Diversified Energy Share Discussion Threads

[asp5] 31/10/2023 17:03

I have read a number of posts lamenting a raft of issues surrounding DEC including:

1) Management & execution of buybacks
2) Concerns over debt levels
3) Worries over the sudden departure of the CFO
4) Poor hedging strategy and how it is impacting profits
5) Risks associated with DEC's ARO commitments
6) Problems with purchasing assets from the market given the higher interest rate situation
7) Lack of communication from the company
8) Decline rate of the wells over time and impact to revenues over the longer term
9) Tanking of the share price currently and the current market perception of DEC

In my opinion, all the above issues and any others I may have missed, can be discussed and argued but are essentially irrelevent from a value investing perspective. What I believe makes DEC a compelling investment case for long term investors (those willing to hold till the end of 2027) are the following:

a) DEC has hedges in place for the next 3 years that secures the current dividend. Furthermore henry hub futures prices for 2027 are in the $3,5 - $4,8 range which if locked in would comfortably secure the dividend.

b) If I invest today (assuming in a SIPP) and DEC do not cut the dividend (as per hedge strategy & committed by the founder & CEO) by the end of 2027 my initial invest will have been repaid. Whatever the DEC share price at the end of 2027 (which is unknowable now, but should be above zero) will be pure profit.

c) None of the issues listed above impacts points a & b.

I think it was Warren Buffet who said the first rule of investing is not to lose money. The second rule of investing is not to forget rule 1. With DEC the risk/reward balance is heavily skewed in favour of investors who invest at these levels. The rest to my mind is frankly noise and those who can be patient should be well rewarded.

I continue to invest into DEC and am happy to constructively discuss the above logic (my time permitting). Good luck all and please ensure you DYOR.

[tag57] 31/10/2023 16:05

Cassini, I would have thought that higher interest rates would be reflected in a higher discount rate on future cash flows therefore would be reflected in the acquisition price paid. This should be reflected by all bidders so should not really affect the business model, except if they cannot get access to fixed rate debt.

[cassini] 31/10/2023 15:23

lomand1,

Makes sense, like housing then, higher interest rates means falling house prices so the total cost of acquiring an asset remains about the same i.e. what the market can afford.

[lomand01] 31/10/2023 15:15

Cassini. No the cost of capital is reflected in the price paid for the assets. E&P companies also face higher COC which means that many will be selling assets to raise capital. Eventually it sorts itself out like any free market

[cassini] 31/10/2023 14:56

I'm wondering if the rise in interest rates hasn't just lumbered DEC with a bit of extra interest on its non-fixed rate loans, which apparently aren't more than 12% of their entire debt, but has changed the whole business model somewhat?

DEC started up in times of ZIRP, but those days are gone.

DEC's strategy was to acquire declining fields by a mix of issuing new shares and using their RCF, then to hedge most of their future gas sales to guarantee they could pay off their debts.

On the face of it, having 12% of debt in non-fixed rate loans doesn't seem to alter things fundamentally.

However, as it buys wells in decline, DEC's strategy is to continue to acquire gas/oil wells to replace declining production. There would be a run-off phase in the distant future, where presumably the share price would decline continuously to discount the falling worth of what was left in the existing wells, but that wasn't to be the case for a long time.

Now, interest rates have risen precipitously, so has the cost of borrowing therefore, so acquiring new assets going forward is going to hit the potential profitability of any new acquisitions as servicing the debt will be more expensive.

So, are we therefore looking at a step-change in DEC's business model? Is maintaining production by debt-funded acquisitions no longer a sustainable option, at least, not at the current dividend levels?

This either brings the run-off phase nearer or it hits the dividend. Hence the recent whackjob on the share price.

I expect this theory is full of holes but I put it out there for comment.

[topazfrenzy] 31/10/2023 10:55

So buying in at this level with the dividend where it is you'd get your money back in 4-5 years

It should be seen as a sort of annuity in this case where you are paid the dividend and what it is worth after 5 years, what you cash in, is the money you paid for this return

[oneillshaun] 31/10/2023 08:49

Someone said this will be interesting takeover target, I would love to hear why you believe that?Right now I don't think this is getting any takeover interest maybe if drifts to 50p which at the current rate is very possible.Also people getting excited about a 20% plus divi on a consistently share price it's just madness, every time you reinvest it just ends up falling a little more.

[johnhemming] 31/10/2023 07:33

We know that the gas price drop caused issues with Liquidity. One can only assume that the increase in gas price will reverse some of that as the company becomes less dependent on the cash flow from hedging and instead on cash from gas sales.

I think #6042 is a good analysis.

[stevensupertrader] 31/10/2023 07:32

Johnbuyghost. Halloween is today , pipielime still shut . If I were you , I hung up my boot for good and keep my mouth shut. Time to shut up .

[marksp2011] 30/10/2023 19:32

Probably good you have sold you will sleep better you were obviously stressed.

[2wild] 30/10/2023 17:59

Would love to see these at 60p. On a yield of 24%. Picked up another tranche today at 67.98p. Yielding over 20% in my sip.

Last year, I picked up marks and spencers at 98 pence after falling from over 2 35p some months earlier. I think they fell another 10% soon afterwards. Now up 108%. Hopefully DEC will do something similar. Fingers crosses.

[cassini] 30/10/2023 17:25

Might do a double bottom with an intra day 66p?

[oneillshaun] 30/10/2023 16:18

This is looking desperate and without any news or updates we will soon be knocking on 60p what a disaster.

[mondex] 30/10/2023 10:00

Thank you Asp5, an excellent explanation.

[asp5] 30/10/2023 09:47

Hi Scrawl, been busy with work, but just wanted to provide my thoughts re your post #6018

Firstly DEC operate two types of well, conventional and unconventional. It is the conventional wells which average ~21K to plug, while the unconventional wells are in the 40K-60K range. From memory a signiciant majority of wells are conventional with the minority unconventional (Unfortunately I do not have the time to validate. Does anyone have the numbers/references to hand for this??).

Conventional wells follow an exponential decline path before reaching a steady decline phase. The unconventional wells have a parabolic decline path (steeper) before reaching this steady decline phase. So more gas is produced in the early years. This skews both the production mix and decline rates. So even though there are only a minority of unconventional wells they represent ~45% of gas produced (p4 of the sustainability report from april 23).

When banks lend to purchase assets they will need an official reserve auditor to assess the wells. As I understand it, these numbers are used in the financial reports. So if the terminal decline rate is quoted as 9% this would be the decline rate prior to applying DEC's operational improvement techniques aka SAM which should have a meaningfull impact on the decline rate (as its their core competency - running wells more efficiently than others). Its a bit like the bank provides a mortgage based on their assessment of the current value of a house and not based on the plans you have to do it up and add value to it after purchase.

I treat the 4,5% decline rate assumption in the ARO as the long term decline rate, so only when a well is in the steadily state decline phase (for example after 15 years) and after SAM techniques have been applied. Just to underline this, in the previous ARO report, 75% of wells had a decline rate of under 6%, before SAM techniques applied (slide 9) which indicated the age & type of the wells purchased at that time and how the mix has changed since then.

Now in terms of capping capacity they have increased it from 40 in 2021 to 450 in 2023, thats a x10 increase in 2 years. DEC have committed to increase this further over the coming years. This should increase inline with the 3rd party plugging contracts DEC win. Given that DEC have 10-15 year agreements in place with the various states that sets a minimum plugging rate of 80 per year, DEC have considerable flexibility on how best to economically deliver on ARO for the first 10-15 years.

I do not think the ARO is behind the reason of the CFO's departure. I suspect it is more related to the US listing, and how the debt has been financed/managed and dropping the ball when it comes to creating financial headroom for continuous acquisitions that the business model is founded on. I think the previous CFO simply messed up and Rusty has the finance background to call it out and solve it.

[croasdalelfc] 30/10/2023 09:11

Bearish: NG inventories are 9% higher than 2022 and 5% higher than 5 yr average.US gas production is at record levelsEU gas storage is 99% full and capacity is 5% higher than 2022.Weather in EU is mild.Bullish: LNG exports remain close to record highs.US weather turning colder for next 7 days .Imo bears and bulls will cancel each other with swings between $3.2 and $3.5 / mcf

[croasdalelfc] 30/10/2023 08:56

They bought 500k in one day earlier in Oct.5m bought back since February placing .Approx 4% of placing stock at 25% discount

[owenski] 30/10/2023 08:44

Aleman, agree, gas prices have been trending up since the April 23 low point. I'd suggest they're going to start accelerating as gas use starts kicking in over the winter period.

[cassini] 30/10/2023 08:39

350,000 buy-back on Friday - largest yet that I've seen.

[valuehurts] 29/10/2023 23:43

So who would buy them? Maybe private equity but they would need to keep Rusty and the team on board to manage the business or find a very experienced operator.

[lomand01] 29/10/2023 15:29

That's why buying an entity that has the personnel,scale and know-how to do it and make money may be so attractive.there will be tens of thousands of wells with declining production in the next decade which will require management and plugging whilst new wells will be more expensive and less productive, (the best ones having been drilled already). A tasty morsel is our DEC...just saying..

[valuehurts] 29/10/2023 11:18

The majors haven't sold all these assets to Dec to manage only to try buying them back. Its a headache to deal with the complexity of the accounting, the personnel and all the states involved. Only Dec can really do this.

[fardels bear] 28/10/2023 18:00

Not an easy one for a predator to swallow I'd have thought.

[grum9] 28/10/2023 14:07

Worry less about share price and guess which predator will come knocking?