I think you missed the most important point in Jacob's thesis - the inflated D&A expense that is to go back to the "correct" level whenever that expense is discontinued, which will spike earnings
As I understand it, the average capital depreciation schedule for MSV's rigs (the majority of historic Capex spending) is ~7 years.
Given that management's capital spending program (and also PP&E) peaked in FY 2022, I don't see a major step-down in Depreciation until ~FY 2029. This step-down is also clearly reliant on Capex remaining at reduced levels between now and then. For me, this is probably too difficult to predict with any accuracy.
What is confusing me is whether they took advantage of the temporary instant write-off program or not. Did D&A increase solely because of the Deepcore aquisition+newly purchased rigs, hence driving D&A up. OR did they combine these purchases with the write-off program? After all, Accumulated Dep./gross PPE was hovering between 40-50% prior to 2020 despite the rapid increase in #rigs but this ratio started to increase after that and now sitting at 68% as mentioned in the other comment. So it seems that they did indeed take advantage off the temp. law if this is to make sense to me. And if this is the case, it would mean that total CAPEX should trend towards its maintenance level as "growth capex" is decreasing. What do you think?
Yes, I found this confusing too and the scope of the ATO Temporary Full Expensing program was one of the points I discussed with management.
On this, I understand that any spending under the scheme was only ‘written off’ from a tax perspective. This tax ‘write-off’ created a Deferred Tax Asset. However, all PP&E spending under the scheme (i.e. the drilling rigs) were fully capitalised with the normal depreciation schedule (i.e. an average of 7 years for drilling rigs).
Almost 70% of their gross PPE is depreciated already. Historically it has been below 50% prior to 2022. There is $63M in PPE. capex is sitting at $0.23M/Rig today, down from $0.6M/Rig in 2022. Ammortization is basically non-existent now that they have completely written off Deepcore. If they continue depreciating the same amount as this and previous years (~26M), I don't see how it will take until FY29 for depreciation to step down. Or have I missed something perhaps? Cheers
I think about MSV’s Depreciation as being split between maintenance and growth. I’ll use simple maths to (hopefully) explain my thoughts: (If there are any accountants reading - please either forgive or correct me!)
Maintenance Depreciation. Let’s assume that Maintenance Capex going forward is A$15mm per year exactly. An amount that simply maintains the fleet. With no growth, Maintenance Depreciation equals Maintenance Capex of A$15mm per year.
Growth Depreciation. Let’s assume (for simplicity) that Growth Capex spending was A$70 million and the entire amount was spent in FY 2022. Using ‘straight-line’ depreciation of 7 years would add A$10mm of Growth Depreciation per year until FY 2029.
Adding this together, total Depreciation is A$25mm (maintenance of A$15mm + growth of A$10mm) from FY 2022 until FY 2029 before stepping down to A$15mm (once the Growth Capex has been fully depreciated).
Clearly this is an over-simplification and in the case of MSV, the large expenditure on Growth Capex took place over a few years and really started in FY 2020. With a seven year depreciation schedule, there may therefore be a ‘step-down’ in Depreciation starting around FY 2027. But only if Growth Capex remains minimal between now and then.
I think you missed the most important point in Jacob's thesis - the inflated D&A expense that is to go back to the "correct" level whenever that expense is discontinued, which will spike earnings
Great comment - thank you :)
As I understand it, the average capital depreciation schedule for MSV's rigs (the majority of historic Capex spending) is ~7 years.
Given that management's capital spending program (and also PP&E) peaked in FY 2022, I don't see a major step-down in Depreciation until ~FY 2029. This step-down is also clearly reliant on Capex remaining at reduced levels between now and then. For me, this is probably too difficult to predict with any accuracy.
What is confusing me is whether they took advantage of the temporary instant write-off program or not. Did D&A increase solely because of the Deepcore aquisition+newly purchased rigs, hence driving D&A up. OR did they combine these purchases with the write-off program? After all, Accumulated Dep./gross PPE was hovering between 40-50% prior to 2020 despite the rapid increase in #rigs but this ratio started to increase after that and now sitting at 68% as mentioned in the other comment. So it seems that they did indeed take advantage off the temp. law if this is to make sense to me. And if this is the case, it would mean that total CAPEX should trend towards its maintenance level as "growth capex" is decreasing. What do you think?
Yes, I found this confusing too and the scope of the ATO Temporary Full Expensing program was one of the points I discussed with management.
On this, I understand that any spending under the scheme was only ‘written off’ from a tax perspective. This tax ‘write-off’ created a Deferred Tax Asset. However, all PP&E spending under the scheme (i.e. the drilling rigs) were fully capitalised with the normal depreciation schedule (i.e. an average of 7 years for drilling rigs).
Almost 70% of their gross PPE is depreciated already. Historically it has been below 50% prior to 2022. There is $63M in PPE. capex is sitting at $0.23M/Rig today, down from $0.6M/Rig in 2022. Ammortization is basically non-existent now that they have completely written off Deepcore. If they continue depreciating the same amount as this and previous years (~26M), I don't see how it will take until FY29 for depreciation to step down. Or have I missed something perhaps? Cheers
I think about MSV’s Depreciation as being split between maintenance and growth. I’ll use simple maths to (hopefully) explain my thoughts: (If there are any accountants reading - please either forgive or correct me!)
Maintenance Depreciation. Let’s assume that Maintenance Capex going forward is A$15mm per year exactly. An amount that simply maintains the fleet. With no growth, Maintenance Depreciation equals Maintenance Capex of A$15mm per year.
Growth Depreciation. Let’s assume (for simplicity) that Growth Capex spending was A$70 million and the entire amount was spent in FY 2022. Using ‘straight-line’ depreciation of 7 years would add A$10mm of Growth Depreciation per year until FY 2029.
Adding this together, total Depreciation is A$25mm (maintenance of A$15mm + growth of A$10mm) from FY 2022 until FY 2029 before stepping down to A$15mm (once the Growth Capex has been fully depreciated).
Clearly this is an over-simplification and in the case of MSV, the large expenditure on Growth Capex took place over a few years and really started in FY 2020. With a seven year depreciation schedule, there may therefore be a ‘step-down’ in Depreciation starting around FY 2027. But only if Growth Capex remains minimal between now and then.
I hope that makes some sense.