Diversified Energy Share Discussion Threads

[leoneobull] 23/5/2024 19:38

Amen Seeking Alpha.Valuation - $20+ Fair ValueI will base my valuation on the cash flows of the company because I think they are predictably stable and also resilient to natural gas price fluctuations. For 2024, I expect the company to be able to earn at least $200 million in free cash flow, by taking $50 million of free cash flow in the first quarter and multiplying it by 4 to annualize it out. Given the free cash flow came in at $74 million for Q1, I think $200 million in FCF for 2024 is reasonable as $74 million actual for Q1 2024 is much higher than my projected $50 million of FCF a quarter. Also, FCF for 2023 was $219 million according to their presentation, so assuming it can hold at around $200 million seems reasonable as the hedges do their work in keeping cash flows stable.Divide $200 million in FCF by shares outstanding of ~50 million gets me around $4 FCF per share. Multiply FCF by a below-average P/FCF of 5 gets me $20 per share fair value, with what looks to me incredibly conservative assumptions. Ultimately, the free cash flow is all that matters to me and I see it staying at the very minimum flat for the next year or two due to smart hedging and mature wells that don't deteriorate that quickly.I also find it unusual for a company that has historical acquisitions exceeding $2 billion to somehow have a market cap of below $700 million today. Those acquisitions seem to be value-add, as they increased the production capacity and cash flows of the company since they occurred. If I bought $2 billion of wells, oil producing assets and infrastructure, hedging contracts, and suddenly, it's selling on the market for $700 million today, I'd think the market is severely undervaluing my assets. That's exactly what, I think, is happening to Diversified Energy at this price, and thus believe the stock is probably undervalued.

[leoneobull] 23/5/2024 18:40

Seeking alpha new articleBuy Diversified EnergyRarely have I seen a company with such good cash flows trading at such a low price. I'm rather impressed by the hedging, mature wells, and overall free cash flow the company generates. Management seems to be pretty smart about acquiring assets that fit the business model, so with over $2 billion in historical acquisitions, I think the market is severely underpricing the company today. Investors should look to Diversified Energy for its solid income and cheap assets at a bargain price.

[leoneobull] 23/5/2024 18:34

Closed up on ex dividend day. Did shorts close somewhat?

[tsmith2] 23/5/2024 14:36

nice base formation at 11

[ramellous] 23/5/2024 10:27

There was for the first 5 mins of the day.. Must have been bought up.albeit very quickly..

[croasdalelfc] 23/5/2024 09:48

Wot no drop? Hmmm weird!

[this_is_me] 23/5/2024 08:37

XD today. The share price sems to have become stuck in a trading range.

[aleman] 22/5/2024 23:35

DEC is adding additional hedges for 2026 & 2027, where forward natural gas prices are around US$4/mmbtu ...

But that's my point - these forward prices have been rising back to their value of 15 months ago AND spot is back to or above the level of 15 months ago - that's a big rise in hte the residual unhedged 15% or whatever production selling now and likley most of production being sold forward - yet the share price is saying "meh", rising only from 950p to 1100p, conpared to 1700p+ last time were at similar prices. There seems to be a lot scepticism about the rise in prices as if they won't stick or go higher, despite chat about booming Asian demand for air-conditioning in years ahead as being the driver.

The October 26 contract was $3.60 at the end of March but is $3.91 now. Spot has gone from $1.80 to $2.90+. DEC will be selling at both of these so I'd say prospect look a lot brighter than a few months ago, with some suggestions futures will keep rising - though agreed rather speculative. The strength of Asian demand does seem to have caught some out, though, and there is increasing export capacity from the USA to feed it. It looks likely US prices will rise as more is exported, but DEC shares do not seem to agree (yet).

[tag57] 22/5/2024 22:31

BH, yes they will continue to increase their hedging on a constant rolling basis. Hopefully well north of $3 and paying down large chunks of debt!

[bountyhunter] 22/5/2024 21:15

Surely the level of currently arranged hedging tails off by the time you get to 3 years out or even by 26/27, so presumably there would be new hedging yet to be arranged to be progressively layered onto existing hedging?

[justiceforthemany] 22/5/2024 21:04

Natural Gas up at 3 USD
That's big.

[kaos3] 22/5/2024 20:04

aleman

because in a discount model - the most impact of a positive change in NG prices is closer to now. the further out in time you go, the less impact /prices to dec start to rise 4 years later/. dec production is hedged out 3 years and only after that time the impact starts to kick in. and even then it is diminished by the time value of money.

so you are right in general, but full impact of the ng rise now will be strongly dilluted

but if they get non hedged new production now /bought/ the impact of the rising NG price will be felt strongly and in full for the new production

oak bloke
The 1Q24 hedge floor price was US$3.36Mcf ($20.16BOE) so 40% higher than the average settled price and $2/BOE higher than my model assumptions - that’s where the 48% margin was achieved! DEC tell us the 2024 average natural gas hedge floor is US$3.41/Mcf which is a 65% premium to the US$2.04/MMBtu active contract at the end of Q1 (it is $2.24 today). This boosts my revenue assumptions by $2/BOE. As part of the Oaktree acquisition DEC will acquire a hedge portfolio that carries a c14% premium to the 2024 remaining DEC hedge floor. DEC is adding additional hedges for 2026 & 2027, where forward natural gas prices are around US$4/mmbtu ...

eg ... 3,36 - 4 us/mcf range is almost fixed for the next 3 years .... so why should rising prices now meaningful impact cash flow now or in the next 3 years ..... beyond that i agree

[bountyhunter] 22/5/2024 18:21

XD 29c tomorrow.

[leoneobull] 22/5/2024 18:07

I hold more dec than ever before going into the latest dividend. With the recent acquisition and very good hedging, I see dec as a stable investment. The shorts make me nervous, but I suspect they were a play on the low gas price in US, plus esg concerns, which have been well handled by dec management.

[aleman] 22/5/2024 17:40

Why should the shares not go higher of futures prices rise so the new hedges they take out generate higher profit? It's not just a case of "being hedged" so it makes no difference. The hedging policy is basically selling forward 2 to 3 years with a little buffer left to be sold at short or spot . Prices of ALL have been rising since February and are back similar to the levels of early 2023.

The next question is if they have the same volume to sell forward 2 or 3 years as they did a year ago. Well, it's not far off but the shares will fall a bit if they don't get another deal done to use up some of the cash being accrued specifically for that. That might account for some of the share fall since 15 months ago but it should be more like 5-10% than 35%+. As I said, though, losing a CFO and 2/3rds of the dividend does not help. Still, a new acquisition with the growing cash might shed some new light on the weakness in valuation - or not given that nobody seems to really understand all the financial engineering in this company.

[kaos3] 22/5/2024 17:03

they are almost fully hedged ... hence i bought cheaper being sure ... but i also expected it to not go much higher.

until they increase production ... that is unhedged and that can move share price higher. so... cash used for buying more production and selling existing holdings at higher multiple is the only chance imho to move share price substantially. and the interest rates

i consider dec as a higher risk bond atm

all imho

[aleman] 22/5/2024 16:57

Strange how this one does not seem to be responding to both spot being quite perky of late and medium and longer futures rising since Feb lows when they had not actually that fallen much from early 2023 prices anyway. You'd look at both and then guess the shares would be up around 1700-1800p. Maybe the dividend cut is going to hang heavy over DEC for a while as it has been a hit to credibility, as perhaps was the exit of the CFO. Nonetheless, I can only see the shares rising if gas prices stick around this level, as talk of dividend increases could resurface.

[bountyhunter] 20/5/2024 20:09

XD on Thursday

[renewed1] 20/5/2024 19:10

And apart from the next quarter all well above 3 ...begs the question why the need to cut the divi!!!!

[action] 20/5/2024 16:16

Natural gas price near January high..

[asp5] 19/5/2024 19:58

The initial Russel 2000 rebalancing companies list for 2024 will be published on May 24th and an updated list will be published weekly until the end of June.

I compiled the below list of funds/institutional investors from the recent DEC annual report (only lists holding greateer then 3%), simply wall street, yahoo finance & morningstar (links below).

To be conservative I only took funds that confirmed their position recently (in 2024). The list is below with their % holding. Please do let me know if anyone spots an error. There are 31 institutions in the list, however yahoo & other sites state the range of investor institutions in the range of 104 to 144.

In summary, A conservative estimate of 76% of shares are already held by institutions/private investors. Given the limited supply of shares and the laws of supply/demand, I would expect a positive share price development over the next month.

Some observations:
- I most definitely would not like to be holding a short position in DEC at this moment in time.
- Given the names in the list, it does not look like the US trackers have purchased shares yet
- The below may also explain why DEC are not purchasing significant volumes of shares at present. As usual DYOR.

NYSE Control Account 6.64
Hargreaves Landsdown 5.98
Interactive Investor 5.21
Columbia Management Investment Advisers 5.03
Vanguard Group 4.89
JO Hambro Capital Management 4.80
GLG Partners 4.69
BlackRock 4.32
M&G Investments 4.20
abrdn 4.06
Jupiter Fund Management Plc 5.02
Rusty 2.58
Allianz Asset Management GmbH 2.36
UBS Asset Management AG 1.45
Rathbones Investment Management Limited 1.44
Goldman Sachs Group, Investment Banking and Securities Investments 0.86
GAM UK Equity Income A Dis Semi-Ann A 2.17
Merchants Trust Ord 1.4
Premier Miton UK Multi Cap Income B Acc 1.11
CQS New City High Yield Ord 0.95
ES R&M UK Listed Smaller Coms B Acc 0.95
MI Chelverton UK Equity Income B Inc 0.89
Susquehanna International Group, LLP 0.84
CQS Natural Resources G&I Ord 0.79
Barclays Plc 0.78
Santander UK Growth Unit Trust RA 0.76
iShares Core MSCI EAFE ETF 0.6
Millennium Management Llc 0.59
DFA United Kingdom Small Company Series 0.39
iShares MSCI EAFE Small Cap ETF 0.36
Nationwide Var Ins Tr-NVIT Columbia Overseas Value Fund 0.27

Total 76.38%

References:

[bountyhunter] 17/5/2024 18:05

I agree Leon, certainly when we finally get the first cut in interest rates if not sooner.

[aleman] 17/5/2024 14:45

Futures have started to look perky in the last few days.

[leoneobull] 17/5/2024 09:53

Bounty I firmly believe holding pattern will break out into an uptrend. Iced short Island tea for me please snowcap

[bountyhunter] 17/5/2024 09:12

Sorry shorter support has melted away ☃️ύ1;️