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The Oilers' Cap Management Problems - Part Duh

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A response to a reader's comment from our previous article on the Oilers' mismanagement of the salary cap.

Anne-Marie Sorvin-USA TODAY Sports

This past weekend, I wrote a piece detailing how over the past 24 months the Oilers' have allowed their cap space to deteriorate from one of the most enviable positions in the league to one where they are likely to finish the season with less than $3M in cap space.

Reader Maurey Loeffler provided the comment below in response to the piece...

First of all, Hendricks, Ference, Purcell and Nikitin contracts suck (especially Hendricks and Ference as there are options for their services in the $700k range). I’m not debating that. For sure, they haven’t been great cap managers, but I actually don’t think they need to be. What?!?! Hear me out. They may be taking a big risk, but I’m sure they see the writing on the wall that there will be huge cap increases coming with increased NHL revenues.

Rogers just paid $5.2 billion for NHL broadcast rights for 12 years. That’s $433.3M per year. 57% of that revenue, or $247M, goes to the players on 30 teams for $8.23M per team per year in cap increase just from that TV deal alone. And that deal hasn’t kicked into the revenue equation yet. When it does, it may be the single biggest increase in the cap since the cap was installed.

When Hall, Eberla and Nugent-Hopkins are 27, 28, & 25 respectively at the end of Eberle’s contract (the 1st to expire), they will have a cap hit of 18M on a roughly 91M payroll. By then, if they keep getting better and peak in their mid-twenties as most players do historically, the Oilers could be competing for a cup with probably the 2017-2018 season as their best chance. My 91M figure comes by taking the percentage increase in cap each year since the 2005-2006 season. The average rise in cap has been about 7% over that period. That includes the claw back during the last negotiations and doesn’t take into account the very real possibility of 2 expansion teams with franchise fees, relocation fees, added merchandise revenues and TV rights for the new teams. That should add revenue and increase the cap more (which is why I’m all for expansion to 32 teams and moving 2 teams). There will also be no negotiations to hurt revenue until the summer of 2022. I think we could more realistically see a 10% or more increase per season. If it goes up by 10%, it will be 101M when they’re all still under contract. I think they’ll be among the lowest paid stars by then. Roughly less than 18% of your salary going to 3 of your best is a bargain, with plenty left over to go shopping on the UFA market for players that want to come to a contending team.

I started to respond with a comment, but felt some of this was worth putting in enough detail to post on its own. Maurey, thanks for your comment. Please know that the "Duh" in the title is in reference to the Oilers, not your comment, though I would like to show why I disagree...

My Response

As some of the existing comments noted, there are some issues with your math...

The Rogers TV deal is worth $5.232B over 12 years. The players receive 50% of HRR, not 57%. So the players' share of the TV deal is 5.232/2 or $2.616B over that span. Annually, that works out to about $218M. That's $7.267M per team and yes, as others discussed, you need to remove the value of the previous deal. Without ready access to the previous TV deal's numbers, I'm willing to accept that the annual increase is probably somewhere in the $4-5M range per team.

Another item is that the TV deal is structured to with annual payments beginning at approximately $300M and increasing to over $500M over the life of the deal. So, as it relates to HRR, it remains to be seen if the accounting will normalize the deal's impacts over the 12 period ($218M for each of the next 12 seasons) or if they will account for the revenues as they occur (approximately $150M in players' share at first with marginal annual increased to over $250M by the end of the deal).

In the first scenario above, you're looking at a hypothetical jump of $4-5M based on the deal however, that's only for 1 season. In this case, there would be no annual increase in that amount. The first year brings the increase, and every year thereafter the $4-5M just maintains the existing revenue stream...it doesn't compound itself.

In the second case, the first year cap increase drops by approximately $2.25M, but there would be incremental gains throughout the deal. So, if the cap does take the big jump next year, you're looking at about $73-74M next season plus organic growth numbers, which are likely to be slowed by the continued devaluing of Canadian currency as it related to the US dollar. If the dollars are accounted for as they are received, the cap jumps to $71-72M plus organic growth numbers.

Even allowing for that organic growth, your mention of a $91M cap by 2017/18 seems unrealistic as the cap is likely headed towards a mid-70's number for next season with much smaller annual gains thereafter unless other factors that don't currently exist are added to the equation. I'd suspect a low-to-mid 80's cap hit at that time if growth continues steadily.

2015/16 Roster
Since the first case gives you the best outlook for the 2015/16 season, we'll use that, though I don't believe that will be how the league accounts for the TV rights revenue. I'll also allow for continued organic growth as well, though with the Canadian dollar already down about 12%, I have my doubts that HRR will continue to grow as quickly. What's a fair number for next season $76M? Let's go with that, though if you disagree, please let me know and if you can substantiate a better number, I'm happy to accept it.
I say it all the time...I hate hypotheticals, because its impossible to predict the future, but I'll try to make some reasonable approximations here...please use the comments to tell me where you disagree and we'll all work it through together.

Forwards

Up front, the Oilers have their top line locked up for 2015/16, so barring major trades, there won't be any change there. The second line will have David Perron and Nail Yakupov back (all roster talk is subject to change with trades of course, we're looking at contract status here). Yakupov will need a new contract which, although it won't be in the Hall/RNH range, will certainly be more than the $925,000 the cap currently counts for him. We'll leave that centre spot for now because its clearly something they still hope to address. The third line will have Benoit Pouliot and Teddy Purcell back and again, along with a centre to be determined. The 4th line has Matt Hendricks and Boyd Gordon returning, though most of the 12, 13, 14 forwards are up for replacement next season.
Summary:
Hall ($6M) - RNH ($6M) - Eberle ($6M)
Perron ($3.8125) - TBD - Yakupov (TBD)
Pouliot ($4M) - TBD - Purcell ($4.5M)
Hendricks ($1.85M) - Gordon ($3M) - TBD
So, as a starting point to work from, the Oiler have $35.1625M allocated for 8 forwards under contract and need to find a 2C, 3C, 4RW and re-sign Yakupov, not to mention allow for some depth players. Is it fair to say Yakupov possibly takes a 1 yr. $2.5M deal to try and prove himself? Then, let's also assume that Draisaitl is on the team next year, regardless of what happens this season. That's $925,000, though you do have to plan for those pesky ELC bonuses. Lastly...do you want to re-sign Arcobello? What's that...$1.5M? Using that guess, and a $1M allowance for the 12F, plus another $2M ($1M x 2) for depth players, you're at...$43.0875M. Forwards done.

Defence

The blueline has a few more problem areas. Are we buying out Andrew Ference? Let's say we do because that gives us the most cap space, although the cap penalty eats some space for the next 4 seasons, so its a give and take. The 15/16 cap penalty is the smallest though at $666,667, its an extra $1M in each of the next 3 yrs, but in the short term, it doesn't hurt too much. Nikitin and his $4.5M deal is back, as is Mark Fayne's $3.625. Justin Schultz has to be qualified at $3.675...expecting him to take that is unlikely, but we'll go with a modest raise...$4M? Are we assuming all of Marincin, Nurse and Klefbom are on the team next year? If so, that's another $894,167 each for Nurse and Klefbom (again...watch those bonuses...). That brings us to 5 Dmen. You still need to sign or (more likely) replace Jeff Petry and re-sign Marincin. Let's assume they want a vet to support all these kids and sign a $4M UFA in Petry's place and Marincin signs for $2.25M. Sound reasonable, if not too generous? OK, let's look at our blueline.

Summary:

Nikitin ($4.5) - Fayne ($3.625)

Marincin ($2.25) - Schultz ($4M)

Nurse ($894,167) - TBD ($4M)

Klefbom ($894,167)

Ference Buyout ($666,667)

These 7 players plus the buyout combine for a cap hit of $20.83M...combined with the $43.0875 from the forwards and we're at $63.9175M with only the goalies to go...looking good!

Goalies

Ben Scrivens has a contract for next season at $2.3M but Viktor Fasth is a UFA. Let's go conservative and say they get a player to compete with Scrivens for $2.5M...that's actually cheaper than Fasth's deal.

Summary:

Scrivens ($2.3M)

TBD ($2.5M)

Alright...let's tally this up...$4.8M for the goaltenders, plus the $63.9175 from the skaters brings the Oilers to a grand total of only $68.7175M! SUCCESS!

Why that's $7.5M in cap space for next season! The Oilers are fine, right?

Oh Wait...

There's one thing we've forgotten to account for...actually getting better.

So we have about $7.5M in cap space, though that is a bit artificial as Draisaitl, Nurse and Klefbom collectively have access to almost half of that (as much as $3.675M...2.475, .85 and .35 respectively) in performance bonuses which will bleed over into 16/17 if we don't allow space for them.

Let's call it $7.5M for now though. That's a decent number. Although our roster is already full, so there's no space to add bodies. We'll have to make some choices as we go. Let's see what we can do.

How about we hold on to Arcobello, but push him to a depth role and sign a real NHL #2 centre? I'd suspect that costs about $5M, but let's say the Oilers offer some serious term to get someone at $4.5M (just keep pushing those problems down the road!). That's an extra $3M to replace Arco, and Arco's a bit more expensive as a depth guy, so we're out $3.5M in cap room. That means we're at about $4M in available space left. There's still those bonuses to worry about, but we're living in the moment here!

Maybe we want some more experience on the blueline and decide to let Nurse taste the pro game in OKC. Sure...reasonable decision. Signing that guy probably costs another $4M, but with the money we save demoting Nurse our cap changes about $3M, so we've got about $1M to go.

Maybe at this point, we're mindful of the bonuses and we call it a summer.

So how do we look?

Well, we've done some ok things again, just like every summer. We added a 2C and a top 4D, re-signed or replaced everyone and we still have $1M to go! Good right?

Is it passable? I guess so. But the point of the initial article was never that the Oilers were going to be in a Blackhawks/Bruins level cap crises. Two years ago, this franchise had the room to go out and add key pieces without subtracting and build a strong core around their developing young players. That opportunity is now gone.

Beyond the fact that the team above probably still keeps you in the bottom third of the league next year, even getting to THAT point required some pretty generous assumptions.

  • The TV deal jumping the full 1/12th of the players' share of the contract in year 1 rather than the scaled amount that Rogers is paying next year. (That difference alone puts them well over the cap)
  • Yakupov, Marincin, Schultz and Arcobello all taking modest raises rather than signing long-term deals.
  • The buyout of Andrew Ference
  • Acquiring a #2C for less than $5M
  • Acquiring a replacement for Jeff Petry and another top 4 Dman for an avg. of $4M each

Sure, the Oilers can make their cap situation work. Sure, they can even add a piece here or there, but small incremental changes aren't going to turn this team into a playoff roster. The franchise had their chance to use their amazing cap situation to take the leap back to being a contender. They squandered it. Now the job is much tougher.

Can they fix the problem over a few seasons? Of course they can. But at that point, you're talking about 10 or 11 years with no meaningful hockey played in Edmonton. Are people really willing to wait that long?

They shouldn't.