Diversified Energy Share Discussion Threads

[asp5] 04/6/2022 08:57

Renewable energy developers are facing delays of up to a decade to connect new capacity to the UK electricity grid according to the FT ..... this pattern can be observed elsewhere.

I suspect gas will be required in the energy mix for longer than many assume.

[sunbed44] 04/6/2022 08:29

All this chat about hedging is pointless and boring. Even for the very few who fully understand DECs position and strategy, not even they can tell what impact it will have on the market cap moving forward. There are simply too many other variables and too many people on here think theyre the group CFO. Move on with your conversations.

[spangle93] 04/6/2022 07:53

Not to labour the point much longer...

But
1. DEC's 2023 production hedges are at a higher price than 2022's (slide 35 of pres, or trading update) and cover the 80% of the planned production

2. First Berlin aren't strangers to DEC, but still assume a markedly lower unit price for DEC's production, as you calculated in 2827

[asp5] 03/6/2022 20:29

Hi Aleman - both Cenkos & first Berlin are using the lower futures prices in 2023 in their estimates for lower revenue in 2023. I have not had a chance to look in detail on their treatment for hedge adjusted EBITDA - maybe someone can take look.

if I get a chance over the long weekend I may try and take a peak.

[asp5] 03/6/2022 20:20

Hi Spangle - So both First Berlin & Cenkos are using futures prices at the time of their reports for their unit prices for 2023. Remember they are regulated and need to provide a suitable basis for their estimates.

So if you take a look at henry hub future prices (link below) you will see that prices for delivery for all remaining months of 2022 is around the $8.x

If you look at April 23 through to Dec 23 prices are around $5.x. This is why they their research notes show the drop in revenue etc. for 2023. They are only reflecting current market prices.

Now the important thing to note is that futures prices say for Dec 23 reflect the markets view today of what prices will be in Dec 2023. Now the actual price in DEC 23 is hardly ever the same as the expected price predicted now (June 2022). What typically happens is as you get closer to dates then supply/demand dynamics are more certain, clearer and more predictable (bit like weather forecasting).

You can see this in the futures price for Jan 23 & Feb 23 which is similar to 22 at $8.x - however the moment you start going into Mar 23 the futures price drops to $7+.

So what are the key uncertainties that could impact the supply/demand dynamics. In my view they are: Ukraine/Russia situation (resolution unlikely soon in my view), extra supply coming on stream near term from shale producers ramping up output(unlikely in my view) or demand destruction takes place due to a global recession (potentially).

key thing is that if DEC layers any additional hedges now for 2023 then it will be at a price above its current average hedge price of §3.x

[aleman] 03/6/2022 20:12

I've not read the First Berlin report carefully yet but are they assuming that there will be a significant price fall next year, as indicated by hedge prices, but cannot book the specific gains DEC's hedges would bring until the market brings them - so they can only book the losses that have so far occurred on the market at the last reporting date? How can you book a mark to market gain before it is made? Are they booking lower profit of a projected price fall but not the corresponding reductions in losses on the hedges for the same period?

Edit - Yes, I think that might be it. Note the cashflow statement has zero contribution from financial instruments for 2022 and 2023 after huge positives in 2020 and 2021. That seems to suggest booked losses on hedges from previous gas price rises are then assumed not to reverse and generate booked profits when you get price falls. This is due to accounting rules that allow you to estimate a future price change for a commodity sold but not a future price change for a market traded derivative. I'm not sure, though. Anyone agree?

[aleman] 03/6/2022 19:52

Just remember that maybe 80% of 2022 production was hedged when the price was below $3 - at an average of maybe $2.60? 10% would be $3+ and the remainder at closer to spot. That's not much over $3 overall. Rusty said they make lots of cash at $3 but don't expect massive numbers for 2022 - just solid ones. Futures contracts of all durations are over $4 now so the benefit of higher prices now for some should be spread over several years in the case of DEC.


July 2022 contract going back 5 years


free stock charts from uk.advfn.com

[spangle93] 03/6/2022 17:30

asp3 - thanks for your explanation

I'm still a bit uncertain why, if you can "do the math" with the published numbers (as I did with the "gut feel" that lodged the question), First Berlin can't.

But at least I/we weren't missing anything worrying


PS apologies for misquoting the source of the link, scwral

[lomand] 03/6/2022 14:58

A US listing will likely necessitate a cap raise if only for the purpose of providing liquidity and an incentive for the placing agent. I don't see that as being too much of a problem although the other alternative is that the the company drops its UK listing and moves everything to the US. When you think about it, the need for a UK listing will have served its purpose if/when the market cap reaches ~1.5B. this is a domestic USA story with a far bigger audience over there. The original UK AIM listing was after all only opportunistic.

[asp5] 03/6/2022 14:07

Hi scrawl - as per trading update mid may - 70% of existing gas production is hedged at $3,02 for 2024. Now we have $500M of acquisitions in 2022 and at least the same again in my view for 2023 and 2024 (so min $1,5+B of acquisitions that will impact average hedge price materially for 24).

I think the US listing only makes sense once they have made the acquisitions this year and the sustainability reports are out. Then there is a fantastic story to tell - but I do agree the hedging will require explaining and may be a drag - however all the key producers in the US are now hedging significantly which gives me confidence that the investor base in the US who invest in this segment are going to be more familiar with this than we may think - at least compared to the average UK investor....

[asp5] 03/6/2022 13:26

Fully agree lomand. The last equity raise was in May 21 which raised $225M but represented 20% of the Company's existing ordinary share capital. That's a sizeable dilution (even though acquisitions were accretive). It also built on top of previous equity raises in 2018 & 2019.

Given DECs model relies on acquisition, I have been impressed with management pivoting towards an ABS approach to secure capital rather than an equity raise approach especially given the share price response to the last raise.

I strongly believe the old capital raising strategy plus all the sustainability related topics are still hanging over the current share price. Its only been over 12M or so since that last equity raise and even more recent since the Bloomberg articles.

Once DEC demonstrates its ability to grow in a non-dilutive manner via actual results and releases its first sets of independently audited sustainability reports then a lot of the drag on current share price performance will be removed.

Its very difficult to say when that will be exactly, however as many have mentioned we are being paid handsomely via the dividend while the penny drops and the share price re-rates.

I would also add, given the hedges being taken out (wisely in my view) - even if a significant recession/downturn occurs with the associated demand destruction - DEC will not be materially impacted. This is a great from a risk and shareholder perspective.

[scrwal] 03/6/2022 13:17

I think we should be aware that the hedged prices for 2023 onwards only took off at the start of this year meaning that the bulk of 2022-23 revenue is already locked in at c$3 , the money making level. We won't see significant changes on hedged production $value until 2024. This will be mitigated by any unhedged production from acquisitions.

A US listing makes sense for a US producing company. However we struggle with the intricacies /nuances of the hedging policy which I suspect a US investor will also really struggle with. Also the hedging model may be one that is untypical for a US company particularly in the oil/gas field.
There is also the Bloomberg "article" which did give some insight as to how little was known in the US about DEC and its operation and the "how can they do that better" than the larger more well known corporations which may filter into an US investors purview even though the article was mainly toilet paper.

[lomand] 03/6/2022 11:47

asp5 - thanks for your input.the game changer for DEC is the credibility and flexibility of the Oaktree relationship and the use of ASB given a balance sheet profile which is different from a trad O&G company.The downside is that it is confusing for the average investor but the good news is that it gives incredible leverage on assets but with most of the downside risk hedged.A US listing wikk bring in a bigger audience with an appetite for this type of asset management. In the meantime I can't think of a much better risk reward in the current environment.

[asp5] 03/6/2022 11:29

just out of curiosity - went back to an old cenkos note from April 30th 2021 - they estimated 2021 FY hedge adjusted EBITDA of $274,8M. Actuals turned out to be $343,1 - a 25% delta.

To be fair there were a few acquisitions post this note.

[asp5] 03/6/2022 09:51

lomand - took a quick glance at the cenkos report. They include the recent east texas acquisition (strange as report is dated 23 may) . Revenue down approx 40% 22 vs 23.

Given they include the acquisition - their production estimate based on boepd increases 3% (22 vs 23). Again no further acquisitions reflected (which is fair - acqusitions can really only be reflected post announcements). See table 2 top of p5.

The drop is all coming from assumptions on unit prices. Cenkos split out gas, oil & NGL unit price assumptions in table 4 top of p7. Gas price (per mcf) is 7,1 vs 4,8 (22 vs 23).

Hope this helps.

[asp5] 03/6/2022 09:27

Hi Spangle - to give credit where its correctly due - its scrwal who kindly posted the first berlin link.

You are quite right that 2023 shows a marked reduction in the revenue numbers. My take is as follows:

If you look at the top of figure 2 on p4 you see estimated production for 2022 at ~48,9 Mboe while for 2023 it is estimated at 44,9. This represents the 7%-9% decline rate. However the note is from May 25th which is the day before the $50M acquisition announcements which will address this reduction and add $35M to EBITDA. Also DEC have $500M of liquidity for acquisitions to come - so production volume is certainly not the issue and will be significantly higher (assuming further acquisitions are made). The note assumes no acquisitions.

To get to the 30% reduction in revenues (lets say an additional 20+% is needed on top of the assumed production decline) this has to come from assumptions on unit prices. You can derive the estimated unit prices the analysts are using from the top 2 lines of figure 2 (revenue unhedged/Mboe). For 2022 they estimate an average $42,86 per Mboe while for 2023 $33,29 per Mboe (this is where the big reduction comes from).

In reality we know from the trading update in mid may - 80% of current 2023 production is hedged at $3,27 a ~4% increase on 2022. When the remaining 20% is layered in then based on current prices this will increase the average. Also the new acquisition had unhedged production - so that will also have a positive effect on the average 2023 hedge price. The same applies for any new planned acquisitions based on the $500M liquidity available.

So in short you need to interpret the data on DEC carefully. Clearly for those who do not do this they may be put off investing. I see this as a window of opportunity to build my position. At some stage results will be published and the analysts will revise their numbers and the share price will reflect the performance of the business.

[lomand] 03/6/2022 09:25

I agree. It seems strange given that the futures prices for 2023/24 have been gradually increasing. Anyone any ideas and how does this compare with the Cenkos projections?

[spangle93] 03/6/2022 07:52

asp5 - Thanks for thelink to the First Berlin note.

Question - In the table on page 1, plus in the other Figures, they show quite a pronounced reduction in projected hedged EBITDA for 2023 vs 2022, and even vs 2021. The reduction is more than 8.5%, which assumes that it's based on getting lower product prices rather than just natural decline of production rates at the same unit prices.

I thought/believed that with the rising gas prices, as posted by Aleman, our hedges were also being placed at higher prices, so that even if the historically high unhedged prices fell, we'd still have higher earnings next year. What am I missing?

If I were researching the company and saw that on so many key metrics, the company would be doing worse next year, it wouldn't be an incentive to buy.

[sunbed44] 02/6/2022 10:30

Look at i3E mate which pays excellent monthly dividend and has huge capital growth upside as well

[woodhawk] 02/6/2022 10:19

As has been said, we are certainly being paid an exceptional dividend while we wait. I am pleased that the dividend is paid quarterly - negating some of the more tumultuous share price rides of bi-annual payers (even more so the more asymetrical ones). I too am taking advantage by topping up at these levels whilst the bargain remains.

[asp5] 02/6/2022 09:01

lomand - fully agree and tbh I am using the current price levels to top up my position when spare funds become available. I think the penny may well drop once the next round of acquisitions are reflected in the accounts and the strength of the DEC model becomes apparent.

[lomand] 02/6/2022 08:19

Asp5. I think you are correct. The last deal was exceptional but even if we assume future acquisitions are in line with the historical average the EBITDA/FCF numbers would still be very impressive. Investors still have not grasped the business model of DEC but we are getting well paid for parking our money while we wait...

[asp5] 02/6/2022 05:37

Thanks scrwal. First Berlin were bang on (~0,4% delta) with their Q1 estimate for hedge adjusted EBITDA of $109,8M (vs $109,3M actual).

They have estimated full year 2022 hedge adjusted EBITDA of $473M. That is a 38% increase vs 2021.

Given that DEC has $500M of liquidity for acquisitions, they should be able to add $125M - $150M to hedge adjusted EBITDA resulting in a conservative ~$625M. If they could do 10 deals like the recent $50M acquisition they could add $350M to hedge adjusted EBITDA - however that deal was exceptional.

At this level adjusted FCF would be around ~$500M. That would be quite something (in 2020 FCF was ~$220M). At some stage this growth is going to be reflected in the share price.....

[woodhawk] 01/6/2022 20:48

Thanks, scrwal

[scrwal] 01/6/2022 20:06

Link for First Berlin 25 May Report