Diversified Energy Share Discussion Threads

[simplemilltownboy] 14/10/2022 08:11

That was a significant but back yesterday. GLA

[clive7878] 13/10/2022 22:38

In theory share buy backs mean less shares in circulation and leads to a lower pe ratio and possibly a higher divi and share value, but a company has to buy back 5%, 10% or even up to 20% for there to be a noticeable difference, as most share buy backs are only make a marginal difference.

The share price range is holding up well in the current climate, I have often thought about topping up more for the quarterly dividend.

Sainsburys over the last few months has lost a third plus falling from £3 to 175. Can Sainsburys with a 7% yield and Tescos with a 5.5% yield fall much further, is the $64 question?

The Conservatives seem to have dropped a brick getting rid of Boris, and then appointing bouncy Truss instead of Sunak with mortgages going from 1.6% to 6%, and now Labour being so far ahead in the polls. She will need to do a Tommy Cooper and pull a rabbit out of the hat, to survive and win the next Election.

I did take a punt in VTU, but timing appears to be poor although on fundamentals they are cheap but in todays market there are negatives too.

[holts] 13/10/2022 13:52

Technically the argument for buybacks is sound , however purely from experience of stocks I’ve held that buyback the reward has never been noticeable and although you can argue a particular price would be worse if they hadn’t , the market is so fickle if has decided to trash a price there is lttle difference, hence prefer the cash in my hand rather than in the paper .

[meanreverter] 13/10/2022 07:55

The annual decline rate of Dec's gas wells is 8.5%. If capital investment were cut to the bone, and all cash flow paid out to shareholders, the dividend would be wonderful. However, the decline rate would then erode the dividends, shareholders would become uneasy, the share price would decline, and the company would eventually die.

To avoid that situation, the company reinvests some cash flow. In doing so, it is careful to get the best value. If, as may happen from time to time, the best value is to be found in its own shares, then so be it: do a share buyback. While the total dividend may decline as a result, the rate per share can be maintained or increased, and the remaining shareholders are happy even though the company is getting smaller.

In practice, sometimes the cheapest gas-producing assets up for sale will not be those represented by the shares of DEC. Then the company will snap up bargains elsewhere. Either way, it is good for the company to have the flexibility to get the best value in the market, be it at home or abroad.

Looking at DEC's history, I would say that its record of capital allocation has been pretty good. If that success is maintained, eventually its prestige will be boosted, along with its share price. In that happy event, rather than buying back its shares, it will do the opposite and make acquisitions by issuing paper. However, while all that is possible, I will settle for DEC's performance reverting to mediocrity, as is the case with the majority of companies.

[viscount1] 12/10/2022 23:38

Sure, yes. Like that famous incompetent Warren Buffett of Berkshire Hathaway.

[lord gnome] 12/10/2022 22:49

And I’d be happy if they canned the buybacks and gave me a bigger divi. I am only here for the divi.

[viscount1] 12/10/2022 21:56

I'd be happy if they canned the dividend and only did buybacks.

[charggg] 12/10/2022 20:16

Let's hope the CEO and board understand that US listing is going to be the key catalyst to rerate the shares more in line with PDP and peers - UK market is very inefficient.

[lomand01] 12/10/2022 20:11

Correct. I was referring to a full US listing and to attract quality nationwide institutional research.

[bluemango] 12/10/2022 18:59

Transferred from Aim to main market listing in 2020.

[lomand01] 12/10/2022 18:51

DEC raised money in Aim as alternative would have been pink sheets in the USA (small raise) which is a nightmare. Would have not had any institutional investors only pump and dump retail. Natural home now it's bigger is the USA although still tiny for full listing

[charggg] 12/10/2022 17:46

Has anyone asked the company or knows why DEC is not listed in the US stock exchange? Given the amount of listed E&Ps in the US market - would have thought that's the most obvious location to list your shares given its the country of operation?In this interview from a month ago, the CFO seems to imply that preparations are underway for listing in US stock market soon. Any thoughts? Surely that can be the main catalyst to drive share price up towards NAV, and dividend yield down to more realistic E&P levels, given the depth of US equity markets?https://youtu.be/2FuZT4N7DKY

[holts] 12/10/2022 14:59

Would DEC be buying back if the exchange rate had not been so advantageous?

[redsonning] 12/10/2022 14:55

Thanks asp5. Yes, I too have found the discussion extremely interesting and well informed. 1knocker is I believe correct in pointing out that some Boards choose very poor timing and understanding for their use of buy-backs. On the other hand I think it would be too much of a sledge hammer to ban them entirely, since there are many occasions when the parameters do work well for shareholders to see buy-backs used.
I defer to those who are well informed about the NAV strength of DEC. But given those existing quoted numbers there should be plenty of downside protection to justify using buy-backs at the current share price.

[asp5] 12/10/2022 14:02

redsonning - DEC have entered into several ABS deals with a syndicate of banks (I think up to 15). These ABS deals as well as the existing revolving credit facility (which is assessed bi-annually) would have been through appropriate due dilligence processes. So I have confidence in the NAV published in their reports.

[1knocker] 12/10/2022 13:59

I am aware of the company policy, and as with any other tool in the toolkit buybacks can be conducted well or badly, responsibly or irresponsibly. I have confidence in this management, or I would not be invested! All that said though, if the share price is a steal (a matter for investor judgment) if you return cash to investors they can buy shares at a bargain price.If they do so, they get a larger share of the company assets and revenue, just as if they retained their existing holdings while to total number of shares in issue was reduced But let it be their judgment, to be made in the context of the whole choice of investments in the investment universe to select from.

Its an idea;ogical consideration, not a matter of whether this is , as buy backs go, a sound one or not. Its a question of the appropriate delineation between director and shareholder functions. Our BoD might make the shareholders a fortune by up the gas business and moving into house painting, but company law limits the business enterprises in which a company may engage to those stated as the objects of the company in the Memorandum and Articles of Association, which in DEC's case are unlikely to include house painting. That is right, its the function of the shareholders to decide what enterprises they want to invest in, and that of the BoD to run the companies business within that field, whether or not there is a better return to be made in house painting than in gas. That is a matter for the shareholders, not the company.

Moreover, looking at the wider picture I have little doubt that the corporate sector would be healthier if buy bac wee still illegal. They are a tool in the toolbox it would be better was not there, because it is too often used incompetently (when the share price is actually low for a reason, or not low at all) or for balance sheet and accounting sleight of hand, and even to achieve targets to trigger director bonus entitlements.

[asp5] 12/10/2022 13:40

Firstly just would like to thank everyone for the positive tone of the discussion and the way different views on the topic are being debated.

Clearly we are in a very healthy position in that DEC is generating considerable FCF. The DEC board is responsible to decide (as has been mentioned in posts above) what is the best use of this cash flow for the long term benefit of shareholders.

If accretive acquisitions will be available at better prices in a few months time after market turbulence has played out, I would prefer DEC mgmt to not to chase a deal.

It is from this longer term perspective that I believe the advantages of share buybacks (as per my earlier post) have merit over special dividends. However if a shorter term view is taken however then a dividend could be viewed as a better choice.

If you ask a trader and a long term value investor like myself to define what is long term you will get very different answers. I think Rusty founded the firm around 2001, so I suspect he is in the later camp.

1knocker - you do make a fair point re the tax situation of individual investors.

[lomand01] 12/10/2022 12:36

1knocker. I believe that you have a fundamental misunderstanding. The share buy backs are not an attempt to manipulate the share price. It's a decision about what to do with a specific $ of free cash flow and how to use it mosst effectively. If there is a deal on the table which is accretive then obviously that's the first choice subject to management constraints. But if by buying back stock at a massive discount to NAV is a better option then that's fine by me. From day 1 the company has been very clear in its objectives of running the company more like a fund, disciplined with the objective of regular and immediate consistent rewards to shareholders as well as growing the business via a clearly articulated strategy. This is very rare particularly for a smaller resource company. They have carved out a unique niche. If you own the stock you are just ahead of other investors who have not done their homework.

[bluemango] 12/10/2022 12:25

#3568 I don't think their motivation is to try to 'manage the share price' but instead to make increasing the yield easier by concentrating the equity at an opportunistic time of perceived undervaluation. With clear long term benefits to shareholders. One assumes they've simply done the sums and it resulted in this as the preferred outcome.

[1knocker] 12/10/2022 12:18

asp, you articulate the buy back case very persuasively, but I still think that the function of the BoD is to run the business of the company, not to manage the share price. If capital is return ed to the shareholders, they can if they see fit use it to purchase more shares in the company, thereby increasing their prospective dividend income, and increasing their exposure to future share price gains an falls. Or thy can put the money into some other investment, or on a horse, according to their own judgment. T my mind that is the way it should be, The BoD manages the business, and the shareholder manages his investment returns of (all being well( the BoD's success in managing the business.

As for the tax aspect, the tax portions of the shareholders depend upon their own circumstances, residency, and tax status. I agree tat it is part of the BoD's remit to minimise the company's exposure to tax, but I don't agree that it is for them to concern themselves with the shareholders' tax affairs which, as I say, differ. Consistently with my 'division of function' view, it seems to me that the furthest the company should go in pursuit of tax efficiency for the shareholders is to offer alternative methods for receipt of payments, For example the alternatives of receiving money as capital or income. The decision as to which to opt for being a matter for the shareholder.

[redsonning] 12/10/2022 12:12

No problem with buying in shares at such a large discount to NAV per share. Clearly that works well, and is all in line with sensible financial control. But as always, the real question is "are the assets correctly valued?" and if they are then "why doesn't the market price seem to believe that valuation?"

[bluemango] 12/10/2022 09:14

Good posts above.

Agree that concentrating the equity and making the prospect of sustainable dividend growth easier, is preferable to a one-off special dividend.

[charggg] 12/10/2022 09:07

Energy aspects is calling for peak shale oil in 2024. Which would mean less associated gas as well. Would be good to hear how DEC sees it and is it sensible to mix a bit if drilling as well alongside the existing producing wells.

[asp5] 12/10/2022 07:58

I have to say I am highly supportive of the managements share buyback approach. Reasoning as follows:


1) A 108M GBP buyback if paid as a dividend would equate to a payout of 12,7p per share. Applying a 15% and 30% WHT depending if shares held in an ISA or not would equate to 10,8p and 8,9p respectively. A 10% share buy back should increase the shareprice (assuming a 130p start point) by 13p (20% & 46% more repectively than the dividend approach). Importantly no tax is liable until shares are sold and likely to be 0% if you leverage available tax reliefs (ISA, SIPP, Personal Allowance etc.).

2) A maximum of 85M shares are to be purchased, with a max 108M reserved for this exercise. This equates to DEC being able to buy at an average of 127p. The effective NAV of 254p (using current low GBP/USD exchnage rates) is based on PDP PV10 pro forma of announced acquisitions. This equates to a 50% discount on assets DEC understands well. Effectively buying 1 pound for 50p.

3) However this valuation standard only accounts for proved developed producing assets discounted using a 10% rate. Given interest rates are expected to peak around 4%-5% and DEC already sees significant potential for infill drilling, bringing wells back to production etc, then DEC are from a value persepctive actually buying much more than 1 pound for 50p.

4) On a standalone basis this buyback frees up 15M USD or 13,5M GBP per annum. DEC have announced a plan to be net zero by 2040 and the published ARO stretches out for 50+ years. In short they take a long term view. So this buyback repays itself after 8 years and after 20 years is worth 300M USD. A one-off dividend payment does not have this effect.

5) Finally given the expected volatility of markets given the need to discount increasingly bad news on the economic front (especially over Q4 22 and Q1 23) - what better than having an effective floor to the share price of 127p below which a wave of buying kicks in. Importantly the size of the buying (10% of shares) is bigger than the position of any of the existing institutional investors.

To summarise, in my view this is a fantastic piece of business from a highly competent managament team who if I remember correctly have not sold any material volume of shares over the years. To me at least it does not look like they are trying to "goose the numbers" for their own short term gain.