Diversified Energy Share Discussion Threads

[2paperman] 22/8/2022 16:14

How much is next div in pence anyone?

[scrwal] 22/8/2022 15:43

asp5 Thanks for the kind reply.

I have previously posted that the ARO plan is what defines DECs strategy. I think we have a different interpretation of subsidy in this instance but I agree that the surplus capacity earnt should be kept as cash to build the Pre Fund account even at this early stage.

I presume post 3413 may have been a sarcastic comment but I have filtered the poster some time ago so can't really tell.

[asp5] 22/8/2022 14:39

Hi Scrwal

Before responding to the substance of your previous post can I just say it is a pleasure to respond given the thoughtful and polite way you raise questions. I am happy to have views challenged, change my position because my facts are wrong or change if my logic does not hold water etc. In short I feel the board should be about us - the small guys discussing our thoughts challenging each other (constructively) so we all are able to make successfull returns - including getting out of shares that we should not be in !!!

So adressing the point you raised, I assumed the 50% subsidy going into some fund based on slide 13 of Dec's ARO presentation where after the debt has been amortized a pre-fund ARO account is scheduled to be setup. Their model even assumes interest earned on that account is 3%. Now I am making an assumption on the 50% i.e. how much would be deposited into this fund etc. but I always like to do an exercise for myself where I could make a plausible argument for something in this case why DEC could re-book a significantly lower ARO cost VS what EQT booked based on their different business model. I am definitely guessing and just making some broad brush assumptions that would allow DEC to book as they have based on reasonable logic.

btw I fully agree with your take on the "reasonable" phrase used by the auditors. I think insufficient time has elapsed to build the evidence and hence full confidence that this works as modelled. I believe the balance of risk is in our favour and this will become clear especially over the next few years (Rusty has the bulk of his wealth in DEC so has skin in the game). Naturally this is a risk return topic. As soon as these doubts are eliminated then I expect another re-rating of the share - but clearly a negative impact if this does not materialize. The joys of investing & deciding when you want to jump in.

One last thing on the political front, I believe most US states will do everything they can to support DEC to ensure their model works. If they can get a viable private sector solution that takes care of the ARO problem for legacy wells that would be a huge win otherwise they will have to bear the costs themselves. I do not see any other company of a similar size to DEC in this space better positioned to be the trusted custodian player ensuring wells are decommissioned appropriately.

[aleman] 22/8/2022 14:31

Dutch LNG import capacity to double, with first new imports starting from September:





EU storage of 75% is at the 10-year average after being around 10% below the 10-year average at the March 2022 low of 25%. (The pre-winter build usually peaks around 90% at the end of November.)



EU gas storage will reach 75% today, totalling 834 TWh and exceeding the level of October 1st 2021. However, while Europe has historically relied on Russian gas flows of 5.5 TWh/d during the heating season, current Russian exports of about 1 TWh/d means a deficit of 4.5 TWh/d must be replaced – equivalent to ca. 25% of daily Winter consumption. Increased draw on gas storage and higher LNG imports will largely mitigate the shortfall. In the first half of this year European imports of LNG were up by 55%, and if this trend continues then LNG could replace 30% of the missing Russian gas.

[greygeorge] 22/8/2022 14:26

Wow ! I can;t wait to read the books that are going to be published by the experts here. So many brains, so many words.

[woodhawk] 22/8/2022 14:01

Looks like some profit taking has kicked in here after a seriously strong run up from 110p. A pretty rough day on the market today too - most of my shares getting hammered.

[scrwal] 22/8/2022 13:48

asp5 Thanks for the comments which I generally agree with apart from

"As a very rough & dirty calc (I know not accurate) we can take 200M/3 = 66M. Then apply a 30% discount as DEC ARO costs are lower than peers - 66 x 30% = 46M. Then lets say 50% of costs are subsidized by selling excess capaity - we get to 23M - which is approx what DEC are booking. So I see a reduced booking of ARO costs as reasonable based on their model"

I don't see why you are including the 50% subsidy as this is not a cost of plugging and it doesn't appear that DEC are doing so as their $25k per well previously was done when there was no capacity. There is no evidence yet to support the offset and for it to happen the accounting treatment implies that a cash fund must be set up to hold all the excess selling capacity BUT the gross cost of the ARO has to be shown - you can't offset it even though it does net out to the $23M ie $46M ARO and $23M cash.
When capping commences the cash is used and the ARO reduced by the same amount but there is still $23M to be found from future funding.
This is just me attempting to disprove your rough calc with mine with the problem being we don't know enough.

As regards the auditors finding assumptions to reasonable that doesn't necessarily mean a lot. Being an auditor previously one of things you hated was being presented with a load of management assumptions on something especially if you are at odds with them. The crucial word is "reasonable" which is quite vague as it doesn't mean accurate or correct more like we can't dispute on current events what has been presented. The auditor is hoping that the future does validate the assumptions or there are events that couldn't be foreseen - not oops there was a problem which maybe should have been spotted by either party or management had been economical with what was presented.

[asp5] 22/8/2022 11:44

European benchmark gas prices have risen as much as 16pc this morning ahead of a planned shutdown of the Nord Stream pipeline from Russia at the end of this month.

This may be pay walled but the news should be around. I strongly believe that US gas prices will normalise with european prices over time - which would mean the macro picture for higher prices is looking good for DEC.

[asp5] 22/8/2022 09:27

Whichever method DEC uses to reduce the decline rate and extract every last molecule of gas then it is attempting operationally to maximise extraction and lengthen the life of the well.

By doing this it logically pushes the pluggin date further out which will reduce the NPV of this cost. By gaining this extra time DEC are also able to generate additional revenue (from selling excess pluggin capacity) which can be for example be put into an account gaining interest to cover costs when Dec's wells are ready to be plugged.

This extra time also allows for processes, tools, materials used etc. to be developed & refined that ultimately reduces this pluggin cost. So by the time they come to plug their well this is highly optimzed.

The above is all part of the business model and makes logical sense and DEC are showing it works in action. If there is data that does not support this I would be interested however I have not seen any yet.

[meanreverter] 22/8/2022 08:40

Spangle93 : A simple model of a gas reservoir being tapped at a constant throttle would indicate an exponentially decaying pressure and yield. This would indeed lead to old assets having a lower decline rate, along with lower productivity, in comparison with younger assets. DEC specializes in acquiring such ageing assets, and running them to extinction. (This reminds me of Benjamin Graham's “cigar-butt221; investment style.) This is a perfectly viable business model if done in a disciplined way: low output at minimal cost. It excludes any form of well management beyond essential maintenance and perhaps occasional adjustment of the flow valve.

[spangle93] 22/8/2022 07:59

To a degree, meanreverter has a point.

DEC's USP is that it buys and operates wells that have reached later life. The unconstrained, generic, decline rate of a gas well / field is parabolic, with a steeper decline in early years, flattening out to a long tail of residual production in later years. Unconventional (shale) gas wells exaggerate this trend. Pulling at a higher rate lowers the pressure and shortens the well life. Putting the two together it wouldn't be unreasonable to expect the decline rate in DEC's wells to be lower than "peers".

The way I see it is that the decline rate isn't "per well" but "per region" and usually per company. So, with its smart well management, DEC can maybe use compression to drain more from a series of wells, perhaps reperforate or squeeze acid in blocked wells, or perforate bypassed sands, or workover wells to replace leaking tubing or other integrity issues that would cause them to be shut in.

We used to use "scorpion curves" to decide which jobs would add most value (after those that were mandatory from an HSE perspective. Plot cost on the y-axis, expected return on the x-axis, and rank them by the latter from the origin. Having identified the best "bang foor the buck", those are the jobs assigned to the teams in the field, hopefully combining them for greater efficiency.

Summarising, it would be of concern if DEC's decline rate was NOT better than its peers. However, the intent of the SMART system of improving efficiency and lowering cost means the decline rate is less than the well portfolio would have had if it were still operated in a non-core fashion by the previous owners.

[meanreverter] 22/8/2022 07:52

carcosa : I haven't managed to locate anything in the publications of DEC which shows how the company can reduce the decline rate of an existing well without a corresponding reduction in the withdrawal rate. Would you please explain to me how this can be done, or guide me to where I can find such an explanation?

[carcosa] 22/8/2022 07:23

Considering all the presentations, videos, reports etc issued by DEC, the fact that an investor/interested party believes "The only way to achieve a lower decline rate is to reduce the withdrawal rate." is a true statement goes to show how ineffective DEC have been in getting their message across.

Yet the Ohio Valley Institute report which is blatantly inaccurate, misleading and based on wholly unreasonable modelling assumptions is readily believed.

Still, it provides opportunities for investors.

[meanreverter] 22/8/2022 07:03

asp5 : The decline rate of a conventional natural-gas well is determined by the gas in place and the rate of withdrawal. The only way to achieve a lower decline rate is to reduce the withdrawal rate. That doesn't give you more gas; it just delays when you get the gas.

[asp5] 22/8/2022 03:29

Hi Scrwal

part 2 - so lets take the ARO cost topic. DEC will want to reflect their reduced decline rates, their reduced costs and the fact that costs will be offset by revenue from selling excess capacity in the ARO.

In the river valley appendix p20, it refers to 11,250 wells purchased by DEC from EQT who had ARO at $200M in their books. DEC reduced this is $26M. Lets break this down.

Firstly EQT have put the ARO cost per well at $200M/11250 = $18K per well. However the report complains elsewhere that DEC have estimated a pluggin cost per well of ~20K which is too low. This inconsistency is a bit of a theme.

Now if DEC decline rates are x3 better, then revenue will be greater per well over life and the well will be plugged much later than EQT would have, hence pushing out costs till later and with discounting meaning a smaller number booked. Something the report questions but is just logical to me.

As a very rough & dirty calc (I know not accurate) we can take 200M/3 = 66M. Then apply a 30% discount as DEC ARO costs are lower than peers - 66 x 30% = 46M. Then lets say 50% of costs are subsidized by selling excess capaity - we get to 23M - which is approx what DEC are booking. So I see a reduced booking of ARO costs as reasonable based on their model. Should it be 26 or 30 or 22 - I leave that to the accountants/auditors/regulators. But I can see how it is logically around that ballpark.

Now is DEC focusing on the easy wells first so its costs are lower - probably. But also if well costs go up DEC just need to change the ratio of excess capacity sold to own wells pluggs to help offset costs - so for me this is something that can be controlled.

For me the report boils down to - I do not believe DEC can have a decline rate of ~8,5%, DEC cannot optimize the ARO process to reduce costs and DEC cannot subsidize pluggin costs by selling excess revenue. The report rests on questioning this as what DEC reports logically follows on from these 3 points (at least for me).

DEC are currently demonstrating that they are doing it out in the field and plan to get get better & better at it.

[asp5] 22/8/2022 02:43

Hi Scrwal

Thanks for the link to the references. I missed this initally and it helps to rationalize things.

We should really start on the basis that DEC is focused on operational excellence rather than being experts in drilling new wells. This makes it stand out from a business model perspective vs most (all?) other E&P players. This operational excellence can be seen in:

1) The decline rates where DEC achieves an average 8,5% compared to a peer average 27%, a x3 improvement. This rate is not a one-off but a consistent level (5%-9%) achieved over several years. In Appalachia the decline rate is below 7% (see DEC Aug report p21, p22). This will by default extend the life of wells vs peers.

2) ARO costs where good progress has been made progress. The average cost to plug a well has been reduced by 16% since 2020 and by 30% if only inhouse staff are used. Further gains/improvements are expected as scale and expertise are built up.

As an example, DEC have reduced the time to plug a well from 8 days to 4 days (see DEC ARO report p 6) a significant productivity gain. They are also exploring how to optimize materials used to plug wells etc.

They now have 15 rigs/teams giving them the capacity to plug ~600 wells a year. In H1 2022, they recieved $2,8M in income selling excess pluggin capacity (likely more in H2). This income alone covers the cost of plugging the 200+ wells targeted by DEC this year. So DEC have demonstrated a scalable model that can presently plug wells at net zero cost.

I have not seen any report where a state has comlained about the quality of the plugging work and refused to sign-off - so expected quality levels are being met at these costs. I expect scale and revenue to grow consistently with the potential this could be a net revenue generation topic.

3) ESG. Significant efforts to accurately monitor and plug leaks are underway including with thousands of miles of midstream assets. Any leaks plugged increases volume of gas sold and hence revenue. So ultimately enhances the bottom line with costs already accounted for. DEC have set a goal of being best in class. Again striving for operational excellence. Reportingon this topic has improved significantly over the last couple of years and I expect similar progress going forward given all the work currently in porgress.

Based on above I will write a follow-up post with my thoughts on how they impact the River Valley analysis.

[scrwal] 21/8/2022 20:46

These are the appendices referred to in the report


asp5 - the auditors were referring to the non impairment of assets not the ARO and the report does state such matters are subjective but DEC looked like being on its own not doing so and by implication doing something that only goes in its favour.

Bloomberg were going on about methane issues on a very small sample and tacked on a bit about underfunding. Ohio Valley has put more meat on the bones in their report and have come at things from the DEC does things differently to other producers and aren't saying methane emissions are out of control - they are alluding to the fact that DEC has a history of revising items in its favour eg extending the economic life of its wells.

Yes the report bangs on about the ARO but Ohio River Valley are Appalachian based so it is important to them and the community they serve. There will be some bias but you would expect that from a local organisation.

[asp5] 21/8/2022 17:58

Hi Scrwal - looks like a repeat of all the topics that bloomerberg raised a while back. Had an initial review and could not see a single new issue.

The good thing is DEC have already addressed these points. This includes engaging ISOS group to independently validate the accuracy and completeness of their emissions reporting. Really not sure what more DEC can do to show the validity of their data.

On the ARO concerns, I find it funny that the report states that the auditor finds the assumptions that DEC are making re ARO are reasonable yet provide no detail on what they specifically find unreasonable. How dare DEC focus on their operational expertise and reducing cost of AROs !!

I will take a closer look but at first glance this is not a fair analytical analysis rather the usual agenda driven reporting as per bloomberg. It may frighten new retail investors - but I seriously doubt it will impact the professionals.

[scrwal] 21/8/2022 13:25

This report issued in April by the Ohio River Valley Institute makes for interesting reading. Given its stance the lack of impact on DECs share price is surprising but that may be because of the lack of exposure maybe.

Obviously investors would be aware of some of the observations made from their own research into the company but although it is contentious its does bring together a lot of points about DEC into a single article.

I wouldn't say it is biased as there is a lot of data that is tied to DEC reporting and financial accounting/statements. Obviously assumptions made can always be disputed but essentially we have to make our own minds up about the comments made. People won't agree with it but it gives food for thought and focusses the mind. It could also give a reason for the perceived apparent undervaluation of DEC.



I found it in the comments section on the excellent Seeking Alpha article 3 August which was posted earlier on this board

[fordtin] 19/8/2022 15:01

May be wishful thinking, but I thought it might be interesting to have a look at what effect a continued rise in share price might have on the div yield;




 
dividend
 
 
 
 




SP
 
Gross
 
-15.00%
 
-30.00%


 
 
 
 
 
 
 


140
 
10.25%
 
8.71%
 
7.18%


150
 
9.57%
 
8.13%
 
6.70%


160
 
8.97%
 
7.62%
 
6.28%


170
 
8.44%
 
7.18%
 
5.91%


180
 
7.97%
 
6.78%
 
5.58%


190
 
7.55%
 
6.42%
 
5.29%


200
 
7.18%
 
6.10%
 
5.02%


210
 
6.83%
 
5.81%
 
4.78%


220
 
6.52%
 
5.55%
 
4.57%



( N.B. at 1.1845 USD = 1 GBP )

[tom111] 19/8/2022 13:43

Sorry my fingers got tangled up

[scottishfield] 19/8/2022 13:09

Assume you mean SEPL?

[tom111] 19/8/2022 13:06

Sold yesterday had a good run switched over to SEPT awaiting news.The divi is about the same now since the rise in the share price here.I know this is a brilliant co just that the share price has spiked a bit,always difficult to know when to sell,easier to buy.

[asp5] 19/8/2022 08:40

Large investors / funds who are invested or are interested to invest will understand this effect and will not be impacted. The noise (if any) will come from new retail investors. Hopefully they will scrawl through this discussion board first but probably wishfull thinking.

Taking a bigger picture view capital spending for almost all extractive industries from 2010-2020 has been severely curtailed. For example, in the energy industries, capital spending in the S&P 500 has fallen from $320 bn per year to less than $100 bn today.

After years of underinvestment, the cost of every energy source has gone from record lows to record highs. This is a result of ESG pressures, recent geo political shocks and execution of flawed energy strategies. It will take many years to correct/fix.

In 2020, energy and materials made up less than 2% of the S&P 500 compared with 20% in 2008. This % has increased more recently but in my view I see considerably more rebalancing to come.

DEC still looks a bargain to me at these levels with plenty of share price growth ahead and of course a nice divi while we wait to see how the share price develops.