Diversified Energy Share Discussion Threads

[sogoesit] 09/8/2022 14:39

Not interested in debating issues about how, why and on what basis I speculate with my own money.
Cheers and good luck.

[greygeorge] 09/8/2022 14:10

Sogoesit, i think you'll find the debt finance is fixed, so no nasty surprises there as far as the future servicing of current debt goes. As for the future, ten years plus, yeah, who knows what the future holds ? But assuming no new acquisitions, and the depletion of current proven reserves at the scheduled timetable, DEC will by then have an oil services company, dealing with the maintenance, de-oommissioning and capping of legacy wells left all over the mid-west and beyond. Maybe they'll diversify into renewables, or become a commodity trader, or even a hedge fund ? I'm thinking of Man Group, which started life a barrel-maker ans is now an investment management firm. So, who knows ? As you say, that's a long way down the road. Or it could get taken over. Or go bust. Who's to say we'll even be around in ten years ? Lots of ponderables, and imponderables too. Basically, it's kind of pointless at this point wondering what may be a decade down the line.

[sogoesit] 09/8/2022 13:48

Cheers scrwal... thanks for that clarification.

[scrwal] 09/8/2022 12:56

Sogoesit

The Asset Retirement Supplement explains the long term plan for the company including the longer term issues.
Current debt will be repaid by 2030.

Ultimately the debt issuers get paid well before the end of the company and the shares become worthless at the end - again this is implied in the ARO plan.

[sogoesit] 09/8/2022 12:25

As you say, Aleman, "there is quite a mix going on" and it is therefore complicated.

Even if I did have a decent IQ, something always open to question, without knowing, especially, the Swaps contracts it would be difficult to summarise, in layman's terms, what the underlying accounting issues are. And I am not an accountant.

But as an amateur PI layperson, when I first looked at this company a few years ago it became apparent, on my analysis, that the company hedges in order to fulfil debt covenants (to pay interest and assure itself of a (nearly guaranteed) position to repay its debt as required by its lenders).
The hedging structure also appears designed with tax "efficiency" issues in mind as it does not enter into futures contracts (physical or financial) and I assume this must be for tax reasons.

In general terms it finances its survival, and some growth, through acquisition, and must continue to do so, as its asset base declines at 8.5% per annum, on a roughly 50/50 debt equity basis.
The equity is a quasi-bond and, I think is intentionally structured as such. If there is going to be capital appreciation this will come through (i) purchase of assets "below fair value"; (ii) structural increase in Natgas prices and/or (iii) increases in the rate of acquired assets (over and above the decline rate or assets with decline rates less than currently 8.5%pa). But the capital appreciation is low risk, low return and potentially slow.

A look at the historical price chart bears out my conclusion that this is, for a gas resources company, a relatively low risk play for which one gets market returns (risk adjusted) of about 10% pa... a quasi-bond no less. (Or, in mining terms, a tolling arrangement).

There are other issues, that arrive at the end of the company's life... but they are far into the future but, in reasonableness, should be discounted. Have the debt issuers taken this into account or will they just be happy to get repaid and equity holders end-up with nothing?
Are equity holders, being paid 10%pa getting a fair return for their risk? (eg if debt financing costs increase will the yield be maintained?).
I.E. "in layman's terms" my view is that the quasi bond is "perpetual", has a (variable) coupon but has no face-value to be re-paid upon maturity.

I also stand to be corrected (but realise someone will in all likelihood call me a fool.. as evidenced by my red down-tick troll)!

[aleman] 09/8/2022 11:03

The company says it buys and sells calls and buys and sells puts, amongst other ways of hedging, so it is clearly NOT just contracting to sell future deliveries with cash exchanging hands only on the agreed date. Clearly there is a cash cost (and likely profit) to some these dealings before the relative delivery dates if they are being bought and sold. While the year-end assets are broken out, the cash cost seems to be summarised in the cashflow analysis as "hedge modifications associated with ABS notes" of $73m. That compares to a loss on settled financial derivatives in the period of $473m and a loss on unsettled derivatives of $1206m.

So it looks like there is a quite a mix going on there and the people arguing are neither fully correct nor fully incorrect. It's somewhere in between.

I stand to be corrected!

[my retirement fund] 09/8/2022 10:57

True that! But lot easier if someone with a decent IQ can read it for us and post a simple summary here!

[sogoesit] 09/8/2022 10:32

As rik shaw's post #3305 points out too, if you wish to understand the company, and its hedging strategy, read the accounts.
In them there is no mention of futures contracts, financially settled or physically settled. They are all derivatives contracts as far as I can see. The company has employed this (highly sophisticated) strategy for a purpose, and for as long as I can remember (it's a core income stock for me).
Nice to see some capital gain today. Maybe a break-out to a new level?
Good luck all.

[owenski] 09/8/2022 08:42

If you want to understand hedging, there are numerous tutorials specific to O&G on Youtube. Go educate yourselves.

[11_percent] 09/8/2022 08:41

I am being ironic.........Blackrock, or someone is keeping the share price under 125p......and have been for some time.

[woodhawk] 09/8/2022 08:31

... until it isn't. Another hefty divi due soon!

[11_percent] 09/8/2022 08:14

Back under 125......where it should be....its proper place.

[rik shaw] 09/8/2022 08:12

For a detailed explanation of the financial instruments DEC uses look at Note 13 (page 41) of the Interim Report published on their website yesterday. Link:



This sets out which derivatives involve cash payment to/from the counterparty depending on circumstance and which do not. It also summaries for each year gas volumes and weighted average price for each category of derivative.

Page 11 of the accounts sets out
1 Average realised sales price (excluding impact of derivatives settled in cash)
2 Average realised sales price (including impact of derivatives settled in cash)
3 Total commodity revenue
4 Net (loss) on derivative settlements (Read with note on page 14 which explains ‘(a) Represents the cash settlement of hedges that settled during the period.’)
5 Hedged Total Revenue

If that’s not enough to get your head round have a look at page 16 if you want to understand how well placed they are wrt tax.

[pro_s2009] 09/8/2022 01:48

fred177, if you want a simpler yield/divi/company, I would suggest I3E. No issues with witholding taxes, yield is currently around 6% but will be rising as their net operating income and profits are going through the roof.



Assets are low decline and company model is simple, and there is a lot of upside to company through development and also some explo. One big benefit I like with I3E is the dividend is paid monthly, so you get a regular monthly income coming in. Next dividend is as below. Currently is 0.1425 pence per share paid every month.

Being Canada its also low risk.....there are other high yields out there like GKP but obviously it comes with much higher risk......


Next monthly I3E dividend :

Dividend: 0.1425 pence/share
Ex-Dividend Date: 11 Aug 2022
Record Date: 12 Aug 2022
Payment date: 2 Sep 2022

[greygeorge] 09/8/2022 01:34

Damn. That's a good idea.

[pro_s2009] 09/8/2022 01:28

Chaps......I would suggest that you just agree to disagree and email the company for guidance.

The companies reply you can then post on here which will clarify for all.

Email send to [e-mail] with a cc to [e-mail]


Very simple to email them and ask them to explain the hedging in laymans terms to clarify. Just inform them on certain discussion boards there is confusion and disagreement on how the hedging works, and could they please clarify noting that their response will be posted on a public bulletin board.

[greygeorge] 09/8/2022 00:30

lord gnome, you really don't understand what you're posting, do you ?

[lord gnome] 08/8/2022 23:20

greygeorge et al. An illustration:

It is January, and Company A wants to hedge forward some of its December production to guarantee its income. It agrees with a hedging counter-party to hedge 100,000 barrels of oil for December production at the current market price - say $100 per barrel.
December comes and the price of oil is $100. The hedge expires and there is no cost and no profit to either party (other than the admin/insurance cost of the hedge).
If December comes and the price of the oil sold is just $50 then the hedging company pays Company A the difference, i.e. 100,000 X $50 = $5 millions. Company A gets its money thanks to the hedge.
If December comes and the price of the oil sold has increased to $150, then Company A sells the oil for $150 but must pay the excess to the hedging counter-party. In this scenario it is the hedging company that receives the 100,000 x $50 =$5 millions.
Are you with me so far? This is simple maths.
Company A is not trading oil (or gas) it is not trading futures, it is merely insuring its trading income by way of hedging. In DEC's case this keeps the banks happy and also the shareholders happy as it pretty much guarantees our dividends come what may.

Now for the difficult bit. Stay with me.

Mark to Market Situations.

The hedge is taken out in January, but prices can move about a bit. In June, when the company reports its half year figures, the price of oil has risen to $120. If this prevails until December, Company A will owe the hedging company 100,000 X $20 =$2 millions, when the oil is sold, being the excess price receivable over the hedging level. This is therefore a mark to market loss of $2 millions on the hedge and must be reported with the half year results (ring any bells?).
Come December, the price is still $120 per barrel. The oil is sold. The company keeps the $100 per barrel and the $20 goes to the hedge counter-party. The Mark to Market loss disappears and the hedge has been paid out from oil sale proceeds.
Now do you understand?
I have tried to keep this very simple for you. In reaity, DEC will have lots of hedges running at various future dates and for various amounts of production to ensure that income matches liabilities. It keeps the banks and shareholders happy.
We are insured when things turn bad, but we relinquish some of the upside when things go well.
If you still don't follow me, I give up. Good night and sleep well. Rusty knows what he is doing even if you don't.

[greygeorge] 08/8/2022 23:20

podgyted, all I've done is highlighted the ignorance and stupidity of a lot of posters on this board.

[podgyted] 08/8/2022 23:15

I do so love it when a poster of 3 months duration pronounces him/her/itself to be an expert.

Nuff said.

We disagree.

[greygeorge] 08/8/2022 23:06

I do so love it when an anonymous poster feels the need to state their qualifications and / or experience to other anonymous posters.

[podgyted] 08/8/2022 23:02

"It's the posters here who are clueless"

You came quickly up to speed in 3 months.

"I don't think you fully understand what you're posting" - possibly not, I'm just an retired FD with experience of using hedging.

[greygeorge] 08/8/2022 23:01

fred177, not quite. DEC produces gas which it sells, at a profit. It sells future production, at a fixed rate, at a profit margin they're happy with, and which the market is prepared to pay. This gives the company forward earnings vision that it can rely on. The buyers take on the risk of rising or falling prices in the future, when the gas id due to be delivered, they're either futures traders, or end-users, like big utilities or big industrial gas consumers (think steel companies).

DEC doesn't have to pay these traders, or the end users, anything, whether gas goes up or down in price. As long as it delivers the gas.

[woodhawk] 08/8/2022 22:52

Shame to see you go, Fred177. Better to get out if you don't understand what you've invested in. Better luck next time.

[fred177] 08/8/2022 22:50

I am a complete novice at this, but, I am assuming that DEC gets the gas away at the market price circa $8 dollars, they then have to pay of the insurance policy/hedge who gain the difference, lucky them ? WHICH SHOWS AS THE LOSS ?