Diversified Gas & Oil Share Discussion Threads

[lord gnome] 01/9/2018 08:27

Morning Sogoesit. Bad night? Nice to see the share price resuming its upwards path. All that seems to have happened with the recent gyrations is that it has returned to the established long term trend line. I can cope with that. Looking forward to bumper dividends.

[lab305] 21/8/2018 10:10

At this rate there will be no ordinary investors left just institutions. Over the last month many hundreds of small sales have gone through . Since the management and institutions historically owned a large percentage they must be running out soon! Roll on the results in September and hopefully a much bigger dividend.

[melody9999] 14/8/2018 09:34

Tks for other posters for useful info. I listened to the Proactive interview a couple of times.

Key takes on decommissioning. Rusty's verbatim comments in commas:

- its normal business - this negotiation is no different
- expected at time of acquisition
- expect "mutually satisfactory" outcome. "I think agreement will set people at ease"
- fundamentals / cashflow unchanged inc 8 / 9% divi
- deeper wells with higher cost (eg $41K). "Not many in portfolio"

[carcosa] 14/8/2018 04:58

Gas prices have been moving upward recently.~6% this month to date.

Associated with this is an article:
hxxps://oilprice.com/Energy/Gas-Prices/Are-Natural-Gas-Prices-About-To-Break-Out.html

"...Investors in natural gas futures or in natural gas producers should watch this situation closely, as a disconnect may be developing between natural gas supply risk and price reality. Unless inventories bounce back into the normal range over the next few months, the risk of much higher prices by the end of winter will be significantly higher.

Natural gas is currently priced for perfection, with the implicit assumption that production will pick back up enough to prevent supply concerns. There are many risks to this perfection scenario (a cold winter, hiccups in production, increased exports to Mexico) that in my opinion are not sufficiently priced into the market."

[zengas] 13/8/2018 21:23

They've plugged 31 wells this year since March. (4 and a half months). That's a very low number and 14 in a year are for Ohio so why the delay ?
What they've done was between $8,100 and $21,000 - had 2 wells so far at $41,000 so that confirms that some do have a much higher cost and how would that bear out amongst the 920 when they haven't plugged that many.

They confirmed 920 wells to plug and still to agree on. When asked how many wells they had in PA. He said 'I think right now in PA about 25,000 wells'.
If they've only done 31 since March, that's not many in a year and my concern is if their cash flow and divs are based on low amount of wells why they weren't plugging more. 920 wells is a high number and that's only 4% of their 25,000 wells.

One question that wasn't asked was how many wells are inactive or how many are expected to be coming up to being inactive versus productive wells and will that create a bigger number to deal with much earlier than expected beyond this 920 ? One thing you don't want is a significant number of wells being added for plugging in a further 12 months imo.

Div yield this year of 8.5% - 9%. I think when they explain the above and people can be assured of no nasty surprises, it might restore confidence.

[lord gnome] 13/8/2018 19:52

Proactive Investors interview today with Rusty. Sounds like an agreement on plugging could be announced any day now. He is surprised at the share price reaction to the RNS. Almost calling it a buying opportunity.

(www).proactiveinvestors.co.uk/companies/stocktube/10102/diversified-gas-oil-very-close-to-pennsylvania-decommissioning-agreement

Looks like 1.4 million of delayed buys from this morning were printed after close of play.

[podgyted] 13/8/2018 19:09

Warren Buffet/Charlie Munger have said they have a system which segregates into "Yes", "No" and "Too Difficult".

This is in the too difficult pile IMO.

The share price graph shows the market has lost some confidence here. If they don't do any more deals its probably H2 2019 when we will see some "clean" figures - but I'd be staggered if they don't do any more deals by then - the problem will therefore continue.

I'm on the sidelines and to be frank I'm not sure if there is any value here or if the company is simply returning capital to shareholders.

[zengas] 13/8/2018 13:49

lab305 i fully take your point about plugging being common knowledge/standard practice and it's nothing new to me. I've not said the wells are $100k each but bear in mind they can run up to this in the state and we don't fully know what the costs are per 'individual' well.

You say "if the regulators demand that the process be speeded up and they have to do an extra 100 wells per year average cost 25000 dollars each that's only $2.5m and it will not even scratch the surface of the expanded company profits". We don't know that and it begs the question why haven't they completed those before now ? They say they haven't complied. Why not ? Plugging 900 odd wells at $20k/well ($18m) wouldn't concern me but i have to ask why is the company appealing in the first place and the question is could the average costs in these 900 odd wells be higher thus the need to appeal it especially as the company can't pick or choose what wells to deal with when it's got an order against it.

I don't think anybody here suddendly thinks they have to "plug 1000 wells at $100k each." Number 1 the company didn't tell us how many wells were on the order (we had to find that ourselves) and No 2 they haven't given any costings for those 900+ wells other than a figure for 14 wells/year in Ohio at $20,600/well. How would the average Ohio well cost look if they were doing 100-200 wells/yr in Ohio instead of 14 ?

I would not rely on the average price because i am conscious of possible price skewing - ie budget to close the cheapest ones first in order for a company to keep its costs down at the lowest possible point in the early years when its nothing more than a formal agreement. Why fix ones at $40k first if you can get away with a formal agreement and do ones at an average $20k first? Makes sense when you want to conserve your cashflow in the early years given the loans etc to be paid.

Whose to say the state will alllow 9 years at 100/yr to complete those. States get caught with operators going out of business/gas prices etc and they don't want to bear the brunt. It's not only that, there has become an onus on operators to fix these because of damage/threat to water supplies, proximity in some cases to homes, schools and communities who want these issues resolved (not hard to find/research without my post becoming longer) so they might not get as long as hoped for to deal with them.

It's also not insignificant if the costs have to be brought forward. If someone budgets for their mortgage over 25 years and you're suddendly asked that you have to pay a bigger chunk of it earlier you can see how it can be a problem. It can affect free cash flow and have an effect on the dividend.

We don't know if other states may yet adopt a process to do the same and then there's also the issue of previously undocumented wells that you as owner of the properties can be asked to clean up. There could be up to 500,000 in PA alone and if you get hit with even a few hundred more that you didn't know about then your decommissioning costs go up even if they are pushed down the road. What happens if Virgina or Ohio announced a similar order as PA. How long formal agreements can last is anyones guess. If a stricter process was introduced/enforced rather than an informal agreeement and they follow PAs example whose to say that wouldn't have a bearing. If they weren't complying before the order in PA well you could ask are they complying everywhere else ?

As for saying they are fully budgeted for and particularly the point in the RNS

From DGOC -
"Decommissioning costs will be incurred by the Group at the end of the operating life of some of the Group’s properties. The ultimate decommissioning costs are uncertain and cost estimates can vary in response to many factors including changes to relevant legal requirements, the emergence of new restoration techniques or experience at other production sites.

The expected timing and amount of expenditure can also change, for example, in response to changes in reserves or changes in laws and regulations or their interpretation. As a result, there could be significant adjustments to the provisions established which would affect future financial results."

[fozzie] 13/8/2018 13:42

Well i certainly didn't expect to get the chance to buy more at this level, looks like i will topping up sub100 for sure, a gift!

[reptile3] 13/8/2018 12:30

Thanks for that lab305. Well plugging does seem to be the issue. The links below give an interesting insight to the costs involved and the application of a bonding system. Click on the attached link "Abandoned Unconventional Natural Gas Wells- a looming problem for Pensylvania?". From my reading it would appear states should still hold bond money from abandoned wells where operators/owners have walked away. Also unless a company applies for and receives approval for an extension of the regulatory inactive status it must become active, plugged or abandoned. Not sure how that applies to DGOC.

vpasec.org/wells/owplugging.html

[lab305] 11/8/2018 10:17

I think that things have got a little out of hand here. My understanding of the situation is this.
The plugging of old wells is standard practice and fully budgeted for in the company's forecasts. Recently the regulators in Pennsylvania have clamped down on rogue companies that have not been fulfilling their obligations and demanded plugging of obsolete wells. DGOC are now in negotiations with them merely to agree the speed of the process. Since the wells were to be plugged whatever it may mean a little more spent earlier than later but it had to be spent anyway.

The whole issue of plugging was common knowledge in the US and the latest moves by the regulators well publisised in the media over there. Questions were therefore addressed to the company asking if this would affect them. In an effort to allay concern about this they came up with the trading statement. Unfortunately far from calming it spooked UK investors who had never heard of plugging and the result was that many magnified it into a gloomy scenario. The company didn't help by the very poor and ambiguous wording in the RNS.

Finally the costs of the process are almost insignificant.Firstly there is a full programme of well plugging budgeted for anyway. If the regulators demand that the process be speeded up and they have to do an extra 100 wells per year average cost 25000 dollars each, that's only 2.5million. It will not even scratch the surface of the expanded company profits.
Reading through the posts on here some people seem to believe that suddenly DGOC have got to plug 1000 wells at 100K dollars each from nowhere with no budget.That is simply wrong.I have added over the last days. The pound continues to weaken and natural gas strengthen .

[zengas] 10/8/2018 15:44

I bought these for the dividend Lord Gnome and the possibility of growth in the s/p.

My main concern was the sheer amount of wells, and nearly as much production as wells and the head count to look after them but given the bank and subscriber support, chose to take that risk and buy in.

The earlier comment that someone greatfully posted about the shorting increase made me wonder why and I'm just slightly surprised that DGOC could not elaborate further this am without investors having to go dig and find what the appeal issue was. To me it's not insignificant and I would hope that a further parcel of wells were not to come out of the woodwork earlier than expected.

I definitely think now that the short interest is related to this. Have DGOC got any estimate of wells that they are unsure of that could be found on their properties that they haven't budgeted for and that the previous owners haven't documented? Also if lots of these decommissioning costs are having to be brought forward could it present a problem financially or a squeeze? If it's not going to be an issue or affect their free cash flow then why not comply rather than appeal - which makes me think it may impact them (they say not significantly but to me that still means it will affect them for something they hadn't planned on). Also if other states crack down harder rather than just formal agreements like Ohio then what ? Also they gave the costs associated with plugging in Ohio but completely didn't indicate what the costs are in Pennslyvania ? Could they be plugging the cheapest ones first in Ohio via a formal agreement thus skewing the cost profile presented leaving more of the most expensive ones for further down the road ? They are being hit with 920 wells. Those articles highlight that some wells range up to $100,000 to plug. It would only take the average cost to jump from $20,600 that they give for 14 wells/yr in Ohio to an average of $30,000 and the company is hit for $28m. Heaven forbid the average was much higher ? While they say they don't expect a 'significant impact', it must mean some impact is expected given they've chosen to appeal. They haven't been fulfilling their commitments so you could argue they also never expected this action. If the plugging orders become more of an issue and any choppy waters encountered on the gas prices at any point then it could put financial pressure on the company. I think that's why there's a short interest in the company and they just didn't open it for the sake of it. Hopefully they will give more updates come results day. I just feel they didn't represent todays RNS in the best way and left more questions than answers as to the size of the potential problem they are appealing.

[lord gnome] 10/8/2018 14:32

Very interesting finds Zengas, thank you. DGOC must have been aware of the liabilities when doing the deals. It may however explain why they achieved such low purchase prices as they knew they were taking on the plugging liabilities. No such thing as a free lunch, eh?

[zengas] 10/8/2018 13:47

920+ wells DGOC have been ordered to plug as we bought some assets of CNX that include some of the wells that fall under the order (see full link). If they fall in around the $20,600/well quoted for Ohio that's roughly $19m brought forward that they are appealing against. If they are below the average not so bad, but a figure of $10k/well more and the cost gets up to nearly $30m. I've a feeling those engaged in the short have seen this and the question is could there be more wells to come or brought forward for plugging, and the implication of those not known about which would become our responsibility when/if documented as we own the properties.


July 22 2018

The Pennsylvania Department of Environmental Protection (DEP) has ordered CNX Resources Corp., XTO Energy Inc. and Alliance Petroleum Corp. to plug more than 1,000 abandoned wells across the state.

The agency issued separate administrative orders to the exploration and production (E&P) companies earlier this month and said that each has failed to follow state law by not plugging the wells.

“It is critical that all operators adhere to state laws to mitigate the environmental and public health and safety hazards and not add to the costly orphaned and abandoned well inventory that would otherwise fall on the shoulders of Pennsylvania citizens,” said DEP Secretary Patrick McDonnell.

The DEP estimates that hundreds of thousands of oil and gas wells have been drilled in the state since 1859. Much of that activity predates the agency and applicable regulations. Currently, DEP estimates that up to 560,000 wells are abandoned across the state.

DEP has repeatedly sounded off on the issue. While E&Ps across the state share in the responsibilities, Diversified has recently been on a buying binge throughout the Appalachian Basin, amassing more than six million acres of mostly legacy properties.

Making sure that abandoned wells are plugged is and has been a priority for DEP,” said agency spokesman Neil Shader of the orders. DEP often works with operators to schedule plugging, but it wanted to ensure the work is done, because “the situation that DEP wants to avoid is that current operators will walk away from their obligation and add to the existing inventory of orphan and abandoned wells.”

Diversified also recently purchased EQT Corp.’s Huron formation assets in Kentucky, Virginia and southern West Virginia, taking on what EQT said are $200 million of plugging and other liabilities associated with the assets in an indication of the responsibilities that come with such properties.

[zengas] 10/8/2018 13:33

Aug 2 2018

DEP orders Pa. operators to plug 1,058 abandoned wells

The Pennsylvania Department of Environmental Protection (DEP) has issued administrative orders requiring three oil and gas companies — Alliance Petroleum Corporation (Alliance), XTO Energy Inc. (XTO), and CNX Gas Company LLC (CNX) — to plug 1,058 abandoned oil and gas wells across Pennsylvania

A listing of the wells is as follows:
⦁ Alliance (a wholly owned subsidiary of Diversified Gas and Oil) — 638 abandoned wells
⦁ CNX — 327 abandoned wells
⦁ XTO — 93 abandoned wells

The orders include deadlines by which each company must plug their abandoned wells.
Costs can vary greatly depending on the well conditions, but generally, run between $10,000 and $100,000 per well.

[zengas] 10/8/2018 13:11

The ambiguity is the other half of that paragraph - "Although the Company does not expect its planned plugging activities to increase, the Company does not foresee this as having a significant impact on its consolidated free cash flows".

Are they implying though that it may have some impact ? Just a pity that they didn't elaborate on what the consent order was that they are appealing.

Going back to the bit about their Ohio agreement with regulators to plug 90 wells over a 5 year period - this is stated as a 'formal agreement' so could the case be that the Penslylvannian one changed somewhat to a more rigorous one from a possible previous formal one and is there anything down the line in possible legislation that would change any formal agreements ?

[alter ego] 10/8/2018 12:45

Lord Gnome, agreed. management are v experienced in this business so all aspects of owning and running their newly acquired fields will have been taken into account. Its unfortunate that mentioning the need to reach an agreement on well plugging has spooked the market. They have made it very clear that this is not expected to become a serious issue " The Company does not expect to increase its planned plugging activities and that it has made adequate provision in respect of its decommissioning liabilities.

There's nothing ambiguous about that.

[lord gnome] 10/8/2018 12:30

I am content to assume that the plugging issue was all taken into account in the due diligence conducted prior to the takeover.

[lab305] 10/8/2018 12:01

Well the RNS designed to allay fears and dampen speculation seems to have had just the opposite effect. The share price continues to drop. Only a few weeks to some real data.

[zengas] 10/8/2018 11:33

I've been wondering about the post above noting short interest increasing and if this is linked to what DGOC said today in the RNS.

They give an example of plugging up to 18 wells a year in Ohio and the average cost of $20,600/well and how they have budgeted for that. Immaterial at $400k/yr for Ohio on the low number of wells but what is the Pennsylvania number ?

Just wondering if there could be something more to this and why DGOC flagged it because if it was the normal budgeted for wells it wouldn't warrant such an RNS re Pennsylvania. DGOC is appealing an order made by the body responsible for oil/gas wells and wonder why they would go so far as to say "does not forsee this as having a significant impact on it's consolidated free cash flows".
We know the high number of wells DGOC has but what isn't clear is where they all producing wells and what is the total number of all wells including old disused wells and any yet to find ? They have 6.5 million acres.

From their website in Pennsylvania alone the Dept of Environmental protection believe there are 300,000 - 760,000 oil/gas wells drilled in the state with as many as 560,000 unaccounted for. That's a lot of unaccounted wells so if older wells where found on your property then maybe it could bump up your decommissioning costs that you hadn't allowed for ?

It seems they make the order if on your property to address them. If they want the abandoned wells speeded up re plugging perhaps that could have an impact on what DGOC have allowed for over a much longer timescale that is somehow brought forward meaning more costs in a shorter period ?

From the DOEP website -

"Because of the recognized human health and the environmental risks, oil and gas operators are currently required to plug abandoned wells, which the Oil and Gas Act defines as:

“Any well that has not been used to produce, extract or inject any gas, petroleum or other liquid within the preceding 12 months.

Any well for which the equipment necessary for production, extraction or injection has been removed, or

Any well, considered dry, not equipped for production within 60 days after drilling, re-drilling or deepening, except that it shall not include any well granted inactive status.”

[melody9999] 10/8/2018 11:16

Perhaps the RNS is intended to act as a signal to the State as to DGOC's approach?

Unclear messages can sometimes be because they are being drafted for the benefit of different audiences.

[sogoesit] 10/8/2018 09:56

I think it's clear enough.
Decommissioning is a regulatory and environmental risk. Especially where a company has new assets it has come to manage and may manage in a different way to the prior management.
The BoD are signalling this risk to investors and say the situation falls within their planning.

Investors will take a view on the risks outwith management's planning.

[carcosa] 10/8/2018 09:16

"Why set a hare running?"

Must admit I am a bit confused as to why they dedicated so much of the RNS to this issue. Common sense would suggest its there because there is a potential huge problem on the horizon.

However the tone of the RNS is very much 'relaxed'. Comes across as being not an issue. Costs of decommissioning are insignificant per well so the implication is that the State are demanding a huge number to be decommissioned; but that makes little sense for a number of reasons. So then you are left with the State wanting DGOC to do a lot more in decommissioning resulting in doubling/tripling decommission costs; but again that makes little sense because the requirements would apply to all operators and a change in legislation would be required.

So I am left pondering that perhaps because its an American BoD that they feel compelled to bring it to Investors attention whenever they are going to make an appeal against a government agency. Maybe its a thing they do as a SEC requirement in America and they have just followed that path to feel comfortable. Perhaps a UK BoD would not bother with such a statement until it became a lot more serious(?). To me this appears just doing normal business activities.

Given all the words they used in the RNS it seems quite unclear!