
Oversold, 8.78% Dividend Payer Vanguard Natural Resources Is Thinking Long Term - You Should Too [View article]
Yes, but what "Amortization of value on derivative contacts acquired" is, is a mystery to me at the moment. It was netted against gains, it appears, and the difference was reported as a realized gain. IF it's a real cost and transaction, which unrealized losses are not, I don't follow why it would be taken out of the calc of net income/loss. I don't understand what it is at this point in time, so I can't make my own determination of whether it should or should not be used in the calc of net income/loss. Will have to go with what they report.
Some don't regard depreciation as a real cost or expense, but it is in figuring net income/loss. You can't get a reliable net income/loss figure without including all your costs and depreciation is simply the allocation of the cash cost of an asset over time, a real cost which a company pays for out of cash.
I don't trust companies to present everything as it actually is, especially when net income/loss is disregarded for other measures which are not uniform from company to company and not part of SEC/GAAP rules. I prefer to understand it myself, if I can, rather than relying on what a company tells me.
Oversold, 8.78% Dividend Payer Vanguard Natural Resources Is Thinking Long Term - You Should Too [View article]
Thanks for the link. It looks like the main number I haven't included in adjustments for 3rd Qtr, 2012 is "Amortization of value on derivative contracts acquired" of $14.212 million. I wonder what this is?
Looking at page 30 of the 10-Q for 3rd Qtr., under "Hedging and Price Risk Management Activities" it says, "During the three months ended September 30, 2012, we recognized a $0.3 million realized gain on commodity derivative contracts, of which, $18.0 million related to cash received in settlements which was offset by $3.5 million in amortization of premiums paid during the period and $14.2 million in amortization of the value on derivative contracts acquired"
I don't understand what that $14.2 million is, but they added it back to net income. So that's where I am off. I assume they know what they are doing, so thanks. I didn't see the 3rd Qtr. Operating announcement and how they arrived at adjusted net income. So, it all fits now.
Oversold, 8.78% Dividend Payer Vanguard Natural Resources Is Thinking Long Term - You Should Too [View article]
Thanks for this article, David. I hope the NG investments pay off long term. I own VNR and like the monthly distribution. I agree that GAAP net income/loss is very materially distorted when a hedge is adjusted for current fair value and that change is included in the calc of net income, but the hedged item, NG, in this case, is not but remains at historical cost. Obviously, if the hedge went down in value due to an increase in NG prices, then the hedged item went up in value. I hope the accounting profession addresses this soon. It simply makes the numbers unreliable on a GAAP basis.
You say there was $86.7 million in non-cash adjustments for 3rd Qtr., 2012. What I see from the 10-Q is a total of $71.824 million in adjustments which, in my view, should be added to the net loss of $68.727 million, which results in a $3.097 million net income for the quarter.
1. $51.332 million in unrealized losses on commodity derivatives 2. $ 2.463 million in unrealized losses on interest rate swaps 3. $18.029 million impairment write down on oil/ng properties
That's all I see that should be adjusted to arrive at a better net income/loss number. What is the other $14.8 million in adjustments? I don't see it.
Also, for 3rd Qtr. 2011, net income per GAAP was $125.945 million before figuring the amount attributable to VNR. Subtracting the unrealized gains on commodity derivatives of $109.639 million and adding the unrealized losses on interest rate swaps of $1.939 million results in $18.245 million net income for that quarter. I figure VNR's share of that to be (75,884/125,945 * 18,245) $10.993 million. So, it looks to me like the net income declined quarter over quarter.
Maybe you can enlighten me on what is in the 10-Q that I am missing.
Microsoft's Surface Pro: Yay Or Nay? [View article]
And I understand what you are saying. There is a place for a tablet, I agree. But, I don't see the tablet replacing the laptop, is all I'm saying. Some are arguing it will. It doesn't make practical sense.
Annaly: Adding This Stock To The Team Alpha Portfolio [View article]
"I have run across a number of investors holding this stock. Not one of them was aware of the leverage factor. Not one of them was aware that they were buying fixed rate bonds at 3% yields."
They didn't read the 10-Qs and 10-Ks then. It's all in there. That wasn't hidden from anyone.
"We have had 30 years where they have moved in almost one direction.
Simply not credible. The prime rate has been as high as 9.5% (May 17, 2000), having come from 8.25% when Annaly opened for business in 1997. It then declined to 4% by June 27, 2003. Then it rose back up to 8.25% by June 29, 2006. That is 9 years of rates fluctuating up an down. From there, it has declined to the present 3.25%. Soon to be 7 years of declining rates, not 30. The historically high interest rates from 1979 to 1981 were abberations, not the norm. Prior to that rates fluctuated in a range, generally not over 10%.
Google Now: Trading Your Privacy For The Future [View article]
Maybe beyond your death. A search I did tonight on myself and my parents reveals that "mylife.com" and "people search usa" shows both my parents still living, when my Dad passed away in 1996 and my Mother in 1997. Mylife shows my uncle (deceased in 1981) and my aunt (deceased in 2009) as still living. It shows my uncle now living in San Antonio, when he never lived there (it's his son who lives there). It shows my brother related to his son's now divorced wife.
When you harvest this type of information from public records, there is a plethora of inaccurate information. Sometimes you even become associated with relatives who are not your relatives and aliases you have never used. It is pathetic. A computer matching with social security death records would eliminate some of his garbage.
It's kinda bad when you get credit card applications addressed to your Dad, which i did about 3 years ago, after they have been deceased for over a decade.
Analyzing Companies Is A Complex Affair: Don't Use EBITDA [View article]
Oversold, 8.78% Dividend Payer Vanguard Natural Resources Is Thinking Long Term - You Should Too [View article]
A good accountant that knows what he is doing can make his boss money by helping to set prices based on accurate operating costs, establish gross and operating margins which are competitive, and aid the business in avoiding the pitfalls of rising operating costs in the wake of inflation and other causes. We aren't just bean counters. :)
Oversold, 8.78% Dividend Payer Vanguard Natural Resources Is Thinking Long Term - You Should Too [View article]
I agree with you on depreciation on real estate, tax depreciation anyway. But, tax accounting is not what I am speaking of. I am talking about financial accounting, which was created to fairly measure the financial position and operating results of a company through its financial transactions. Depreciation for taxes and for financial accounting are two entirely different subjects with different periods for depreciating an asset.
One system, tax accounting, is created for the early write-off of an asset to encourage a business to invest and stimulate the economy. So, naturally such depreciation is going to write-off the asset sooner than when the asset is actually retired from service.
The other system, financial accounting, is created to fairly measure the actual life of the asset so that its depreciation is measured over or close to the actual life of the asset. Any material failure of this system to do this, in my opinion, is a failure of company management to accurately gauge an asset's useful life. I see this is an argument made with MLPs. That the financial accounting depreciation distorts net income/loss. Then why doesn't management change the period of depreciation for heaven's sake? I am not aware of any FASB pronouncement locking them into a set number or range of years. If I am wrong on this, someone please speak up.
The two systems are created for entirely different purposes.
The other problem with GAAP is that it requires some assets to be recorded at historical cost and remain there, while with other assets it requires that fair value be recorded with each reporting period. Apples and oranges.
So, for real estate, historical cost is the standard, even though it generally appreciates in value over time, land especially, but also buildings, provided capital improvements are made to maintain them in reasonably good condition. So, yes you are right when it comes to REITs, the failure to account for the appreciation in value, not the depreciation, seems to be a problem. But, allocating the cost of an acquired asset over its useful life, I find no problem with.
However, in order to obtain or actually realize the increased value of land and buildings, you have to sell it. So, we are speaking of unrealized gains/losses again, like those for derivatives. A company in the REIT business is in that business for rents. If they sell what is generating them income, then they go out of business. So, should the increased value of the real estate be included in income/loss from operations or in net income at all, as long as it remains your asset, and the asset is not considered inventory? I would argue that it should not be. The sales of the very assets from which you derive your profits from is a liquidation of the business. To include these periodic unrealized gains (assumed the value increases) in net income, in my opinion, would distort what a company is actually making from its actual operations. I might be in favor of adding the increase in value to the asset and to equity on the balance sheet, but less inclined to include it to the income statement, until the asset is actually sold.
Financial statement users need to know how much income/loss a business is making/losing from its core operations, without the "noise" of unrealized gains/losses from the assets it uses to generate those profits, IMO.
Oversold, 8.78% Dividend Payer Vanguard Natural Resources Is Thinking Long Term - You Should Too [View article]
Oversold, 8.78% Dividend Payer Vanguard Natural Resources Is Thinking Long Term - You Should Too [View article]
"The intention of the company is to let these puts expire worthless, thus that $10M is a "loss" on paper, but it's not really a loss since the $10M is actually the price of doing business."
The $10M is not just a "loss" on paper. The $40M is a real cash outflow and "loss" of cash. The fact that it is allocated or spread over a year makes no difference. It's an expense, plain and simple and should remain as such on the income statement for the period. VNR has no justification for adjusting for this. Their "real" net income is $14.2 million less than what they reported as "adjusted net income".
Cash basis accounting, btw, is not reliable for determining your actual net income/loss for a period. There are a multitude of reasons why. And that is NOT what VNR is trying to do in making these adjustments. Cash basis accounting would have to adjust for receivables and payables for the period also. They don't adjust for that to arrive at the "adjusted net income" number. I think they are simply trying to make the number look better than it really is.
It appears to me that net income actually declined in 3rd Qtr, 2012, versus 3rd Qtr. 2011.
Oversold, 8.78% Dividend Payer Vanguard Natural Resources Is Thinking Long Term - You Should Too [View article]
To say it's not a real expense or loss, allocated over the life of the hedge, totally escapes my comprehension. Yes, it is a real cash outlay or cost and, therefore, should reduce your revenues over the same time period through allocation.
Thank you for the post.
Oversold, 8.78% Dividend Payer Vanguard Natural Resources Is Thinking Long Term - You Should Too [View article]
GAAP (generally accepted accounting principles) currently require some hedges changes in fair value to be included in the calculation of net income, while at the same time requiring the hedged item's value to remain at historical cost.
For example: VNR owns oil reserves. Those reserves were purchased for $X amount, let's say they were purchased for $10,000. VNR wants stable cash flows from the reserves, but knows that prices could decline in the future. So, it hedges the reserves (the hedged item) by shorting oil futures (the hedge). IF the hedge's value declines, due to increasing oil prices, that change in fair value, a decline in the unrealized value of the hedge, is reported as an unrealized loss on the income statement and reduces net income or increases net loss, even though the hedge has not been settled yet and no transaction has occurred yet which results in an actual or realized loss on the hedge. Since oil prices have increased, the fair value of the reserves has also increased, but under GAAP, that increase in fair value of the reserves is not reflected on the income statement. The reserves' value remains as historical cost.
What occurs here is a mismatch. The decrease in fair value of the hedge is included in the calculation of net income/loss, but the increase in fair value of the hedged item, the reserves, is not included in the calculation of net income/loss.
This occurs for any hedge which is not declared as a hedge and does not meet hedge accounting requirements. This applies to most, if not all, of VNR's hedges. So, the GAAP rule creates very material distortions in net income/loss. So material that the GAAP number, IMO, is pretty much worthless without making an adjustment for unrealized commodity and interest rate derivatives gains/losses.
In addition, any impairment write downs of reserves is probably only temporary, based on the decreased price of the commodity, so, I would generally adjust for those as well.
Oversold, 8.78% Dividend Payer Vanguard Natural Resources Is Thinking Long Term - You Should Too [View article]
At the same time, it appears that for MLPs the balance sheet is considered more important or just as important as the income statement. Assets acquired can be sold, if need be, for more than their cost, hence lenders don't mind lending more money for MLPs to make more acquisitions and grow distributions? As long as growth continues everyone is happy with distributions growing, whether much net income is actually made or not? Am I getting the jist of why MLPs are popular? The debt can be managed since the assets are worth more than what was borrowed to acquire them. So don't worry about net income. As long as you are breaking even or making a little, and can keep growing through debt and equity and keep distributions growing then everyone is happy? Am I getting it?
Oversold, 8.78% Dividend Payer Vanguard Natural Resources Is Thinking Long Term - You Should Too [View article]
Oversold, 8.78% Dividend Payer Vanguard Natural Resources Is Thinking Long Term - You Should Too [View article]
Some don't regard depreciation as a real cost or expense, but it is in figuring net income/loss. You can't get a reliable net income/loss figure without including all your costs and depreciation is simply the allocation of the cash cost of an asset over time, a real cost which a company pays for out of cash.
I don't trust companies to present everything as it actually is, especially when net income/loss is disregarded for other measures which are not uniform from company to company and not part of SEC/GAAP rules. I prefer to understand it myself, if I can, rather than relying on what a company tells me.
Oversold, 8.78% Dividend Payer Vanguard Natural Resources Is Thinking Long Term - You Should Too [View article]
Looking at page 30 of the 10-Q for 3rd Qtr., under "Hedging and Price Risk Management Activities" it says, "During the three months ended September 30, 2012, we recognized a $0.3 million realized gain on commodity derivative contracts, of which, $18.0 million related to cash received in settlements which was offset by $3.5 million in amortization of premiums paid during the period and $14.2 million in amortization of the value on derivative contracts acquired"
I don't understand what that $14.2 million is, but they added it back to net income. So that's where I am off. I assume they know what they are doing, so thanks. I didn't see the 3rd Qtr. Operating announcement and how they arrived at adjusted net income. So, it all fits now.
Oversold, 8.78% Dividend Payer Vanguard Natural Resources Is Thinking Long Term - You Should Too [View article]
You say there was $86.7 million in non-cash adjustments for 3rd Qtr., 2012. What I see from the 10-Q is a total of $71.824 million in adjustments which, in my view, should be added to the net loss of $68.727 million, which results in a $3.097 million net income for the quarter.
1. $51.332 million in unrealized losses on commodity derivatives
2. $ 2.463 million in unrealized losses on interest rate swaps
3. $18.029 million impairment write down on oil/ng properties
That's all I see that should be adjusted to arrive at a better net income/loss number. What is the other $14.8 million in adjustments? I don't see it.
Also, for 3rd Qtr. 2011, net income per GAAP was $125.945 million before figuring the amount attributable to VNR. Subtracting the unrealized gains on commodity derivatives of $109.639 million and adding the unrealized losses on interest rate swaps of $1.939 million results in $18.245 million net income for that quarter. I figure VNR's share of that to be (75,884/125,945 * 18,245) $10.993 million. So, it looks to me like the net income declined quarter over quarter.
Maybe you can enlighten me on what is in the 10-Q that I am missing.
http://1.usa.gov/VSzPqA
Microsoft's Surface Pro: Yay Or Nay? [View article]
Annaly: Adding This Stock To The Team Alpha Portfolio [View article]
They didn't read the 10-Qs and 10-Ks then. It's all in there. That wasn't hidden from anyone.
"We have had 30 years where they have moved in almost one direction.
Simply not credible. The prime rate has been as high as 9.5% (May 17, 2000), having come from 8.25% when Annaly opened for business in 1997. It then declined to 4% by June 27, 2003. Then it rose back up to 8.25% by June 29, 2006. That is 9 years of rates fluctuating up an down. From there, it has declined to the present 3.25%. Soon to be 7 years of declining rates, not 30. The historically high interest rates from 1979 to 1981 were abberations, not the norm. Prior to that rates fluctuated in a range, generally not over 10%.
http://bit.ly/NVGpgp
"Since the yields on Annaly are higher than most professional investors returns why are they not investing?"
As for professional investors, here is a breakdown of who holds Annaly.
http://yhoo.it/Xoajgc
Google Now: Trading Your Privacy For The Future [View article]
When you harvest this type of information from public records, there is a plethora of inaccurate information. Sometimes you even become associated with relatives who are not your relatives and aliases you have never used. It is pathetic. A computer matching with social security death records would eliminate some of his garbage.
It's kinda bad when you get credit card applications addressed to your Dad, which i did about 3 years ago, after they have been deceased for over a decade.