Diversified Energy Share Discussion Threads

[scrwal] 20/4/2023 16:13

Thanks for the Competent Persons Report John.
Mondex - since the report DEC has reduced its capping cost estimates by up to a third.

The report is heavy reading but there are major changes since then
The report is based on a 75 year time frame but this has been reduced to 50 years by DEC in its ARO June 2022 supplement.
The report on page 34 states "The following graphic (Figure 16) demonstrates the modelled 75-year plugging schedule that meets the aforementioned state agreements for the first 15 years and then escalates to a schedule of approximately 1,100 asset retirements per year by the year 2050" but DEC now shows 4,500 to be done in the first 10 years rising to 72,000 by year 50 which is significantly in advance of the 2020 report.

At this point in time there is insufficient data about how the shift towards unconventional wells impacts the ARO in total and the timing of costs to be incurred.
The company is generating more funds from the unconventional wells but it is unclear what additional funding is to be provided against future retirements - ie is the extra cash going to be used for buybacks , dividends or more acquisitions or will part of it be simply placed in a ring fenced cash pot otherwise the company could struggle to fund the needed increased level of retirements.

Currently on a year to year basis the company is generating good cash flows but there needs to be more clarity over future well retiring and how it is to be funded given the higher level of retirements implied in their own ARO supplement over any particular time frame and any timing impact related to the additional unconventional wells including if possible (but unlikely) how further unconventional additions could impact any modelling - something the company has never provided in the past and realistically never will.

[johnhemming] 20/4/2023 15:54

The last time I looked at the figures in some detail it looked like there was about usd2bn spare after paying the usd2bn plugging costs. However, numbers will now have changed.

[johnhemming] 20/4/2023 15:48

Its on the website.

[greygeorge] 20/4/2023 14:56

Now THAT Dunderhead is an EXCELLENT question.

What other oil and gas companies claim to have a 'unique' and novel smarter asset program ?

DEC's claims of having some sort of magical advantage over other companies should be backed up with proof. Or at least a detailed breakdown of well ages, expected remaining commercially viable life. The info IS out there, in granular form. Each individual well is listed in States' databases, all 70,000+ of them.

Look at the share price. I'm not the only one with questions.

[dunderheed] 20/4/2023 14:48

What other oil (and gas!) companies do, GG?

[greygeorge] 20/4/2023 14:48

I mean, even using a conservative capping cost of $30,000 for 70,000 wells, the capping liability alone is 2.1 billion dollars.

[greygeorge] 20/4/2023 14:41

johnhemming, DEC could easily produce the figures for their wells - their age, the capping costs, the expected capping schedule, REGARDLESS of whatever 'accounting method' they use, or potential future value of gas reserves, blah blah. But they don't. Why don't they ?

[johnhemming] 20/4/2023 14:34

The business is a cash business. The accounts on an accrual basis including marking to market the value of the hedges misrepresent the situation simply because they don't adjust for the variation in the value of the gas yet to be extracted.

[greygeorge] 20/4/2023 14:22

I think scrwal quoted DEC as saying something like ' commercial productive capacity of wells of an average life of 17 years'

Why doesn't DEC clarify the percentage of those wells that have an expected commercial life of less than 2 years, 2-5 years,5-10 years, etc. Obviously they have these figures. Why not publish them ? wouldn't you like to know for sure the short, medium and long term liabilities the company faces in capping old wells ?

[greygeorge] 20/4/2023 14:06

Honestly, DEC accounting is as opaque and meaningless as the SNP accounts. Now, in the case of DEC of course, they're audited. Just as the SNP accounts were audited. At the end of the day, when DEC are found to be frauds, their auditor will just resign and walk away. Just like the SNP auditors did. No accountability, no repercussions, no sanctions. Perversely, the worse the auditor, the more clients they sign up. Who doesn't want their books signed off as legit, even when they're totally fraudulent ?

So, don't hurt your heads trying to figure out anything DEC says - or means - or hides - in its' accounts - Unless it's just to help you sleep soundly at night.

Experts in Accounting, the Oil and Gas Industry, and Financial markets have looked, and they obviously don't like what they see. And they like even less what they CAN'T see.

[mondex] 20/4/2023 11:29

John, Many thanks. Seems clear from this report that the average ARO costs are around $30-40k/well.

[johnhemming] 20/4/2023 08:10

This deals with the ARO (Asset Retirement Obligation) in P33




The table is on P34 which shows the range of different costs for different types of wells.

[johnhemming] 20/4/2023 08:04

In their original plugging document which I found on DEC's website they had a range of costs for different wells.

This is the orphaned wells act


It does not AFAICS change the responsibility for plugging wells where the leaseholder remains solvent. It deals with orphaned wells and ensures states have funds for handling that. Which is useful for plugging companies.

[tag57] 19/4/2023 22:15

scrwal - I only meant that the estimated P&A costs of 40-60k related to the Tanos wells acquired by DEC - the key ref used was (f) but should have been (d) where it stated "Value based on estimated amount to retire wells within Diversified’s central region, as included in the Company’s acquisition presentation published at ir.div.energy/presentation on 28 July 2022.
It does raise the question of which costs DEC has used in its ARO calculations for the element relating to its central region wells - while not material to the overall provision I would assume that they have either used the above 40-60k range or have robust plans to expand Next LVL beyond the Appalachian region.

WRT your comments in 4637 "when the June ARO on page 12 shows costs falling from $25k in 2020 to $21k in 2022 and no figure for 2023 because costs are offset by 3rd party revenues" the 2023 column is probably just trying to show the expectation that costs should reduce further, not be completely offset by 3rd party margins.
The 40-60k plugging costs I would assume are higher as these would be 3rd party contractors and shows the potential margins available to DEC if they could expand Next LVL into this region, assuming they have a sufficient backbone of internal work to build off of.
A few ifs, buts and maybes so certainly worth getting clarification from DEC

[lomand01] 19/4/2023 19:32

There are two types of wells in general: the traditional type wells which form most of the portfolio in the Appalachian area and the non traditional wells that they have been acquiring recently in the central area. The ARO costs of the former are approx half of the latter but the economics of the wells in the central area are far more attractive. It all depends how much gas you can squeeze out of a well before plugging. If you can extract 3X more gas from a non traditional well but the plugging costs are only 2X more then you are still ahead. They know this business pretty well after 20 years!

[scrwal] 19/4/2023 18:56

Tag
The relevant paragraph states
"With a long life of productive capacity remaining in the acquired wells, at 17 years on average, Diversified does not expect any significant near-term cash requirements in
relation to plugging and abandonment ("P&A") activities, as the Company is not
currently required to enter into any Company wide state level P&A agreements in
connection with the Acquisition. The Company estimates costs for P&A activities to be in the range of US$40,000 - 60,000 per well. Continuous monitoring of emissions on more than 90% of the production assets to be acquired complements Diversified's existing emissions detection activities."
The "company" is DEC - as per the document header.

[tag57] 19/4/2023 17:49

Scrwal- the way I read it is that the well retirement cost of $40-60k relates to what Tanos was paying rather than DEC’s current cost given the table details related to Tanos’s position.
I have seen one or two critical reports on DEC’s ARO provisions being too optimistic and raising issues with ARO releases from acquisitions as well as critical reports on methane releases. These do generally appear to be written by people with an axe to grind with DEC’s Ops model.
At the end of the day investors need to understand the risks of this investment and weigh up the benefit of the high divi vs future cash flow risk / ARO provisioning / ESG credentials etc.
Personally I am happy to remain invested long term - even after getting burnt on the last placing.

[1knocker] 19/4/2023 16:32

We scratch around for explanations, but the price still seems out of whack to me, as the world seems to coming round to seeing gas as a solution rather than the problem, and there is no immediate threat to the dividend, and given the dividend history.

I wonder if the true answer lies simply in relative returns. There are quite a number of oil and gas (and related) companies paying double digit dividends at present. DEC remains at the top of the pile as it long has done, but even at the current depressed share price probably by no greater a margin than it has done historically.

Anyhow, every day which passes is one day closer to the June dollop of beer vouchers.

[mondex] 19/4/2023 13:50

Oilfield inflation:

hxxps://www.dallasfed.org/research/energy/indicators/2022/en2207#:~:text=Industry%20contacts%20indicate%20that%20year,in%20September%20(Chart%201).

"..year-to-year cost inflation was over 20 percent in recent months. Similarly, the Producer Price Index for drilling and oilfield services—which had risen nearly continuously in 2022—was up 18.5 percent in September..."

[johnhemming] 19/4/2023 13:48

I have not reviewed the placing document but more of those Wells are non conventional

[scrwal] 19/4/2023 13:11

lab305

Yes their model is for a 50 year corporate life span for 72,000 wells per the June 2022 ARO which shows the estimated 10 yearly cumulative well retirements.
In the past they have made it clear that paying down debt first is their target so that they can then create a cash fund to pay for the longer term retirements and dividends.
The problem is with keeping up with the volume of wells to be retired in the longer term as they are behind the curve already, albeit by not much but showing no inclination to catch up.
Furthermore I am concerned about them stating $40-60K per well retirement in the placing document when the June ARO on page 12 shows costs falling from $25k in 2020 to $21k in 2022 and no figure for 2023 because costs are offset by 3rd party revenues. So how accurate are the costs going forward and why did they quote the 40-60 figure if the wells are not significantly different than usual - it doesn't add up and does make a mockery of the ARO model at this point in time.

Yes they are using what they consider surplus capacity of their in house plugging operation but are doing less than the average needed per their own model. They are doing this because it looks good to say they are covering the current capping costs with the revenue from the 3rd party jobs but all they are doing is delaying retirement of their own wells and not giving clear guidance on actual costs per well that they incur. To reach the 450 per year own wells could mean a significant reduction in the 3rd party revenue.

I also referred to "basket case" wells ( my own words) which have to exist and which should be retired in the immediate shorter term but I do believe a fair few of these wells are being pushed to the side when it is very easy for the company to just own up to these and say that given the number it make take 2/3yrs or however long to retire them. They won't because it may well fully tie up in house plugging to do so and they lose the 3rd party revenue.

I have bought back in at a much lower level than my previous holding and am wary of adding more because of the uncertainty I perceive. If a professional outfit were to take a closer more in depth look at issue a valid critique of the situation , or a blatant hatchet job by a shorter, then the share price would be in trouble and confidence in management could take a bit hit if the ARO model was deemed to be inaccurate and had to be modified for much higher costings.

[johnhemming] 19/4/2023 13:09

The detailed plugging cost analysis is available on their website.

[marksp2011] 19/4/2023 07:31

The issue with P&A is it relates to all the wells on the franchise not just to wells that have been productive under DEC ownership. It is a bit like buying into an asbestos firm and picking up the liabilities from the 1950s/60s.

DEC are responsible for P&A on wildcats from the 1959s/60s too.

[lab305] 19/4/2023 00:34

scrawl if things stay as they are then Dec should be debt free in about 7 years. Given that some wells can produce economically for 40 to 60 years surely there will be plenty of time and money to tackle plugging old wells.

[fred177] 18/4/2023 21:15

LLB = thanks