Diversified Energy Share Discussion Threads

[cwa1] 03/5/2023 10:13

Resolutions 8 & 11 show 18% and 10% against respectively. Also big vote agains remuneration report

[lab305] 03/5/2023 10:04

johnhemming I didn't attend as noone from the US management was due to be there. Are you just referring to the votes cast ?

[johnhemming] 03/5/2023 07:57

Does anyone know why one of the directors was (relatively) unpopular at the AGM?

[johnhemming] 02/5/2023 10:53

@Ptolemy DEC have published their calculations on rectifying the wells and the last set of figures had them having spare cash beyond paying the current dividends, paying off the debt and plugging the wells. If they can get the costs down as well (which appears to be the case) then that is too the good.

It is unlikely that people will stop using gas in the next 50+ years. Noone forecasts that.

[ptolemy] 02/5/2023 10:36

Asp5,

I’ve held on and off for a few years and currently I don’t hold – though looking closely at this price. I feel you are perhaps underplaying some points:

Most people would say that a company is responsible for providing restitution for environmental damage and ensuring safety of operations. DEC have no where near enough money (nor will have) to meet the liabilities of plugging their entire inventory of 65,000 wells. Isn’t that’s like buying a company that can never meet its pension liabilities?

Nat gas may be the cleanest of fossil fuels in use but releasing gas into the air at thousands of well heads is worse than say flaring gas (because releasing methane is better than releasing CO2). The burden will fall on local government and so it’s only a matter of time before governments, lobbyists, and the public turn on them. A ‘leader in his space’ when they only closed in 214 wells last year? I’m less sure.

According to some who have looked into the company more closely than I, in reporting well emissions DEC is accused of using non-industry standard procedures for measuring emissions. They report remarkably lower emissions (up to 90%) soon after taking ownership of wells which elicits suspicion. They report selectively and use political influence. For example, DEC have paid cash directly to The Appalachian Natural Gas Operators Coalition to lobby to avoid their obligations. For Professional Investors looking to have clean ESG credentials, DEC may be on their ‘avoid’ list.

Happy to be corrected.

[lomand01] 30/4/2023 19:50

Asp5. I agree wholeheartedly. I was involved in this type business back in 1990. At that time we were acquiring marginal US oil wells from the majors when crude prices were through the floor. They just wanted rid of them almost at any price. Just not profitable for a big multi national but v profitable when handled with care and patience. It just shows that there is nothing new under the sun..

[asp5] 30/4/2023 18:16

Renewed1, LG, owenski, marksp2011, lomand01 I agree with the sentiment of your various posts and actually believe they are connected by a common thread. Let me try to explain.

DEC have primarily acquired PDP reserves over 20+ acquisitions. PDP Reserves are Proven Reserves which are categorized as both “developedR21; and “producingR21; under the definitions for oil and gas reserves from the Society of Petroleum Evaluation Engineers.

These audited engineering evaluation reports from independent reputed firms can be regarded as solid as they are formally used by DEC & their banks for acquisition funding as part of a careful due diligence process. At the end of 2022 these reserves stood at 829 MMBoe.

The PV10 PDP is taking this volume multiplying it by current market prices and discounting this sum using a 10% rate. Debt repayment and ARO costs are then deducted to arrive at an adjusted PV10 PDP (effectively a NAV per share) of $3,29.

So to answer marksp2011’s question, the certainty of this NAV is fundamentally driven by pricing & ARO assumptions as the discount rate, debt repayment & engineering reports are fixed. I already discussed ARO in my previous post so will not repeat myself.

If we look at the current price environment we are around 20/30 year lows. However as renewed1 mentions LNG export capacity will increase significantly over coming years so I do expect prices will be positively impacted eventually.

The market is effectively applying a discount of ~65% to the NAV due to the risks outlined in post 4716. Is this reasonable? I could understand a 10% - 15% discount reflecting some uncertainty, however current discount levels are excessive in my view and I expect them to reduce in due course as many of the risks are shown over time to be overly pessimistic.

For example, DEC has spent $~2,5B to date on its 20+ acquisitions since 2017 however the market values DEC at only $~1B currently. DEC is not destroying the value of the assets it purchases rather enhancing value via its SAM (smarter asset management) & ESG programmes in my view.

I see this as a classic market mis-pricing scenario which can unfortunately last some time. Hence why I am personally targeting a min. 5 year invest window.

With that time frame, I see downside risks are minimized since a 15% yearly divi (based on current share price) over this period will ensure you get back most of your initial capital.

Hedges for 70-85% of the portfolio are already in place for the next 3 years securing the dividend & debt repayment. This then leaves DEC well positioned to take advantage of the pricing environment once the new LNG facilities are up and running.

Finally 70% of the current debt will have been repaid leaving a strong balance sheet from my perspective. Once again DYOR and good luck all.

[lomand01] 30/4/2023 10:36

Anyone looking for certainty should stick to buying Gilts. The equity markets are a way for investors to price risk. Invariably they get wrong a lot of the time. The only way to improve your odds is to DYOR.

[marksp2011] 30/4/2023 09:04

asp5

Thank you, a well argued post.

"DEC has a net asset value (NAV) of ~$3,29 as per results after paying of debt and retiring all its wells. Based on the current share price this means I can currently buy $1 of assets for ~35c"

Is the crux of it. What is the degree of certainty around those numbers? If they are relatively certain, 160-180 should be a breeze. Is that why the Sp is <100p?

[marksp2011] 30/4/2023 08:33

Thanks LAB305

Hard to tell what it means without seeing their argument. Never really understood why PIs were helped by being excluded from research "for their own safety" :)

First Berlin seems to be a three man band - must admit they have slipped under my radar as I had never seen the name before
Dowgate - I know but I can't comment on how reliable they are

Jefferies I like, they tend to do decent research. Peel and Cenkos? I don't normally read but I am sure they are good in some market sectors

I am sure you are reassured

[owenski] 29/4/2023 09:19

Super post asp5.

For those who might be new or just want a reminder of the "simplicity of the business model" here, the CEO gives a short overview, a five minute watch but a lot of detail on the costs, hedging of this financial asset business model. Worth a review. (From five months ago)

Note the length of time they've been doing this and the mention of 'playing a long game' here, not just a quick return type operation. A safe business IMV anyway.

Most recent Div at last exchange rate was - 3.61p/qtr = 14.44p annual.
At 95p to buy, equates to - 15.2% yield.

I had to recheck those figures as I can't believe one can buy a 15% income in the market. But there you are, a gift if you have confidence in the company, as said, the below video gives a simplistic overview of what is a simple enough business, the market I suspect doesn't get it or doesn't like it for 'fossil fuel' reasons and or gas prices coming back of the highs.

I like the experienced 'can do' management here with their background in banking and finance, which is key, as the business model is acquiring and running financial assets - which happen to be gas fields in this case.

Regards all.

[lord gnome] 29/4/2023 08:33

Great post asp5. Mirrors my own thinking precisely, but I couldn't have put it as succinctly as you have done. People (read 'markets') look at the debt, look at the withholding tax, look at the decommissioning issue etc. and without really understanding what's going on they deem this to be a bad investment. It's not.
At this level it is paying 12.7% even after the 15% withholding tax.

[renewed1] 29/4/2023 07:11

ASP
I see one major consideration not discussed.
The LNG terminals under construction to increase US export capacity.
This could have a positive influence on US LNG prices in a couple of years time.

[drk1] 28/4/2023 17:27

Echo the above, perfect post to begin the weekend!

[huckers] 28/4/2023 15:43

asp5. Fantastic post, thank you.

[lab305] 28/4/2023 15:28

Good well argued post asp5. Thank you.

[asp5] 28/4/2023 14:24

Having read recent posts, I was struck by their gloominess as regards the share price so thought I would summarize my thoughts around this.

Rather than following the price action, I tend to look at my investments from a value & risk perspective. I tend to make my biggest returns when taking advantage of moments when the market mis-prices assets.

DEC has a net asset value (NAV) of ~$3,29 as per results after paying of debt and retiring all its wells. Based on the current share price this means I can currently buy $1 of assets for ~35c. I see the following as the main risks associated with DEC:

1)Dilution risk as DEC issue new shares to fund investments
Since IPO in 2017, DEC has made 20+ acquisitions on an accretive basis, meaning existing shareholders do not “lose out” from a financial perspective (FCF, EBITDA, Dividend etc.) when issuing new shares. The real dilution taking place is in voting rights in my view, which I am comfortable with.

2)Leverage risk as DEC takes on debt to fund investments
The vast majority of debt is based on fixed rate amortizing structures so no interest rate risks. Assets purchased cover interest & repayment costs whilst the hedging strategy removes commodity price risk. A steady leverage ratio of ~2,2 has been consistent since 2017. The picture is not overly concerning from a value perspective.

3)ESG related company risks
Questions in the media have been raised regarding the emission levels of DEC’s well estate and the way these were/are managed. The reaction of the board in implementing various ESG programmes etc. has been impressive, with DEC now a leader in this space. They are well on their way to significantly reducing & minimizing their CO2 footprint. At a company level, I think the ESG risks are well managed. However I do see an industry related risk (see below).

4)Industry related risks
As DEC is a fossil fuel producer there is a risk that the regulatory & market environment may tighten and negatively impact shareholders. I see this as an issue for oil & coal producers, but less so for natural gas.
Nat gas is the cleanest of all fossil fuels and is viewed currently as a transition fuel (coal & oil not). Also the tech to create net zero gas power stations using CCUS at levelized prices equal/lower than renewables (see my previous posts 3693, 3887, 3888) is available and is being rolled out.

Looking at the nat gas lifecycle 10-15% of emissions come from drilling, extraction & transportation while 85 -90% of emissions comes from combustion in the power plant. If companies like Netpower eliminate emissions from combustion & companies like DEC minimize the emissions from production, the US will be in a position to cut its CO2 emissions by ~25% with just this one technology rollout (which supports exiting jobs i.e. voters)

The US has over 100 years of natural gas supply at current production levels (~100Bcf per day). This is a key strategic energy security source for the country and in my view will not be thrown away lightly given the current geo-political situation.

I am firmly of the view Nat Gas will be around a lot longer than the so called transition period.

5)Risk that liabilities are greater than estimated
This primarily relates to decommission risk of wells in the estate. There are two topics for me here. The volume of wells to retire and the unit cost to retire a well.

From a volume perspective the assumption is that all wells will need to be plugged. While this is a valid conservative approach for the accounts, based on point 4 above, it could well be that a significant portion of the estate will be used for CCUS and will instead become a revenue generator and not need plugging as per current expectations. The Inflation reduction act provides significant financial incentives and promotes this to be rolled out.



From a unit cost perspective optimization in the time needed to plug a well, materials used, scheduling of activities etc. resulted in 200 wells being retired in 2022 at an average cost of ~21K. In addition revenue will be generated from retiring 3rd party wells to offset plugging costs.

Taking these factors into account, the current use of historic actual costs & a baseline of all wells needing to be plugged, does seem a reasonable base assumption for now given the uncertainty surrounding the future.

Wrap-Up:

I see DEC as a significant value opportunity for those willing to take a longer term investment view and who are able to ride out near term price fluctuations. It is a mugs game to try to time when a re-rating of the shares will be triggered, but I am of the view that this will happen at some stage based on above.

DEC believe that investors in the US have a better understanding of above topics than investors in the UK and a US listing will act as a catalyst. Who knows, but I will enjoy being paid 15% while I wait for the re-rating.

Btw - I am happy to have a civilised, constructive and/or critical discussions on any of the above but I really have no patience to respond to malicious posts. Good luck all. DYOR.

[lab305] 28/4/2023 08:56

marksp2011 "I can only see one broker rating in the last 15 months "..... Really ?

20 Feb 23 . First Berlin Simon Scholes reiterated his BUY rating and maintained
his GBp 180.00 price target.
Jan 23 - Jefferies cuts Diversified Energy price target to 145 (165) pence - 'buy'
Dec 22 - Peel Hunt target price of 180p
Nov 22 - Dowgate initiate coverage with a Buy and an NAV-derived target price of 210p
Nov 22 - Cenkos We increase our price target following the Q3/22 results to 174p
Oct 22 - First Berlin target price raised to 180p from 160p
Now less than 4 weeks to ex dividend date.

[marksp2011] 26/4/2023 14:46

@lab305

I have a very strict risk management process. I am sure it has made me miss out on some great opportunities in the past but it has also saved me from being in anything that has hurt too much (except my pride).

All my big holdings are funds/ITs. 90% of my holdings by value are funds and ITs - i am very boring

[marksp2011] 26/4/2023 14:36

@lab305

Lots of analysts, lots of fund houses
I can only see one broker rating in the last 15 months

Broker ratings merely reinforce a punters predetermined view if they are going the right way or are completely stupid if they go against :)

When you really know a company and then you read the broker research you quickly see just how useless it is.

[johnhemming] 26/4/2023 13:56

This link gives HH futures Nov 23-Oct 24 are all above USD 3 (as at now)

[cassini] 26/4/2023 13:21

To be fair, if the hedges are to guarantee the paying off of debt incurred to fund acquisitions, then as long as that debt is fixed rate, we can take that out of any inflation complications.

Inflation would still affect other operating costs of course.

[lomand01] 26/4/2023 13:16

Not sure from where you are getting your future strip prices? HH prices for post 2025 well above 3.30 for most months which is healthy for DEC even accounting for normal discount from HH prices.

[scrwal] 26/4/2023 13:06

As hedges unwind the company will re-hedge almost immediately so there will always be c70% hedged 3 years down the line.
We should all know why there is such a high level but it doesn't help the company when there are excessive price spikes which it can't fully benefit from.
Rusty has said DEC makes money over $3 but that was way before the current period of high inflation and it could be this aspect that is driving the poor share price performance as Rusty's figure needs revising upwards - 10% uplift puts it at $3.30 which is higher than the longer term hedging which ain't good. I'm just using a guessed uplift needed.
It's another uncertainty thrown into the mix which markets don't like.

[1knocker] 26/4/2023 12:45

Are we going to slip under 90 again?

I wonder if there will be a spate of buying as Ex d date approaches, or indeed a spate of selling afterwards?

This tries one's patience. Probably good for the soul! Even those of us who are long term holders for the income like to see a bit of blue rather than red once in a while though.