Diversified Energy Share Discussion Threads

[lab305] 04/4/2022 17:13

sunbed44 in answer to your question the board on Antero resources for one which deliberately chose not to hedge and reap the benefits.

[lab305] 04/4/2022 17:07

Fair comment Aleman but the price achieved last year compared to spot and forward prices was appalling. I can't see prices going back much as the world has changed. The board of DEC knew four years ago that the price of gas was too cheap and gas stored was at a very low ebb in the US. I asked them about this at the time . It didn't take a rocket scientist to work out which way it was going . Of course they may have been constrained by the conditions on loans they were taking.
It is still my contention that they have sold forward more than was necessary at far too low a price. Things are improving though as you say and I will have to be content with that.

[sunbed44] 04/4/2022 16:32

A sensible one at last. Who the fxxx could have known what would have happened to prices when they hedged - some right dipsticks on here.

[aleman] 04/4/2022 16:25

But the gas they are forward selling a year out is up over 60% on a year ago and forward sales 2-4 years out are up about 50% on a year ago. They are locking in profit for years ahead that might not be available in future if they only sold spot. Locking in profit like this gives them security of revenue so they can expand steadily by acquisition that is significantly debt financed at reasonable rates. Without the security of locking prices in, they could not raise such finance and could only expand when cash profit was high. They would be expanding now (at high acquisition cost) but probably could not have done so for the past few years (when acquisition costs have been lower).

[shanklin] 04/4/2022 16:22

They would not have a business if they didn’t hedge

[lab305] 04/4/2022 16:04

CASSINI I think that we may be lumping it for some time. We have been losing money hedging since 2019. They should get Jim Bowen to present the results." This is what you could of had ." Whilst the dividend is a very welcome 10% it pales against the 100% increase in gas over the last year.

[sunbed44] 04/4/2022 14:33

Personally I really like the hedging strategy and it takes a lot of the gamble out of what could happen to the price of gas. It ensures we can service our open, interest payments and sustain dividends.think of it like matched betting where you back and also lay the same horse (for example) and guarantee to make profit from the spread / margin. Ill take this all day long and used to make over 1k per month by subscribing to profitaccumulator dot com for 150 per annum. Always guaranteed to make profit betting on horses or other stuff but it takes hours and hours of time to make small profits on each transaction.

[cassini] 04/4/2022 14:14

When the price of gas finally falls we'll all be grateful for the company's hedging policy.

Until then we'll just have to lump it...

[pemcap] 04/4/2022 13:41

Does anyone know why DEC doesn't talk about short cycle capex to up the volumes a bit above hedged volumes? Given the high prices at the moment?

[qvg] 04/4/2022 13:01

I echo asp5's comment - thanks to all for such clear and informative explanations on the hedging issue.

[lab305] 04/4/2022 12:52

I have read through all the erudite posts on hedging and well done all you contributors. It strikes me that we should really be investing in the companies that DEC hedges with. They must be making a fortune with the spot price of gas selling for twice as much as they are paying DEC. I am still a large investor here but the over cautious 90% hedging rate is costing us very dear.

[sunbed44] 04/4/2022 10:08

Great work Aleman thank you

[aleman] 04/4/2022 09:24

May Henry Hub gas futures for 22,23,24,25,26.


free stock charts from uk.advfn.com


free stock charts from uk.advfn.com


free stock charts from uk.advfn.com


free stock charts from uk.advfn.com


free stock charts from uk.advfn.com

[asp5] 04/4/2022 08:51

The broad strategy (as per capital market day slides) is to hedge 70%-90% for current year, 2 years out target 50%-70% hedged and 30% - 50% for 3+ years.

Given legislation changes take time to agree & pass I think this is fine. However when it comes to DEC's ABS structures these by definition are hedged up to 8 years out to ensure financial institutions lend them the money. Given the risks that the banks review in order to approve a loan of this type, I would also feel comfortable that this is done appropriately.

[scrwal] 04/4/2022 08:48

Margins will be hit as production taxes are based on current market prices of gas not the lower hedged prices locked in by DEC.

[ceaserxzy] 04/4/2022 07:31

I agree that the risk of production is negligible as the management have been very experienced so their forecast of well capacity should be fairly reliable. The second risk of costs versus hedged future price could be significant especially if hedged too far into the future, as hyperinflation, drastic policy change to energy and environment and taxation by the government can be out of the control of the company.

[asp5] 04/4/2022 05:07

I would just like to add my thanks to all the contributions on the hedging topic. They have certainly helped me to refine my understanding of the topic.

riskvsreward - I think you succinctly nailed the risks associated with the DEC strategy. Given that DEC have 60+K wells - there is no major installation that if it went offline would cause a material drop in gas production. Combine this with the slow decline predictable nature of the wells in their portfolio, I believe DEC can accurately forecast hedge volumes. So this risk is low in my view.

As for costs, DEC are one of the lowest cost operators (if not the lowest cost operator)so keep this topic well managed. Again a low risk that this causes a problem.

[asp5] 04/4/2022 04:48

premcap - DEC does not have any big capex expenditure apart from the initial acquisition - it operates rather than drills wells. Their smarter asset management (SAM) is based on "small capex" operational improvements that look to maximize gas production at each well acquired. In effect their business model embeds this way of working.

[pemcap] 03/4/2022 22:42

Given the higher gas prices, why doesn't DEC do short cycle capex to increase volume here & there? I see nothing about this in the presentations, nor earnings calls. A way to boost unhedged asset optionality.

[1knocker] 03/4/2022 21:38

That's right. The contact for the future sale becomes the asset on the balance sheet, in place of the item sold. That contract has a value: the price the buyer has contracted to pay, less the cost os supplying the goods to be delivered. During the period between the making of the contract and the time for delivery if the goods could be sold for more than the contract price, the contract has a further (negative) value to the supplier (and a positive value to the purchaser, and if during that period the goods could be bought more cheaply than the contract price the contract has a further (positive) value to the supplier (and a negative value to the purchaser.

It is easy to understand if you think of a farmer who in April sells to Tesco his whole crop of beans fo be harvested in July. After the sale in April, the farmer's asset it the right to payment under the contract, and Tesco owns the beans.

[riskvsreward] 03/4/2022 19:41

It may be more complex in execution but in principle it is not much different from a farmer hedging his crops

[riskvsreward] 03/4/2022 19:36

Only two risks are real. 1. The company cannot deliver the goods it has hedged and the price of the goods has gone up in a big way and 2. The costs of producing goods has gone up too much that the hedged price cannot cover the costs. If neither of these will happen, then gas price going up should be beneficial as it means its asset, that is its oil and gas producing wells are becoming more valuable

[aleman] 03/4/2022 18:57

Trying to keep it simple, say you've hedged 5 years and the price rises. Your first year accounts a year of higher revenue and 5 years of hedge losses, one of which crystallises to offset the higher revenue you receive in sales to bring it back to the cashflow figure that you planned for. Your planned cashflow comes in (hopefully) but the accounting losses of the other 4 years' hedges overwhelm your moderated cash profit for the first year and a big accounting loss is reported. However, if the gas price remains the same, you will then have another 4 years of higher revenues but no more hedge losses left to book so you report the full benefit of the price rise accounted for the next 4 years. The hedges will still crystallise to give you the planned steady cashflow over the 5 years but the accounts show a first year of very big loss then 4 years of accounting profit that are higher than the actual planned cashflow that comes in for those years. At the end of the 5 years, however, the accumulated cash profit and accumulated accounted profit add up to the same.

If the price falls at the start, the reverse happens.

That basic principle seems simple enough. Complications arise because the price does not stay still and hedges other than just selling forward might be used. I'll leave it to others to describe the complexities. I can't!

[podgyted] 03/4/2022 17:42

The way I look at the hedging losses is the 100% provision against a contingency.

To use Redtom's example DEC has sold 100 units at $2 in Dec 2023 to get a fixed income of $200. If DEC produce those 100 units then there is no problem. If however they don't produce those units they will have to buy in the market to sell at $2. The IFRS market to market rules set the buy price at $3 (ie the price at 31/12/22) therefore you get a $100 hedging loss.

So, therefore, to decide whether you can to a vast extent ignore this loss in your analysis of DEC you have to consider how likely it is that DEC cannot produce. Given the vast amount of wells they operate, it would seem very remote.

(However, to give another side, consider SQZ which had hedged 20% of its production so it could definitively cover its capex and operating expenses. When Rhum (a large chunk of its production) went down due to maintenance problems, I suspect there was some concern - but they would still have had enough to cover the forward sales - but it's interesting to note how much cash they have to ring-fence against these hedges, and a prolonged shut down would have drastically reduced its revenue forecast as greater percentage of the remaining production would have gone against the hedge.)

The 100% provision is a bit esoteric as they would have to have no production for the entire year.

[tysoepr] 03/4/2022 17:20

Many thanks to everyone for your time, help and expertise with this, it has helped a great deal! There were bits in all explanations that really helped and redtom1's explanation really brought it home for me.

Much appreciated - thank you all!