Diversified Gas & Oil Share Discussion Threads

[fardels bear] 20/3/2021 10:46

They sell what oil?If you foul up on the very basics pardon me if I give you little credence.

[thetrotsky] 20/3/2021 10:39

Gary1966,

With respect, I think you're completely missing the point.

First of all, they don't sell the oil to the counter parties (they just make good the difference between the realised price and the hedge price).

Secondly, the hypothetical loss in the accounts does not represent the current market value of the derivative contracts; it represents the potential, additional, profit opportunity that would currently be foregone over the lifespan of the contracts, all other factors be equal, at the balance sheet date.

Thirdly, the hypothetical loss will not simply "reduce to zero" if realised prices remain above the hedged prices; the loss will instead become realised (in the same way that a realised gain arises when realised prices are below the hedged prices) unless the company takes some counter action.

However, allowing for the technical nuances of discounting, you would be right, in principle, to say "no additional loss would be booked"; there would, rather, be a release of the loss provision to offset the realised losses.

I do actually understand how hedging works, in principle, and why DGOC has enetered into these derivative contracts and the benefits to DGOC thereof.

However, I think it's important for people (the laymen) to appreciate that there is scope for DGOC to enter into additional counter trades in the future, if appropriate, to mitigate any potential "lost opportunity" at that time, which is not factored into the hypothetical loss i.e. the quantum of any future potential "lost opportunity" is not "set in stone". I'm also saying that, particularly under IFRS, the disclosures in the accounts are confusing and, potentially, misleading and DGOC could, and should, do more to explain how the loss is being computed.

The fact is that the hypthetical loss does actually have a potential cash impact in the future; unless DGOC takes future counter action, the hypothetical loss represents the additional money DGOC could potenially have retained from its realised sales if it hadn't hedged its future production. DGOC refers to this hypothetical loss as a non-cash adjustment simply because it doesn't factor receiving this cash into its business model; it's a subtle difference.

[johnhemming] 20/3/2021 10:17

Gary is basically right. This company continued to make cash profits and pay a cash dividend throughout the peak of the Covid crisis simply because it had hedged as much as it had.

At the same time quite a few shareholders sold the shares and at one point the price went below 60p.

It simply shows that people who understand how companies work can use the same information that everyone else has, but make a profit on their investments whilst others make a loss.

I am happy with this strategy. Meaningless movements in the valuation of contracts based upon the forward valuations of hedges should not be included in assessing how the company is doing. These are not movements that can be expected to continue.

[gary1966] 20/3/2021 08:46

TheTrotsky,

Ok in layman’s terms if the price continues to rise above the hedge prices then the company miss out on additional revenue, that is it. The organisations that they have hedged with would then have a cheap supply of gas that they can sell at a profit on the market. There is no additional liability to DGOC hence why it is a non cash item. Prices exceeding the hedge price doesn’t alter the company’s ability to pay down debt and pay the substantial dividend. Hedging ensures that this happens. As I posted a while ago, over the last two years the hedging has resulted in an additional $194m of revenue on spot prices. The loss in the accounts is a hypothetical loss if they were to sell their contracts today to a third party. The company won’t do this and will see them out to the end of their life as they are linked to the loans they have taken out for acquisitions. This is why the only loss to the company if prices move against them is the loss of revenue. Over the life of the hedge this hypothetical loss will reduce to zero if prices remain above the hedge price. However in real time if prices fall below then our revenue is protected.

I hope this helps.

[thetrotsky] 20/3/2021 08:26

podgyted, regardless of what you may think about IFRS, the accounts are prepared and audited under IFRS and, as such, the accounts say DGOC have made a loss and I don't think that can simply be ignored out of hand. Furthermore, the information you are relying on isn't being audited, which isn't ideal. Personally, I wasn't particularly impressed with the way DGOC presented the figures. The accounts have to be read by both layman and experts alike and I don't think DGOC did enough to explain why there was such a large, material loss reported on their derivative contracts considering that this could be a perrenial accounting issue e.g. simply referencing the forward price curve and discounting didn't, in my view, adequately explain why the loss had arisen or why it could simply be ignored as a "non-cash" adjustment, as if to imply that it will never have any impact in the "real world". IFRS may be Voodoo but you don't simply book a loss that may never arise. I believe, but stand to be corrected, that the book loss on the derivative contracts reflects the potential future revenue DGOC might forego, based on current estimates, if realised prices continue to rise and the company does nothing to mitigate the impact should realised prices exceed hedged prices; if so, why not explain that in layman's terms. I also think that there were simply too many figures in the executive summary (and some figures that made no sense whatsoever e.g. the CFO's statement I previously referrred to) and it only served to make the accounts even more difficult to understand and analyse; DGOC may not like IFRS any more than you do but it almost smacked of a "smoke screen", intentionally or unintentionally, which only serves to raise more questions than answers. I personally would like to see less detailed analysis in the executive summary (the detail should be in the alternative performance measures or appendices)

[cassini] 19/3/2021 14:15

Whatever.

I stopped buying New Scientist and Scientific American over ten years ago as I noticed there was barely a story they wouldn't view from a left-biased political angle.

[thetrotsky] 18/3/2021 14:26

johnhemming, I think you significantly underestimate the amount of time they spend monitoring and managing their derivative contracts. They probably have 100s, if not 1,000s (maybe even 10,000s), of individual ontracts which they will be constantly monitoring to know whether they are "in or out of the money" and/or whether they remain aligned with actual/expected production (it's no good having a contract for delivery today if you're only able to deliver tomorrow).

You will see from the notes to the accounts that they can, and do, vary the terms on some contracts, in return for a payment, if and when the need arises. I'm sure they would also want to take counter action, where they can, if a contract, or contracts, starts moving out of the money and/or be on the lookout for new favourable contracts for 2022 and beyond.

Actively managing their derivative contracts, especially as commodity prices start to rise, could generate $millions (they wouldn't just sit on their hands as the commodity price rises above their contract price; they'd want to try and tap into some of the upside if they can).

[johnhemming] 18/3/2021 13:02

In a sense, however, the hedging contracts are generally set up when the financing is arranged. Hence there is not really that much management to be done about them after that point.

[thetrotsky] 18/3/2021 12:56

Timchecco, You clearly aren't reading the accounts prepared under IFRS; they suggest that DGOC is anything other than very profitable. I appreciate that DGOC's alternative figures indicate that they are doing very well and are "on plan" but those alternative figures aren't audited (says so in the accounts); so you have to take those figures with a "pinch of salt".

Regardless of free cash flow, DGOC does need "distributable reserves" to be able to pay dividends. However, as far as I am aware, "distributable reserves" for this purpose are any surplus of accumulated realised profits not previously distributed or capitalised less accumulated realised losses not previously written off in a reduction or reorganisation of capital i.e. "distributable reserves" does not necessarily equate to the profit and loss account reserve. That being so, it's quite bizarre that there is no requirement to disclose "distributable reserves".

The IFRS accounts are, to say the least, very confusing. For example, if you read the CFO's statement he refers to reporting, after excluding non-cash losses/gains, "a $102 million pre-tax gain compared to $131 million in 2019". Would anybody care to point out where else these figures appear in the accounts (can't find them) and how they tie in with the company's alternative preformance measures that imply that net income in 2020 was about $79 million higher than 2019?!

Finally, I think kibes makes a very good point; management of derivative contracts is becoming as important, if not more important, as maintaining uninterrupted production.

[timchecco] 18/3/2021 09:25

@kibes, you clearly havent done any research on dgoc.

- they are very profitable and dividend are payed out of 40% of free cash flow. Gross profit margins are 50%+.
- Rusty (CEO) worked in the financial industry for more than 10+ Years and has many financial degrees. He knows what he’s doing.

[kibes] 18/3/2021 09:04

podgyted - the fixed income stream sounds good but I don't think people are comfortable when they see a loss on the bottom lne. Dividends are normally paid out of profits, so if there are no profits that is a concern. And the extent of their hedging is so large that their principal business becomes not the production of oil and gas but the management of derivative contracts. That is also a concern as it requires a completely different set of skills to oil and gas production and needs a high level of financial ability which incidentally is beyond the comprehension of most people.

[podgyted] 17/3/2021 20:39

The problem with the statutory accounts is they suffer from the fair value accounting the accountancy bodies are obsessed with.

If DGOC buy something at a favourable price they have to put a bargain purchase entry through the P&L at day one - which is related to a 30 year income stream.

DGOC hedge (normally 80-90%) of their production - depending on where the gas futures are for the following years at the year-end they will book a gain or loss - probably for close to 18 months in total. But what they have actually done is fix their income for that period of time to give certainty to lenders and shareholders (dividends).

Anyone using the statutory figures to assess this company will totally and utterly miss the point.

[johnhemming] 17/3/2021 14:38

>Hedges have to be in place as a back stop to satisfy the banks.
As a shareholder I welcome hedges. I particularly like the fact that DGOC has hedges for many years in the future.

What happens, however, is that the value of the hedge for say the year 2025 goes up and down with todays gas price and the forecasts of future gas prices. Personally I don't care about what the current value is of the hedging portfolio. I care that the hedges guarantee that debt will be paid and that the company will have free cashflow.

However, there will be trades driven by the profit reporting although one would expect that to settle down.

I personally think the error is with the accounting standards that apply here, but I was able to buy this share particularly cheaply last year because people did not understand the full effects of hedging. Hence I should not complain.

I would, however, not be surprised if the company started buying back stock if it gets any cheaper. NAV on Stockopedia is £1.25.

[thetrotsky] 17/3/2021 13:28

DGOC have, for example, hedged 90% of their 2021 natural gas production at an average of $2.94/Mcfe (it should be noted that this compares favourably with 2020 where the average hedged price was $2.33/Mcfe).

So, in principle, if the average realised price in 2021 exceeds $2.94/Mcfe, then DGOC can expect to pay their counterparty the excess amount on 90% of their production and vice versa, and DGOC's income on 90% of their 2021 natural gas production is therefore theoretically capped at $2.94/Mcfe.

However, if it looks likely that the average realised price will exceed $2.94/Mcfe then, as I understand, it remains open to DGOC to enter into offsetting transactions, such as options or swaps, to minimise the impact (to effectively "uncap" their income if the average realised price rises above, say, $2.94/Mcfe + a margin). So, DGOC may still be able to benefit from higher prices despite their existibg hedges.

I would reference Note 14 where it says, "the Group may elect to enter into offsetting transactions for the above instruments for the purpose of cancelling or terminating certain positions".

[lord gnome] 17/3/2021 11:26

Surely any loss on hedges is mitigated by higher gas prices anyway? Hedges have to be in place as a back stop to satisfy the banks. Any new hedges being arranged will reflect current higher gas prices. We win on the way down, and claim protection from lower prices. We lose on the way up and gain some effect from higher prices.That's the nature of the beast.

[thetrotsky] 17/3/2021 10:59

If PIs are selling because of the loss (it's actually very difficult to tell because there's a lot of automated selling every day; at best you can say PIs aren't buying and there's a very rigorous tree shake going on) then I think it is, in part, due to the accounts being extremely difficult to analyse (to say the least); there's a lot of data in the accounts and a lot, of apparently, contradictory information (we've made a loss but, hey, look at all these factors to be positive).

I do think however that people are being a bit myopic about the hedges; the loss is predicated on the forward price curve (the expected future price in up to 10 years time, rather than the actual price) and the company taking absolutely no actions to mitigate their position. I would imagine that the company would be able to cap their hedge payments in the event that the actual market price started to rise above their future hedge prices using options, swaps etc. the closer the hedges come to fruition.

[11_percent] 17/3/2021 10:50

The share price is telling us it will lower.

[deadly] 17/3/2021 10:38

If they are, they're incompetent. Any placing should have been nearer 130p.

[11_percent] 17/3/2021 10:34

The insiders at the institutions are front running the coming placing.

[johnhemming] 17/3/2021 09:31

I think kibes is right as to the reason for the drop. I would think quite a few people understand the impact of hedging. Those that don't will lose out as a consequence. However, they have not "lost money" on the hedging. It is a non cash issue.

[fardels bear] 17/3/2021 09:25

You looking for an entry point, kibes?

[kibes] 17/3/2021 08:58

I don't see the price drop as a fundraise. The shares are down because they made a loss of $23 million in 2020 versus a profit of $99 million in 2019 in my opinion. That is enough to expect a drop. Furthermore, if the gas price goes up they are likely to make a bigger loss in 2021 as they may lose more money on their hedging contracts. And I am not sure about institutions seeing through hedging, most of them only look at the bottom line.

[johnhemming] 16/3/2021 18:31

>I say it because I have seen it before
I don't see this myself. I can see stocks where there are continual fundraises where this would be clearly the situation. However, I don't fit it to this particular situation.