Diversified Energy Share Discussion Threads

[lord gnome] 08/8/2022 19:34

The hedges are meant to protect to the downside. If the price goes into the stratosphere, the counter-party cleans up. DEC pays up out of the extra income generated when the gas is sold at a price above the hedging level. They lose the upside to protect the downside. Does anyone on here have GCSE maths? I am sick and tired of casting my pearls among swine. (Biblical reference, by the way).

[greygeorge] 08/8/2022 19:31

*lost a billion or so dollars (IN CASH)*

[greygeorge] 08/8/2022 19:30

lord gnome, you are correct in what you say here:

'...The banks require hedging as a condition of financing. If the bottom falls out of the market DEC’s income is protected and the banks will continue to get their money...'

So, if DEC's income is indeed PROTECTED, as you quite rightly state, how can you then argue that they LOST a billion or so dollars ???

[lord gnome] 08/8/2022 19:26

Utter garbage. Are you sure that the stock market is right for you? You are investing in something which you clearly don’t understand. The banks require hedging as a condition of financing. If the bottom falls out of the market DEC’s income is protected and the banks will continue to get their money. Which part of this do you completely fail to understand? Hedging is the complete opposite of gambling. Clowns!

[greygeorge] 08/8/2022 19:23

1knocker, thank you, you put it better then me.I just have no patience for the ignorance and stupidity of some who claim to hold an investment in this company.

[greygeorge] 08/8/2022 19:19

jamesiecakes, you are CORRECT. lord gnome, You are WRONG. olrd gonme seems to be under the impression that DEC is a trader in futures and options, whereas it is in fact a PRODUCER of gas. It sells its' product at a pre-determined price, it sells this product either to an end-user (such as a residential gas supplier, or large scale industrial user), or even to a futures TRADING company.

It is the futures TRADING company that takes the actual cash loss or profit on the difference between daily spot trading prices and the prices they previously agreed to pay to the PRODUCER - in this case, DEC. DEC knew in July 2021 what they would receive in terms of cash in July 2022,for the gas they produced in July 2022. It is the price that TRADERS sold the July 2022 production for in July 2022 that determines the CASH LOSS or PROFIT that the TRADER made in that month, on that contract.

For accounting purposes, the loss to DEC is indeed a paper, or accounting, loss only in respect of what it MAY have made had it not sold it's July 2022 production until July 2022, into the spot market.

I just don't understand how lord gnome thinks the company is still in business if his 'theory' is correct.

[1knocker] 08/8/2022 19:13

LG you are completely wrong. DEC is not betting on the price of gas , it is producing and selling the stuff. Provided it can sell it for more than it costs (all in) to produce, it makes profits.Most purchasers buy forward, because they need to set prices for their customers at which they in turn can make a profit. When demand spikes, customers have to top up on the spot market. Gas retailers which sell to their customers and hope to obtain the gas at a price which leaves them a profit prosper (briefly0 while there is a glut of wholesale supply, and rapidly go bust when supplies are constrained. Look at the number of gas and electricity companies which flourished briefly and failed in the UK market.

It is simplistic to think of the spot price as 'the price of gas'. It is really the price at which retailers have to 'top up' when demand exceeds the supplies they have bought, and at which producers can get rid of unsold supply.

Look at the price of oil, which is more visible. You may recall that a year or so back it briefly went negative. That was simply because there was briefly more of the stuff above ground than there were placed to put it, in a period of suppressed demand. In consequence people who had bought oil for future delivery expecting to sell the contracts and make a turn on them found that there were no buyers and they were at risk of having to take delivery, with nowhere to put it. So they ended up paying others to take the contracts off theirr hands. Delivery of 10 tons of manure to your front drive is bad. delivery of o couple of thousand barrels of oil when you are borrowing buckets from the neighbours to put it in is many orders of magnitude worse.

You can't describe a contract as 'good' or 'bad' by looking at the price alone. Its a complex market, which only balances by reason of numerous types of contract for different durations, on a variety of terms, for many different durations.

It does not help that standard accounting conventions work bizarrely in relation to such a trade, and taxation too as it tends to be charged on the 'market' (and don't ask what that is when divorced from the contract terms!) rather than the sale price.

[lord gnome] 08/8/2022 18:53

Jamesiecakes - sorry to tell you this, but I am 100% correct. The lack of understanding about how hedges work is one of the reasons that DEC hasn’t achieved its true value. This issue comes around regularly, rather like the US withholding tax issue. I give up. Believe what you like.

[cassini] 08/8/2022 18:36

I'm with carcosa and jamesiecakes.

The only hedging situation as I understand it where money would actually flow out from DEC would be if they had promised to supply gas to a counterparty hedged at, say $1, but couldn't for some reason and the market spot price was higher, say $2.

Then they have to pay the spot price for that contract to the counterparty so it could source the gas at spot from another supplier in the market.

[jamesiecakes] 08/8/2022 18:07

Hi Lord Gnome

I’m pretty sure you are incorrect, and it’s why there isn’t a huge cash loss just an accounting loss.

As we have the physical product we just sell at less than we would have done if we sold at spot.

Cheers

James

[lord gnome] 08/8/2022 17:16

Yes, it is accurate. It's not about ownership of the gas, it's about the price you sell it for. If you hedge at $1 and you sell it for $2, you pay the extra to the hedge counter-party.

[carcosa] 08/8/2022 16:29

"Conversely, if the price rises to $2 you have to pay the excess gain to the counter-party"

Is this accurate? DEC have the gas, it's not like they have to buy it from a third party that would lead to a real cash loss. I would agree it is a measure of just how much profit DEC have 'lost'.

[john ten] 08/8/2022 16:18

lord gnome thanks for explaining succinctly and with clarity.

[lord gnome] 08/8/2022 15:23

John ten. The hedging losses are a factor of the recent rocket under the price of gas. If you hedge at say $1 and the price falls to 50cents, the counter-party to the hedge pays you the lost 50 cents. Conversely, if the price rises to $2 you have to pay the excess gain to the counter-party. The mark-to-market hedging losses are a measure of just how much profit DEC has missed out on by hedging and how much must be paid to the counter-parties. The positions will nwind over time and money will be paid to the counter-parties as gas is sold at higher prices. DEC has however, had to make margin calls in real cash, reflecting just how much the hedging positions are ‘losing’.
I hope that this explains things for you. It might be looked upon as the price of success. Hopefully as these hedges expire and are replaced, future hedges will be at higher prices, allowing DEC to retain more of the upside.

[woodhawk] 08/8/2022 14:24

Excellent post asp5. Hopefully this will prove to be an absolute steal at these prices.

[asp5] 08/8/2022 13:20

The CEO repeated in the call today that the dividend would never be cut (based on their business model of hedging to protect the div & debt repayment) but the rate of increase will be moderated.

The current yield of 11% is incredibly deep value in my view when considering the shares trade at 50% of NAV and current debt is hedged and will be amortized & eliminated over the next 7 to 8 years.

If the share price appreciates to the $2.82 DEC refers to as NAV then the yield will still be 6+% which is still high yielding compared to most peers and other industries.

When you can buy a $1 asset for 50c, get a ~11% yield at the same time and are protected from adverse price movements for next 10 years what is not to like.

I have put my money where my mouth is. I have sold out of other positions and re-invested into DEC. Very happy with these results and the ground they lay for the future.

[sammu] 08/8/2022 13:15

I haven't run the numbers, but much of the uplift from the unhedged sales seems to be offset by the higher costs of taxes and transportation that vary according to the market price on all sales. Presentation p.34.
This impact will dwindle as hedges are locked in at higher prices, but will also dwindle if the current high price falls back from the current extreme levels over the next who knows ~18months.

[renewed1] 08/8/2022 12:02

Looking at the results I would think we can expect another modest dividend increase in New Year.

[rik shaw] 08/8/2022 09:55

There's also an Investor Meet Company presentation on Thursday 3pm, which I assume will be recorded and made available afterwards.

[woodhawk] 08/8/2022 09:50

As I just posted above you.

[aleman] 08/8/2022 09:43

Operating cashflows pre-working cap up around 10% to $145m - about twice the dividend payment. Seems steady enough.

[woodhawk] 08/8/2022 09:35

Today's presentation here:



S.p. currently at huge discount to NAV.

[tag57] 08/8/2022 09:33

OMG have you seen those hedging losses! Massive!