Diversified Energy Share Discussion Threads

[aleman] 15/10/2021 18:17

UK grid is struggling again tonight as wind produces only 1.6GW - 4% of demand. Old standby gas stations and coal are running again. Gas is keeping the lights on - just - with 56% of output. Maybe not directly affecting DEC but other western nations are following similar policies.

[johnhemming] 15/10/2021 18:02

@scrwal
>It's just that the article has made me focus a bit more on what is going on
>especially with regards to the accounting treatment of the revisions to asset
>retirement obligations.

I have spent quite a bit of time looking at these things. I think of the company as a company with a lot of integrity whose financial planning is really cautious and careful. As that sort of company that looks after their staff and other stakeholders I would be surprised if anything unethical was going on.

Having reviewed everything I am quite happy that they are doing what I would wish them to be doing.

The fact that there is a high percentage dividend yield is a failure of the stock market to recognise the merits of the company rather than anything else.

It is IMO reasonable to assume that the Energy Policy of the Biden Presidency and the proposals of the IPCC are a good base case for financial planning.

[ptolemy] 15/10/2021 17:11

I'm not an engineer, so perhaps someone could help answer this question:

If the expected lifespan of a well is usually 30-40 years, why would engineers designing the well, say in the 1970-80s build in sufficient redundancy for the well still to be operating with integrity 70 or more years later?

If they did build in such redundancy the energy company would be at a competitive disadvantage due to the higher costs incurred. If they didn't build in redundancy then ongoing maintenance costs per well should be higher (not lower) than industry averages.

[1knocker] 15/10/2021 17:04

Of well prof, DEC have purchased the wells, they are making money from them, and they are paying stonking dividends which, happily, once paid can't be recovered from us. Even if you are right (and I hope you are not)as shareholders we all ought to make a bob or two before the chickens come home to roost. I am getting over 11% on my capital outlay on DEC shares, so it is no disaster if the share price stays flat, or even falls a bit. The total return is the only thing which matters to me.

Moreover, I can console myself that if I am contributing to any environmental problem as a shareholder in DEC, that is nothing to the environmental disasters governments around the world will cause in their quest to hit CO2 reduction targets. I don't get much of a warm glow as a citizen of a nation which won't mine coal, but is happy to see it imported from Australia, at the cost of thousands of tons of heavy fuel oil burned per shipload. To governments, its only hitting the targets which matters, not the consequences. I guess that I could reduce my methane footprint by filling in my garden pond, which bubbles off methane as leaves and other vegetation rot in it and, hey ho, I would probably earn a climate change browny point or two. Perhaps by next year I will be entitled to a subsidy toward the cost of filling it in. But at what cost to biodiversity and the frogs, neuts dragonflies, and any number of other insects it supports? Anyone recall the push for bio diesel, and the vast tracts of South American forest which were destroyed to grow the crops to provide it? Never forget, there is no problem a government (and especially an international government) cure cannot make far worse through collateral damage and unintended consequences.

[aleman] 15/10/2021 17:00

EBITDA run rate at the moment is $520m per annum after accounting for the low plugging rates already mentioned in court cases, etc. However, with gas prices rocketing lately, that run rate will be even higher as some gas (not pre-sold with futures contracts) will be sold at higher prices and some unproductive wells will be recommissioned. (They might even drill some infill wells if prices hold up though that might spoil their environmental angle of taking dirty assets and making them less dirty). It's ridiculous to say there is no cash there to plug more wells unless there is fraud. DEC is currently throwing of large amounts of cash and that will be increasing as gas prices have risen since those EBITDA projections - both spot price and futures contracts. If the company has any sense, it will put some cash aside to plug wells and all this scarempongering will go away. I'd be happy for them to announce no dividend increase next year to pay for it. They would need maybe $40-50m to plug a couple of thousand wells over the next couple of years on top of the targets already agreed with courts. They've probably gained more than that in gas price rises from the last month, some of which have already been locked in on the new acquisition. They could easily manage to step up plugging and maintain the dividend and make debt payments unless there's some fraud in the figures. I don't think anybody has claimed fraud yet. Running around shouting about leaks and lack of plugging on wells they've only just bought is just click-bait and does not represent an understanding of the financial figures or the way DEC sells into the market. Why don't media reports mention the other 3m+ wells in the US not under DEC's control that don't look to have plans in place for leak reduction and plugging? They should be encouraging DEC to take more of them over.

[scrwal] 15/10/2021 16:55

I'm surprised that there doesn't seem to be some ramping up of production now.

I'm happy with the aggregate overview of the company.
It's just that the article has made me focus a bit more on what is going on especially with regards to the accounting treatment of the revisions to asset retirement obligations.

[johnhemming] 15/10/2021 16:42

@scrwal if prices move to USD12 we could see some wells put back into service. The company may publish a more detailed plan. A search in the regulators database will probably provide more information. I am ok with the aggregate summary.

[swallowsflysouth] 15/10/2021 16:40

PJK,
'You know as well as I that at some point in the future gas will come to an end, just like coal.'

That is clearly the case with all commodities, the real question is when?

In some case you talking centuries, in other case decades, definitely not tomorrow !

[redtom1] 15/10/2021 16:29

PJK,

Please tell me how do you engage is a reasoned debate when you state that you don't buy the business plan and DEC will just walk away. How can this be debated?
You're being ridiculous but at least we know your agenda.

[scrwal] 15/10/2021 16:24

How many wells are being plugged on a yearly basis compared to the total owned ,and of the total owned how many are completely unproductive and should be plugged using DEC's retirement decision tree - We don't know and neither do we know how many it has already identified and what time frame they are using.

The current cash spent on plugging is only $2.5M per year. That is a deliberate policy at the moment. The estimated spend is $1.7Bn over 75 years - an annual rate way over the current spend but that is what is planned.

Given the number of wells and it's relative size compared to Exxon and Chevron there would be some concern about DEC's ability to cap more than it intends to over the medium term. The cash at 30 June is $3.6M which isn't a lot at $20k per capping.

The financial model is sound so long as its assumptions hold up - one of which appears to be that <$3M is the annual spend on capping for the next 5/10 years.

[professor john koestler] 15/10/2021 16:15

Whatever you doughnut.

[fardels bear] 15/10/2021 16:13

Not him. redtom

[fardels bear] 15/10/2021 16:13

Second that

[professor john koestler] 15/10/2021 16:12

I'm looking for reasoned debate and surely that helps us all. I respect the views of John and I am reading his posts and opinions with great interest.

[redtom1] 15/10/2021 16:09

PJK,

Well at least you've owned up to your to your real position.
"I don't buy the business plan. It relies on very long term natural gas sales. DEC will just close up shop and walk away"

What is the point of having a debate if that is your view? As I said before, your agenda was firmly established up front and you have now confirmed it.

[johnhemming] 15/10/2021 16:08

>You know as well as I that at some point in the future gas will come to an end,
Which is why I have linked to forecasts from the IPCC. Governments may not go as far as the IPCC are suggesting. However, if we are to do realistic forecasts we should at least accept that the IPCC forecasts are reasonable.

>One could argue that if a company is looking to utilise wells today, tomorrow, last
>year, that are deemed likely to be outlawed within a decade or so then bonds posted
>should resemble a greater fraction of wells purchased.
Indeed that would be a not unreasonable argument. However, going back to source from the IPCC these are not wells that are going to be outlawed within a decade or so.

In the USA there are areas of the country where methane leaks from the ground naturally (not as a result of fracking). There is an argument that from a climate change perspective it would be better to trap that gas and burn it.

It is not as simple as turning the tap off in 2031.

[professor john koestler] 15/10/2021 16:02

john

You know as well as I that at some point in the future gas will come to an end, just like coal. Any clown can produce a forecast/businesss plan showing liabilities will be covered over a period of decades. That is just faffing with Excel until it fits.

Take Pennsylvania as an example:

Department of Environmental Protection requires the Alabama-based company to submit a $7 million bond to cover plugging costs if the company walks away from its obligations, plus additional bonds of $20,000 to $30,000 per well for unproductive wells that the company buys or sells in the future.

Diversified owns about 23,000 wells in Pennsylvania.

One could argue that if a company is looking to utilise wells today, tomorrow, last year, that are deemed likely to be outlawed within a decade or so then bonds posted should resemble a greater fraction of wells purchased.

I don't buy the business plan. It relies on very long term natural gas sales which is very unlikely IMO. DEC will just close up shop and walk away which leads to the opinion they shouldn't have been allowed to purchase them in the first place.

[johnhemming] 15/10/2021 15:55

>DEC cannot fund the plugging for the quantities Bloomberg would like.
I don't think that is true at all. Bloomberg are not suggesting solutions in the article they are arguing that the cash revenues cannot fund plugging when that is obviously not the case in all realistic perspectives.

[johnhemming] 15/10/2021 15:53

>Let's hope gas continues to flow for another century, eh?
Try reading the provided link to the cash flow forecasts. That does not suggest gas flowing for a century. It does indicate that there is a retirement funding stream.

I have read some of the IPCC reports in the past and have done a quick google on this. This report


on page 97
says: "Natural gas changes by −13% to −62%", but alternatively "some pathways show a marked increase albeit with widespread deployment of CCS."

A 13% reduction is less than is forecast by DEC themselves and you should note that the IPCC could see an increase in natural gas usage.

[scrwal] 15/10/2021 15:51

DEC cannot fund the plugging for the quantities Bloomberg would like.

DEC has set up the state agreements so that minimal plugging is done in the first 10/15 years because it needs cash to pay off its debts. This is clearly inferred in its wind down model where it pays off $0.9Bn in the first ten years and after that the funds generated are then allocated to the ARO and dividends.

The Wind Down model shows in totality that after 75 years everything should be plugged using cash generated over that time. It doesn't show -likely will never show - how funds are allocated over say 5 year periods. The cash spent re ARO is likely to be at minimum levels until all loans are paid off. It will then increase steadily, with cash being built up over the next 25 years and will reach consistently high capping levels after that using up the cash built up and cash saved on declining dividends.

The company is betting that no adverse legislation is put in force in the next 10 years where it has to cap a lot more wells.

[professor john koestler] 15/10/2021 15:45

I have no agenda.

$7M bond on how many wells?

Let's hope gas continues to flow for another century, eh?

[johnhemming] 15/10/2021 15:44

>I don't see evidence on the ability to finance the plugging of all their wells.
That has been provided in the link. That is not an issue.

>What if federal law outlaws gas in two decades?
If the USA outlaws gas (which would come after coal and oil) then all the companies involved in that in the USA would shut down overnight and there would be no funds available to retire any assets in a proper manner.

Gas is used, for example, to produce fertiliser. I have argued for decades that we need more sustainable sources of energy. However, there is a real problem in shutting down things too quickly. I have not studied the plans in the USA, but I would assume that this is not in the plan.

Realistically if fossil fuel prices continue going up the companies will have more money which will enable at least retiring all the assets that could arguably be retired.

You can argue about whether the regulation in the past should have been done a different way. However, we are where we are.

DEC have a responsible plan for retiring assets and the funding stream has been identified.

Bloomberg are basically wrong in the thesis of their article.

This is a quote from a Bloomberg article.
"At the rate Diversified is paying dividends to shareholders, some worry there will be nothing left when the bills come due."

That is basically rubbish. People who have not studied the financial forecasts may ask a question about this, but the answer is available.

Bloomberg are not saying all the producing wells should be shut down today.