Diversified Gas & Oil Share Discussion Threads

[thetrotsky] 22/3/2021 10:15

Gary, I disagree. If the contract is to have any value then somebody has to pay. Even if the original counterparty sells the contract, DGOC either has to deliver oil at the contract price (below the market price) or make good the difference between the hedged price and the market value. Otherwise there would be no value to the contract. If you don't believe me then I suggest that you read Note 14 where it says quite clearly "If the Group sells a swap, it receives a fixed price for the contract and pays a floating market price to the counterparty". There is a cash impact on DGOC but it's a cash impact that they do not factor into their calculations (DGOC makes its calculations based on the fixed price). It is, as I've said before, a reflection of the potential opportunity lost. The reason DGOC refers to it as a non-cash adjustment is because it's currently unrealised and may never crystallise (the market price may drop or DGOC may be anle to take counter actions to mitigate the effect). It really isn't complicated ;-)

[johnhemming] 22/3/2021 06:41

>Deals have been done in Appalachia but not by us.
Personally I think it is more important to do deals at the right price than do deals regardless of price.

[lab305] 21/3/2021 22:23

Just to refresh some memory ....
Oaktree deal done on 5 October last. That will be six months in two weeks.
Cenkos valuation 138p on 29 October last. That was down from 148p previously.
New Cenkos valuation from last week 134p.
We need a game changing deal to reverse this decline. Deals have been done in Appalachia but not by us. Chevron 725m to EQT for one. Rusty seems sure that something is imminent. Let's hope so.

[johnhemming] 21/3/2021 06:58

gary says:
"leads to unnecessary wild swings in annual profits that over the life cancel out to zero."

That is the nub of the issue. The business is planning to have a consistent positive free cash flow and pay shareholders over 40% of it.

They are doing that well.

They have sufficient exposure to commodity prices to provide a hedge against inflation.

If some people decide not to buy the shares because they don't understand that is their loss and our (shareholders) gain.

[kaos3] 21/3/2021 06:02

another Q regarding their risk exposure - if they hedge like for example 60% and that is with one specialist firm (writing it for their own exposure or just consulting) - just one client would be possibly buying 60 % of their operations

Well - it is not so - but how is it?

[gary1966] 20/3/2021 22:03

TheTrotsky,

Sorry been out all day and only just seen your post.

From your post 518:

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).

No they don’t make good the difference. If the price of gas exceeds the hedge price then the value of the contract goes up to the person who holds it in the same way it goes down for DGOC. They can then sell the contract to another party for a profit or if they are taking physical delivery then they can sell the gas and that is how they crystallise their gain. There is no cash impact on DGOC and once again reiterates why it is a non cash item in the accounts. The only price the company can pay for being on the wrong side of the hedge is to have lost out on revenue over the life of the contract. The only purpose of the hedge, as I have said, is to ensure they have sufficient revenue to repay the loans and ensure the dividend. It really isn’t more complicated than that and lenders will probably insist on it being taken out as security for their money. As I have also said it makes DGOC an investable company rather than a casino.

Kind regards

PS With regards to DGOC and IFRS, yes I would say it is a complete waste of time. Appreciate that future legally bound contracted payments should be shown on the accounts but M2M accounting completely distorts most if not all sets of accounts and leads to unnecessary wild swings in annual profits that over the life cancel out to zero.

[kaos3] 20/3/2021 20:31

main derivatives position result is in "natural gas swap". what is it ???

"In the most common type of natural gas swap, one party, such as a large natural gas consumer, agrees to pay a fixed price for natural gas on specific dates to a counter-party who, in turn, agrees to pay a floating price for natural gas that references a published price, such as the NYMEX natural gas futures"

[kaos3] 20/3/2021 20:16

I consider above material and can not say anything bad about it. it is as it is. and it brings a huge refreshment to the P&L

[kaos3] 20/3/2021 20:13

no off balance sheet I could find

[kaos3] 20/3/2021 20:11

dgoc does not do it by them selfs? I thought they are doing hedging by them selfs - if they understand the "art". By outsourcing the "art" - it does not mean they do not understand what is going on and it does not mean that hedging is doing someone without skin in the dgoc game.

"....o assist with its hedging program design and composition, DGO engages a specialist firm with the appropriate skills and experience to manage its risk management derivative-related activities."

[kaos3] 20/3/2021 20:00

they basically can agree on fair value derivatives exposure ???
note 19
"Netting the fair values of derivative assets and liabilities for financial reporting purposes is permitted if such assets and liabilities are with the same counterparty and a legal right of set-off exists, subject to a master netting arrangement."

and that was - what I was thinking of above

it is not - "John - how much do we need this year" - it is done very professional

but it is a gain - not a loss - so nice

"Net gain (loss) on fair value adjustments on unsettled financial instruments (b)20,270"

good work by dgoc and hired guns

[kaos3] 20/3/2021 19:52

and their report is about selling oil btw

"DGO applies the expected credit loss model to trade receivables arising from 1) sales of natural gas, NGLs and crude oil 2) sales of gathering and transportation of third party natural gas and 3) the provision of other services"


"Adjusted fair value of oil and gas properties.."

[kaos3] 20/3/2021 19:51

I was thinking about their hedges - are they plain vanilla broad exchange traded hedging products - preferred by myself

or

a contract specially written for dgoc - not as "transparent" to me (Greece debacle and so many others...) as lots of creativity gets started if wanted

and found this sentence in their report

"our hedge strategy of opportunistically layering on appropriately structured hedge contracts at"

I found also currency hedges - why - if they are US only btw

can not make my mind how to look at it.

they use both kinds of hedging products (vanilla and "sold" to them for them)
Natural gasSwaps69,242 4,053 Collars3,882 131 Basis swaps(2,455)(1,720)Put options(24,783)7,292

[dunderheed] 20/3/2021 15:53

Trotsky what do you mean by ..."the two parties then settle any difference bewteen the realised price and the hedged price (by payment to DGOC if the realised price is below the hedged price and vice versa)"...
WTGR that's not my understanding of the hedging they are doing as what are they actually hedging then?

We will have to disagree regarding IFRS - as far as I can see if a company does not lean exactly toward the IFRS they can do it their way stating any differences they have made and this takes away the whole point of standardisation.
There are always subjective interpretations regarding (as a small example) forward pricing, discount rates applied and inflation rates, treatment of fixed / intangible assets etc. for ease of comparisons anyway.

Anyway apologies if I appeared rude, you are of course right to be "reserved" as Enron was too complex to be understood by "simple" people yet was in my eyes a simple fraud!

[kaos3] 20/3/2021 15:01

if one extrapolates - they can not report losses and have positive cash flow for a long time

when I was in the business - before my gardening career

-no cash was when we had profitable growth reinvesting and expanding

- when we were making loss and selling bellow prices we had lots of cash and a loss - it was fun and caused me becoming a gardener

[johnhemming] 20/3/2021 13:51

I don't think the weakness is because of the possibility of a placing. I think it is because some people have sold (possibly automated trades) because of the IFRS reporting of the reduction in value of the hedges.

In the end if the business is always cash positive and pays 40%+ of that to shareholders then good.

It is not impossible that the company itself will buy some shares on the market with the cash it has available. It has done that in the past and I am happy when that is done below NAV. Stockopedia has the NAV at 125p.

[lab305] 20/3/2021 13:38

Well done johnhemming,The Trotsky and Gary1966 for an educated discussion. I have a lot of these but holding them has not been easy.
A few years ago they were new to the market and as they grew quickly so did the profits and then the dividend. That was fine and I liked their strategy of turning around old and neglected wells and the cost savings they accumulated with size. Simple , but now this is not the same animal. I see Rusty , a man who I have the greatest respect for , hailing the results as a triumph even though they indicate a considerable loss . Complex trading in derivatives seems to have become the main business or at least a considerable part of it. A loss is, I am told , not really a loss. Profit is no longer the barometer of how the company is doing but free cash flow.
My barometer of how the company is doing is the share price. That has been hammered post results and justifiably so if you just read the bottom line. However my dilemma is that my simple view is that they are doing poorly whilst the management and Cenkos paint an entirely different picture. Which is correct ?
I understand that the recent share price weakness may be due to the prospect of a placing and institutions selling with that in mind however the share price has still not got back to where it was two years ago . Thank you for any replies in advance.

[kaos3] 20/3/2021 13:29

it was never easy to me to read the reports because:

- opportunity loss was never reported (if market is higher than a loss) - they are great in avoiding a loss - and that is good but at the same time they could avoid more profits - and that number should be talked about as well
- the "real results" should have opportunity loss included if it occurs
- hedges valuation is a mystery to me (and for most bank analysts as this are off exchange contracts where all kind of maneuvers are possible)
- I did never dived into the off balance sheet research (small position I have)
- de commissioning costs brought forward (sunk fund???) is also a very variable concept in evaluation

to sum it up - too many moving parts for myself that can be booked and hence presented as they need or wish at the moment

but what keeps me calm - their industry competence - making it all good - and baking a fixed (cash) profit (and I hope decommissioning later will not kill the model). because rules can change and hence the costs.

[kaos3] 20/3/2021 12:47

"First of all, they don't sell the oil to the counter parties" - can you elaborate - meaning what counter parties (meaning hedging counter parties - and no oil there anyway)

[kaos3] 20/3/2021 12:41

Trotsky do not give in - have the last word for all it takes please. You started a good conversation

[thetrotsky] 20/3/2021 12:17

fardels bear, Pardon my slip but oil or gas it's the hedging principle is the same.

johnhemmings, There is no such thing as "cash profits" (there are "cash surpluses" or "realised profits"). I do get what you are saying but I would reiterate that you are placing reliance on unaudited figures, which isn't entirely desirable.

Dunderheed, I'm glad you're so well informed. Please advise how they've used the forward price curve to compute the future profits/(losses) on their derivative contracts each year and what discount factor they are using. Also, please advise what gains the CFO is specifically referring to in his statement (because his statement seems to contradict the increase in the adjusted profits set out in the alternative accounting measures). Anybody, IMHO, who describes IFRS accounting as a "relatively simple concept" clearly doesn't know what they are talking about; if you hadn't been following the thread, the essential argument here seems to be that we should ignore the IFRS figures because they don't really give a "true and fair view" of DGOC's business which is both risable (given the purpose of an audit) and also speaks volumes for your so-called "simple concept". The concept may be simple (let's value all assets and liabilities, including the proverbial kitchen sink, on a very worst case scenario) but the resultant accounts are from straightforward to either follow or understand (the mere fact that people are choosing to ignore/discount the IFRS figures and fall back on the adjusted figures would suggest that IFRS accounting is not achieving it's objective and is, arguably, a complete waste of time). Also, isn't the DGOC's latest estimated NAV (124p, I believe, although I'm not sure whether that figure factors in DGOC's hedged prices) run counter to your 7% depletion argument? I'm saying the accounts could be better laid out (there's an overload of information in the excutive summary because of IFRS and the impact it's having on the reported profit/loss) and more informative about the very sizable unrealised loss (there's a better explanation in the accounts on the "gain on bargain purchase" than there is on the far larger and more impactful "gain/loss on derivative financial instruments")

[dunderheed] 20/3/2021 10:52

TT / Gary - maybe I am coming from an informed viewpoint but the "accounting" involved is relatively simple concept and the "non cash" element has been highlighted in company accounts / presentations.
What more can you want?
If such concepts are deemed complicated - which only really includes non sophisticated PI's having that view (IMHO) then respectfully they should seek professional advice about this - to ascertain the "risks" attached (essentially opportunity cost of receiving market values when in excess of hedged prices) to such investments.

I think the company more than adequately covers the explanation of "financial instruments" involved and they are not accountancy lecturers?

I would imagine what has spooked investors more, again IMHO is the 7% depletion rates referred earlier and not opportunity costs of what they may be able to get in the market based on forward price curves!

All IMHO and DYOR, of course.