Diversified Energy Share Discussion Threads

[lomand01] 28/10/2023 14:07

hxxps://open.substack.com/pub/theoakbloke/p/gassing-on-about-dec-part-2?utm_source=share&utm_medium=android&r=19pp7m. For those that are still worried about the viability of DEC

[cassini] 27/10/2023 15:10

The usual selling at the US open...

[scrwal] 27/10/2023 12:23

Rusty has said over $3 the company makes decent money but that was some time ago and definitely before inflation jumped so it should now be $3.30-3.50.

[aleman] 27/10/2023 10:42

There's been a host of announcements from banks this year that they will no longer finance new oil and gas development. Is the recent rise from this starting to affect the supply side and push prices up? (I honestly don't know.) Prices might look weak against Ukraine disruption but they're starting to look pretty solid on a longer term scale.


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[renewed1] 27/10/2023 10:39

Thats what I understood.

[aleman] 27/10/2023 10:22

It looks like the cold snap might be starting to affect short contracts now - on top of an underlying rising trend. Central Texas is expected to drop about 20C between now and Monday and the snow and cold will then work its way northeast. 9-month high:


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The average of the 2027 contracts, which will be the area where DEC will likely be doing most selling, average just shy of $4 over the 12 months and it look to be slowly edging up in the last couple of months. Isn't DEC supposed to make lots of money just selling at $3?

[tag57] 27/10/2023 09:48

It wouldn’t surprise me if the price starts to tick up, it shoots up as there must be plenty of investors waiting to try to pile in at the bottom.
I have come close to selling several times over the last few months but managed to stay my hand up until now.
Fundamentals have not changed too much and my decision to invest for income hasn’t changed. Just wish I had invested at today’s price not £1!

[catabrit] 27/10/2023 09:24

A very high value thread by the way. Thanks to everyone for contributing and providing so much background. Got me up to speed very quickly. I bought some more this morning.

[owenski] 27/10/2023 08:59

Well, they're certainly getting bang for their buck on the buybacks.

[fordtin] 27/10/2023 08:38

Fun fact for those still invested;

2023 buybacks to date will save £157,541 off the quarterly dividend bill. That’s enough to fund buybacks of an additional 230,361 shares per quarter at current share price.

[lomand01] 26/10/2023 23:07

11_percent. Suggest you read the analysis of The Oak Bloke as to why this does not make sense (borrowing from Peter to pay Paul). Any BB saves $ on dividend payments but to do so would mean 1) spending $5 to save $1 in the first year. The $5 get added to the short term overdraft. It's clear that the DEC priority has been to reduce the short term overdraft by sale of non core assets ($50MM+ on the first 6 months) and use of any free cash flow. Next year sees the reduction of long term debt with some LBA notes maturing. This further improves cash flow with those assets now debt free & 100% owned by DEC. Total debt drops again the year after and again the year after that The Oak Bloke maths concludes that the current debtnad divs are sustainable. The share price has taken a hammering but will recover once the short term variable rate debt pile falls. My view FWIW is that once the headroom in the facility rises to circa $200MM investors will relax and buyers of the shares return. Understandably this is too stressful for many investors.

[11_percent] 26/10/2023 20:34

The divi here is getting out of hand = 21.8%.........it should be reduced back to 15% or something sensible......and saving used on the buy back.

[lomand01] 26/10/2023 13:21

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 13:20

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

[scrwal] 26/10/2023 13:01

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 12:42

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 12:39

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 08:36

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

[catabrit] 26/10/2023 07:47

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 22:18

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 18:05

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 17:08

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 12:47

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 11:32

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 09:01

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