Diversified Energy Share Discussion Threads

[lomand01] 26/10/2023 12:21

Scrwal. Just for clarification the new wells are non traditional wells (fracking) at an earlier stage of production. The plugging costs are higher for these but this is compensated by their higher production and better gas pricing in the Mid/South. More detail on the Emeth Value video in YT.

[drk1] 26/10/2023 12:20

For those in doubt of DEC's financial model, this is well worth a read................

[scrwal] 26/10/2023 12:01

asp5
Thank you for your reply and I would comment as follows

1) The 2022 Annual Report Supplement clearly shows an 8.5% overall decline rate - the 2021 Supplement page 3 states a Consolidated Production Decline of c9% so the 4.5% is suspect.
2) The placing offer document 8 Feb 2023 page 4 the company states the decline rate of 9% but then states the assets acquired have decline rates of one year 32% 3rd year 23% and a terminal rate of 9%. Including these figures the company expects to have on a pro forma basis a company wide average decline rate of 11%.
3) On the same page plugging and abandonment costs for the new wells is stated to be estimated at $40,000 to $60,000 per well.
4) Yes the 3rd party revenue helps offset costs currently but in order to get close to any of their cumulative 10 year targets this income will be zero as all capacity and more is required to plug their own wells.

Given that there is such a long term time frame we don't really know how things will pan out and we have our own opinions but to use a 4.5% rate when they report a much higher rate elsewhere to me is disturbing. They talk about how 3rd party work covers their own capping costs which is true but they aren't on schedule to meet their own 10 year cumulative target of c4,500 wells.

Finally I have a sneaking suspicion that the CFO left because he may have disagreed with the current ARO model and its assumptions and it will be interesting to see when the next supplement comes out what data it shows and whether the presentation format gets changed.

Anyway I am still holding but when the price gets close to my average I will reappraise things.

[aleman] 26/10/2023 11:42

I know DEC only has about 20% exposure to unhedged prices but I'm surprised the expected cold weather has not lifted the gas price. Montana temperatures are over 20C below normal and it's expected to snow in northern Texas in a few days as the cold spreads south and east. Such cold snaps usually give a little boost to spot prices but there's nothing to be seen yet. Given the general recent upward trend in spot in recent months, I'd have thought this on top might have given it a boost towards $4. Maybe there'll be a more typical reaction in a few days?

[stevensupertrader] 26/10/2023 11:39

Whenever DEC did the Buyback , the following day share price fell , seem to me Buyback is throwing good money away. share price back to last month Low . The Co Board run out of good idea to stop this catastrophe happening.

[11_percent] 26/10/2023 07:36

Don't catch a falling knife......this is only going one way.

[catabrit] 26/10/2023 06:47

Think we are getting well compensated for the risk down here so have nibbled as part of my dividend bucket. It is a wonderful time to go shopping. So much is on offer!

[asp5] 25/10/2023 21:18

scrawl, you are correct that the previous ARO supplement assumed the need to have an ARO sinking fund. However as lomand mentions in the latest ARO, DEC believe it can be covered by operational FCF. The basic logic is as follows (using approximations to keep things simple):

1) Average cost to plug a well ~21K and with ~70K this means ~$1,5B cost to plug all
2) Most wells (~95%) are to be plugged from year 10 (after the ABF financing repaid)
3) Allow 30 years to do this, then ~2200 wells would need to be plugged per year
4) Yearly cost would be $21K x 2,2K = ~$46M per year including in the 30th year
5) Clearly cost inflation will impact cost to plug over time, however likewise the cost of the service DEC provides to 3rd parites will increase over time so some netting out effects will take place. Also optimization efforts / technology improvements may also help to mitigate cost iflation.
6) The long term decline rate is assumed to be 4,5%, which would mean in year 30, revenue (assuming constant gas price) would be 25% of current levels.
7) The latest First Berlin report estimate FCF for 2023 of ~390M. So in 30 years it would be 25% of this level (~98M FCF), more than enough to cover ARO.
8) Now is a 4,5% long term decline rate reasonable? Well back in 2017 when DEC only had a mature portfolio the decline rate was between 3%-5%. The prior ARO report had 50% of the portfolio at a 4,5% decline rate so it is definitely not unreasonable. Clearly the current decline rates are skewed by recent acquisitions which contain many non-mature assets, which will settle down over time and especially by year 10.

The above provides the basic logic why ARO will be operationally expensed. However, I think the risk is even lower.

1) There are ~2+million orphaned wells in the US. Funding has been passed to start the plugging work and DEC have already won bids for this.
2) Now if DEC maintain a 25% margin, they should be able to generate net revenue of ~$5K per well. So for every 4 wells they plug for 3rd parties, they are able to plug one of their own wells at zero incremental cost.
3) If DEC plug a cumulative ~275K 3rd party wells starting in year 10 over the next 30 years (~9K per year) then DEC's ARO costs would be fully covered. This would represent ~15% market share of the orphaned wells.
4) Now clearly this is a highly positive assumption, but I do see a scenario where the real exposure of the ARO is significantly less than what is currently assumed. However this will only become clearer in a few years.
5) There are also other mitigating assumptions that would impact the ARO exposure, such as if the unit price of gas converges upwards to the level of the international gas price as export capacity comes online from 2025 onwards. Also I would assume there are significant opportunities to use some wells for CCS and generate fee income from this and avoid plugging costs altogher.

Based on above logic, I am fine with the assumption to expense the ARO and not set up a sinking fund. Happy to get constructive feedback. As usual DYOR.

[scrwal] 25/10/2023 17:05

That's the problem though - future cash generation from year 30 to 50 is unlikely to cover the annual costs of the 34,000 wells to be retired in that time frame because of the production decline up to year 30 and then onwards. There has to be a cash reserve.

[lomand01] 25/10/2023 16:08

The AROs will be required mainly after ~10 years from now and will be expensed as operating expenses at the time. Assuming that there are no further acquisitions all debt will have been repaid by then. That's my reading of the presentation

[scrwal] 25/10/2023 11:47

asp5

The 2022 Annual Report presentation page 18 shows decline rates of 8.5% and a pro forma rate of 11% which reflects the Tanos II acquisition.

One thing I missed from the June 2022 ARO supplement is this at the top of the graph on page 11 "$8.0 billion in Free Cash Flows provide ~$4.8 billion in dividend potential while also repaying all debt outstanding
and generating sufficient Free Cash Flows to retire all wells without the use of a sinking fund"
I don't know if the board realises what a sinking fund is but this is one definition "A sinking fund is a fund containing money set aside or saved to pay off a debt or bond" so are they really saying that the ARO can be paid off each year with the FCF generated in that year - they can't. All prior ARO supplements have included an element of funds being retained to "Pre-Fund ARO & Dividends Cash Account".
They will still need to create a cash provision at some point because of the production declines and to state there is no need for a sinking fund is insanity.

[marksp2011] 25/10/2023 10:32

the BoE is doing QT
Bonds are giving a return

Outflows from UK equity funds that don't have permanent capital is requiring net selling in the market nearly £600M in September alone.

I have small cap ITs that have lost >10% of NAV in the last 5 weeks

Liquid stocks go first as they can be sold at market prices. If you want to offload into an illiquid stock as some muppet did this week in JCH, selling at best at 08;01 cost a major discount to the bid

There is a lot of portfolio reshaping going on.

When the market thinks a rate cut is coming, the tide will turn but the high tide will be lower than it would have been before fixed income became attractive

banging on about DEC and how they should fight the tide doesn't make a lot of sense to me

[2wild] 25/10/2023 08:01

I paid 68.88p this morning, giving me a yield of 20% in my SIPP.

[lab305] 25/10/2023 07:19

asp5. The first question I would ask is why at the interims there was a substantial increase in RCF debt leaving them more exposed to higher rates.
Hedging works great until prices rise far above what you are receiving. In that case your competitors benefit greatly and acquiring assets becomes very expensive.
Finally if hedging gives certainty of income and protection against shocks why has the share price collapsed ?

[johnhemming] 25/10/2023 06:38

I monitor the tame brokers forecasts on decline. TanosII will increase the decline overall temporarily as TanosII is at an earlier stage of production. The early decline percentages are higher than the later ones.

[asp5] 25/10/2023 04:52

Hi cassini the August 2021 ARO supplement, slide 9 shows that 75% of the estate at that time had a decline rate of less than 6%.

The report is based on work from reserve auditor Wright & Company in 2018 which sampled 20K wells.

DEC should really publish an updated chart based on more recent sampling given all the acquisitions it has made over the past years. I believe this would help to allay alot of fears re the decline rate.

[asp5] 25/10/2023 04:42

If you look at the financial information full year presentation (on the DEC website) for the year they IPO'd (2017). Slide 17 is titled "HEDGED TO PROTECT CASH FLOW & DIVIDEND" in which DEC show their hedges stretching out to 2021 i.e. 4 years. On slide 23 & 24 they show the breakdown of the hedges from gas & oil. Oil hedges remain around 80% of production for 2 years before dropping lower, while gas hedges remain around 80% for 18 months before dropping lower.

In my view the strategy and approach to hedge has been made clear by management from the start and has not deviated over time. What I believe has changed/been improved is that DEC has moved from using RCF facilities (short term revolving financing e.g. review bi-annually etc.) to fund acquisitions which is inherently more risky to long dated amortizing ABF structures which are inherently less risky for shareholders as the rate is fixed in for the tenor and debt repaid at end of term.

However this change in financing requires longer term hedges to be put into place. Hence why DEC now has a rolling 3 year hedge strategy combined with long term hedges in order to secure the lower cost, less risky financing. In my view this is extremely positive and not a negative.

[cassini] 24/10/2023 23:49

Some mention of this 10% decline rate has been made on LSE and one poster noted that some of the wells in the new aquisition are still in their hyperbolic phase and have not reached a stable exponential decline rate yet.

I know that sounds like it comes from the 'trust me bro' school of speculation but I wonder if DEC have published any breakdown of the distribution of decline rates in their wells?

[lab305] 24/10/2023 19:55

fordtin I don't recognize the number but I just checked the totals. I sold all of them over 3 different platforms and the total was just shy of 630k shares.You will appreciate things were fairly hectic this morning! That's all mine gone but I would still buy some back if some of those concerns are addressed. I originally bought into a long life low decline neglected wells better husbandry company. That's changed now and the mouse is running on the wheel trying to keep up.
I honestly think that the increase in hedging has been the main problem. Last year when gas prices went through the roof DEC could not capitalize on that whilst others made hay. Those others put cash away from the bonanza and in more recent lean times they still have reserves. There are therefore no distressed assets about that Rusty would normally pounce on. Hence no deals , a big problem if decline rate is 10%.
That's my take anyway but my criticism of the very high hedging levels over the years has not won me many friends on here !

[fordtin] 24/10/2023 18:04

Lab305 – I guess you’ve got no reason to follow the thread anymore, but if you are still here, I guess the rapid fire string of 50k’s were your sells, do you think the uncrossing trade of 546,086 had any connection to your volley of trades?
It'll be interesting to see if they feature in a buyback rns tomorrow.

[cassini] 24/10/2023 16:44

Disappointing close after an encouraging start.

Note the US appears to have taken us down after 14:30 which was also the case when this started to tumble hard about October 1st. What's that about, it's an up-day in the US markets today.

The downtrend remains intact for now.

I wonder if we're setting up for double bottom?

[lomand01] 24/10/2023 15:03

Lab305. Understand your frustration. If you have not already read it this is some interesting analysis of the points you raised. Not saying he is correct but at least he is independent.
hxxps://open.substack.com/pub/theoakbloke/p/captain-on-dec?utm_source=share&utm_medium=android&r=19pp7m

[lab305] 24/10/2023 14:35

You may well be correct but my patience has snapped. A few weeks ago I sold another large chunk at 90p. I certainly don't regret that. I have been here since 2017 and quickly bought quite a large holding. I have made money on them over the period as much by trading as from the dividend. Obviously I was much wealthier even just a month ago but this level of wealth destruction is unpalatable and I have given them every chance. The main factors that concerned me are these.
1.Sporadic non existent buybacks. To me if the company doesn't show faith in itself then why should I ?
2 Yearly gas production drop from existing wells now compared with first few years.
3. My expectations of bumper interim profits this year due to hedging never materialized.
4. Apparent debt increase at same interims accompanied by interest rate rises.
5. Sudden Eric Williams departure. A person who appeared to be a company man through and through
6. The relentless collapsing share price.
7.The clamming up and quietness of the company. Communications have all but ceased and I know quite a few investors and brokers that have commented on this. Some may remember we used to have investor meetings in London.
8. The outlook for next year is not great as the hedged price they will receive is lower than this year.

[garycook] 24/10/2023 13:42

lab305, Think you may live to regret selling that amount of DEC at 72p. But best of luck.

[lab305] 24/10/2023 13:07

Thanks fordtin. Not one trade but several .