Diversified Energy Share Discussion Threads

[scrwal] 14/10/2021 15:29

At least the price is slowly moving in the right direction. Who knows , it might reach 130p in January but then Rusty says Happy New Year here's a snap placement for $250M of shares at a 10% discount.

[scrwal] 14/10/2021 15:25

The company paid out $34M in dividends last quarter. Using the $2.6Bn over 75 years this payout isn't remotely sustainable in the much longer term based on their wind down model , though the payments should drop lower as later life income falls. Maybe that is why the $24.6M is part of one of the major assumptions - being the div payable in the later years.

[johnhemming] 14/10/2021 15:03

@CASSINI I don't think it is that. What I think it is is that they needed something a bit sensationalist to get people to be interested in the story. The idea that the company cannot fulfil its plugging commitment is that hook.

I am not sure really why he is saying that. The company is, of course, not in a rush to do the plugging. In fact with a higher gas price some wells not currently in use can be brought back into use.

This story only really flies with a gas price around USD1. It should have been spiked by the sub-editors with a gas price anywhere over USD3.

My view is that the additional attention the company will get from this may make it clear that it is potentially in a position to distribute around 4x the amount of cash it is currently planning to distribute.

[cassini] 14/10/2021 14:58

The first casualty of war, is truth.

[johnhemming] 14/10/2021 14:47

Actually there is an error in my last post. With an additional FCF of 7.7bn and proposed dividends of 2.6bn in fact they can pay an additional 2.96 times the dividends ie almost four times the income that the current forecast is.

Looking at the times report:


"It carried allegations from Ted Boettner of the Ohio River Valley Institute, a sustainability research centre, that Diversified’s model may be “built on abandoning those assets” and looked like “a liability bomb that’s destined to explode”."

Now the income is between 7.7bn and potentially 15.4bn or more. The liability for plugging is 1.7bn.

Strikes me someone needs to learn a bit of maths.

[johnhemming] 14/10/2021 14:30

@Cassini thank you for that. It does give the broader figures which explain the basis upon which the business will plug the wells. They use the 1,700m figure which is higher than the current forecast.

It would be nice to see the detailed working papers behind this, but broadly it looks right.

Note on page 13
"b) Beyond 12-year strip as of 8/16/21, realised gas price assumes steady increases of ~$0.12 every 5 years until maxing at $3.15/mcf gas by year 30,"

As I said the risk is to the upside. This is on a figure of total FCF of 7,700m which will take into account depletion.

Over 75 years this is an average over just over USD100m per year (it is currently running at 200m).

Now if that is a figure for USD3.15 at year 30 and todays spot price is USD6. That could see an increase to a net income of 15,000m with the debt and plugging staying the same. That actually means potential dividend income over the time triple what is in that slide.

However, at this stage we cannot be certain. In the past the next contract Henry Hub has gone over USD14. I think we can be certain that the risk is to the up side.

[professor john koestler] 14/10/2021 14:20

"The balance sheet reserves figure is in my opinion (having looked at this quite a bit over the past few days) essentially meaningless."

That is my opinion so far.

[johnhemming] 14/10/2021 14:17

@PJK I think the point is that the issue about plugging is entirely a cash issue. Hence it is a question as to whether the cash flows up to 2095 are sufficient to pay for plugging. I have given some of the figures above. A lot depends, of course, on depletion which varies from well to well. We as investors don't have the figures for that.

One can assume that OakTree have done the detailed due diligence on this as this is an obvious question for anyone to ask.

The balance sheet reserves figure is in my opinion (having looked at this quite a bit over the past few days) essentially meaningless.

The yield is a proportion of free cash flow, the other proportion is mainly spent on paying off debt. Once the debt has been paid the cash is available for plugging etc.

[scrwal] 14/10/2021 14:16

Prof JK
The yield is a product of the share price. Even with future dilution it is probable that the cash available for dividends in absolute terms will still increase enough to maintain a high yield even if we get a smaller % of the total cash flow than it is currently.

[farrugia] 14/10/2021 14:12

Professor - natural gas is going up sharply - the company is hedging future years at the new prices which could easily double the current revenue or more. Plus they can get new wells into production that were uneconomic at low very prices.

[professor john koestler] 14/10/2021 14:05

Good points everyone and I'm glad a constructive discussion is underway. My concerns are best described by what scrwal has written above:

"DEC does make provisions for asset retirement which at 30 June was $510,775,000. This however is purely a book figure but there is no cash provision to pay for any future capping. The hedging process covers loan and interest repayments , dividends plus capital expenditure to replace the declining production. The current cash paid is low and easily covered by cash generation.
To accelerate the capping program means the company has to increase its cash flow by acquiring new assets but the shareholder yield from such assets has to be significantly reduced. Yes there are a lot of reserves but again to meet future obligations the current way of allocating current cash flows has to change to a lower % being distributed to shareholders."

I don't think the yield is sustainable for long, which is what I am looking for. I will continue with my analysis over the next few weeks or so.

[bountyhunter] 14/10/2021 13:53

On the road to recovery, nothing has changed fundamentally and the exceptional dividend underpins this share.

[scrwal] 14/10/2021 13:51

lab305
DEC does make provisions for asset retirement which at 30 June was $510,775,000. This however is purely a book figure but there is no cash provision to pay for any future capping. The hedging process covers loan and interest repayments , dividends plus capital expenditure to replace the declining production. The current cash paid is low and easily covered by cash generation.
To accelerate the capping program means the company has to increase its cash flow by acquiring new assets but the shareholder yield from such assets has to be significantly reduced. Yes there are a lot of reserves but again to meet future obligations the current way of allocating current cash flows has to change to a lower % being distributed to shareholders.

However in trying to work out what was going on regarding the provision I did find something that I found very surprising and somewhat disturbing as follows:
Normally when you make a provision you see the credit side on the balance sheet and the debit side is somewhere in the trading account. If you look at the 30 June 2021 interims Note 18 you will see an accretion figure of $10,216 which is clearly shown in the trading statement , plugging costs of $1,180 is the cash paid. Not completely sure what the $1,878 current asset is for.
The additions of $38,209 relate to acquisitions made but note 4 only shows $33,695 for Indigo .

This leaves $119,284 for revisions. I couldn't see where this went via the trading account but I was looking in the wrong place. You need to look at note 12 Natural Gas and Oil properties. It is included as an addition to assets !! I have no idea if this is the norm for the industry to account for it like this but it seems very strange. We have a big provision to be made , oh that's ok we'll just add it to the asset values - doesn't make sense.

[cassini] 14/10/2021 13:41

DEC now makes up 8.5% of my portfolio.

For those who want to understand the well retirement/capping process better, here is DEC's August 20th 2021 presentation, from their website:



Note that the well retirement flow chart shows one decision branch where wells that are currently uneconomic are not automatically plugged if it is considered there is a good chance that price rises in the future may make them economic again, so these assets may be brought back online if needed.

Hence the plugging of unproductive wells is not automatic. This is analogous to dormant fracking assets being brought back into operation when the oil price rises high enough.

DEC has $1.7 billion allocated to the plugging operation, in their long term model.

[brucie5] 14/10/2021 13:39

johnhemming14 Oct '21 - 13:06 - 1458 of 1460
0 2 0

Excellent post. I've taken the liberty of copying onto the Michael Walters site.

[loafingchard] 14/10/2021 13:36

Great posts guys . I'm happy with my decision to add more on the day of the drop and yesterday . May have a few more if the price slips again. GLA, NAI etc

[farrugia] 14/10/2021 13:28

if the stock price behaves like in the last couple of days it might make a further nudge when the usa markets open - but who knows?

[johnhemming] 14/10/2021 13:06

Different people approach investment in different ways. I personally am guided by ethics as well as numbers when I decide whether to invest in a company. I have always described myself as an environmentalist in that I am concerned as to how companies treat the environment. There are some companies I don't invest in even though their businesses are legal because I don't wish to profit from what they do.

Hence with DEC there are two questions.
a) Is there an ethical issue which needs a substantial change?
b) What are the long term financial issues relating to the plugging of wells.

The fact that there are large numbers of abandoned wells and other sources of methane emissions is not really relevant to those questions.

What the Bloomberg article found is essentially what is reported in the annual reports of Diversified. Sometimes there are leaks. The leaks need to be fixed. Those leaks which Bloomberg reported were fixed and this was not an expensive process.

We know there has been a debate with the states about the plugging of wells, but that has been resolved by agreement.

Hence I don't think in terms of question a) from my perspective that there is an ethical issue. I am relying on the reports of the company.

The second question (b) is harder to answer with any precision. That is because this is a multi decade process where some wells will last until 2095 and others are being plugged this year. (and much in between).

In rough figures we can say that the debt is about 600m and the plugging liability about 1500m. (That uses the figures at H1 2021 - additional transactions will have a similar structure)

The debt is being paid off at a rate of about 70m a year.

Obviously wells that are still extracting gas will not be plugged. What we don't know is the profile of wells production and when they are likely to be plugged.

We also know the plugging rate is intended to increase to 1,000 a year in 2049. That would have a cost of 25m a year. At that point the debt will have been paid off, but revenues may be lower through depletion, however, there is still another 45 years of extraction to go. The plugging rate will increase, but we don't have enough information to do detailed figures.

The financially sensitive point as to whether the company has enough income to plug the wells, therefore, is clearly that it will unless the gas price dives into the ground and is not hedged enough.

Much that the gas price dropped last year I don't personally see that risk as being that great and in any event the company can extend hedging if it seems prudent.

My guess, and it is a guess, is that gas prices will remain reasonably high or potentially go higher (in the USA). They have been higher in the past. Hence I the uncertainty is moreso towards the upside than the downside.

Obviously the company is a more responsible steward of its stakeholders than those which have abandoned wells.

Spot Henry Hub is currently USD6.37.

[farrugia] 14/10/2021 12:55

natural gas at 5.7400 up 2.7%

[redtom1] 14/10/2021 12:28

Prof,
I highlighted 3 factual errors in your first 3 lines.
I suggest you go and do some proper research as there is a ton of data out there.

[farrugia] 14/10/2021 12:22

A Winter of Giant Gas Bills Is Coming. Are You Ready?

[voci] 14/10/2021 12:14

This from Malcy's blog:

hxxps://www.malcysblog.com/2021/10/diversified-energy-company/


Having seen the Bloomberg article a short time ago I thought that since the shares have been hit so hard by what is a one-sided and unrealistic article and certainly does not reflect the good that is being done for the environment in the USA.

Having studied the company for some years I am fully aware of the model which is to ‘aggregate producing wells and tailoring operating programmes to improve performance and emissions profile’. This avoids the alternative- wells changing hands and moving into less reputable ownership – the very fact that DEC has assembled so many wells under its stewardship avoids that alter choice of low quality, unaccountable operators who have no interest in optimising late life wells.

DEC has well documented routine maintenance programmes and of course many wells that come into this category would otherwise fall into disrepair and uncategorised, untested and with no emission history foe ever. The company spends a large amount of time and money systematically retiring wells that have reached the end of their economic lives, it does this in tandem with several US States in which it operates and is already adding more wells to this process than is required or obligated.

All these moves by the company benefit both the shareholders but more importantly the general public, think that the number of wells reported on represent less than 0.05% of the portfolio of assets. In addition the wells highlighted were subsequently fixed for a a small amount and this was no major league situation even though any leak is considered important. In my view any impact on the environment is significantly better when held under the company’s stewardship and not in the unaccounted, unmaintained pool of wells that would be left outside any unregulated ownership.

This short, flash blog will be followed by a more detailed, more studied response in which the article, which fails to see both sides of this story, can be proved to be exactly the reverse of what it pretends to be and that is that DEC has a significantly positive stewardship in the community which if it was not there would be an unregulated wasteland.

It goes without saying that following the fall the shares offer a massive yield and is a must buy under any circumstances. I think that the upcoming Capital Markets Day will prove without doubt the integrity of the company and its management without any doubt.

[johnhemming] 14/10/2021 12:07

The Gizmodo article is particularly lost. The world has a problem with Gas supply at the moment. This is causing problems in the food industry. I agree we need to change the reliance on fossil fuels. However, from a climate change perspective that needs to start with coal, it can then move on to oil. I am a Hydrogen sceptic for reasons related to the second law of Thermodynamics, but there is a general expectation that natural gas (because particularly lower numbers of carbon atoms per molecule means less CO2 as a proportion when oxidised) will remain as part of the energy mix for some time. I don't think converting gas to hydrogen with carbon capture is going to work. Some people do. Whichever way we will need to extract natural gas for some time.

Although DEC have a balance sheet liability for plugging it is IMO an irrelevant figure as it is the future cash flows from gas extraction that will fund plugging. There is no sense plugging a well that is producing because the world needs the gas today.

I have produced links to some of the reports of the deals done with some states in the past.

There is an argument that some of the wells are leaking. This is not news and the company has been doing things about that as can be seen in their reports.

[lab305] 14/10/2021 12:04

1 They are not all old and rusty ( not the chairman) . Some are quite new.
2 Many wells can produce gas effectively for a very long time and some well over 40 years.
3 The older wells have very low decline rates , some as low as 1% or 2%.
4 The wells that do dry up have to be plugged by law . In the past unscrupulous operators abandoned old wells and states were left to foot the bill. They got wise to this and operators are now legally obliged to plug obsolete wells. This DEC does and has several agreements in place in states in which it operates which the authorities are happy with.
5 DEC are complying with all these agreements and there is no suggestion otherwise.
6 At around 25K dollars to decommission a well there is plenty of money available from the increasing profits to plug hundreds of wells per year. DEC plug only wells that have fallen below a threshold of production dictated by the state. Why would they plug wells still making money even if it is quite small ?
7 "Those provisions are liabilities that are NOT MATCHED in liquid assets, no?"
On the contrary the value of the reserves of this company have soared and increased by over a billion dollars in the last six months. This increase has never been reflected in the share price.
8 Professor you are wrong in just about every way. Provision is made yearly by the company to cover future liability. This fund increases annually. They are a prudent company and hedge production to cover debt repayment, dividend and future liability.

[professor john koestler] 14/10/2021 11:59

redtom

Thanks for your answers but I need more detailed examination than those.

That just sounds like you have been reading Rusty's hymn sheet.