DEC-idedly proud!
Diversified close the trading day at the NYSE
Congratulations to Rusty and team.
Not only have they successfully listed in the US boosting liquidity and to help the apparent discount of a UK listing, divested a Special Purpose Vehicle bagging a one-off gain of up to $130m for DEC-hands, they get to clap, whoop whoop, and finally declare the trading day closed. DEC-hands are cheering too!
Meanwhile it’s interesting to see Henry Hub up 15% at $2.90/mmbtu on the hint of colder weather.
Interesting too that trading economics tells us the forecast price ahead for natural gas is positive.
Gas can have a rally at any moment says Skylark.
Remember every rally, even temporary ones (particularly temporary ones) offer opportunities to lock in gas trades, options and puts. DEC relies on variability to lock in advantage.
Meanwhile DEC still faces scrutiny despite having a very robust defence to assertions that it is a leading methane “criminal”.
This is a useful data table which shows all the ESG performance data for DEC for 2020, 2021 and 2022. The key number is the intensity of Methane which as I explained in Probing Deeper Still is 4x lower than the Clean Air folks claim.
I’ve been doing some more reading around the subject of methane in the USA.
What I conclude is that it’s a strange time to launch this probe when existing legislation i.e. Inflation Reduction Act is a game changer on methane. Part of the IRA is the Methane Emissions Reduction Programme (MERP) which has several prongs.
1. FINES
One is to fine O&G firms for methane emissions. Starting in 2024, at $900/ton of methane, increasing over time to $1500 by 2026. The charge is only assessed on emissions exceeding thresholds aligned with industry-set targets. It’s not clear what those targets are.
Assuming DEC’s industry-set target is ZERO methane emissions (it’s not) then the cost of this would be $17m in 2024 and $28m in 2026. (536,000 Co2e / 28 = 19,142 tonnes of methane). Painful enough to force further change.
Whilst this is a negative for DEC in one sense it’s a huge positive too.
How so?
Well, for a start small “mom & pop” operations (like Rusty was back in the day) or maybe large O&G firms who don’t want the hassle may throw in the towel. Sell out. Get rid. DEC might benefit from selecting hoovering up these at attractive rates. Why was the Conoco, East Texas and Tanos acquisitions at such attractive rates? How could the seller be so stupid? Are Conoco fools? Nope. They didn’t want the hassle. Look at how DEC’s 2022 emissions went up on the back of that acquisition. Offload the dross.
Like a gassier version of “homes under the hammer” where your house with a lower EPC sells for 14% less, is it not a GENIUS STRATEGY to use your proven expertise in SMART ASSET MANAGEMENT (SAM) to buy up those wells, make those wells a “do-er upper” and flip them to a special purpose vehicle at a profit (after getting two local estate agents to give their opinions of course).
(Or like Billy Beane trading Baseball players like in DEC-a-dance - you can pick your analogy, reader)
Also because DEC are ahead of the curve and have been proactively investing into SAM to improve the efficiency and emissions, the impact of the fines into the future should be less and heading lower.
And did you know reader, DEC aren’t they only ones realising there’s money in fixing methane. This story is from a not dissimilar company to DEC called Triple Crown.
Their war story was finding and fixing a 3.5% leak had $0.4m costs yielded $3.5m in additional gas revenue…. it was “Wildly Profitable”. Ironic the people covering this positive methane story are none other than our friends over at Bloomberg.
What else does MERP Provide?
More funds to States for detection
Why is that positive? Well, it exposes the bad players. Not all O&G firms are striving for gold standard compliance like DEC is. Exposing dishonesty reveals opportunity. Because the offender now is faced with expensive fixes or offload the assets for what they can get. Reserves to be sold to the highest bidder with no reserve.
More Federal Grants.
In DEC-a-dance I pointed out the $176m tax credits. Well guess what? More where that came from, reader…. courtesy of MERP.
MERP allocates $700 million specifically for “marginal conventional wells,” provides additional funding for plugging wells that complements and reinforces EPA’s ongoing regulatory efforts to reduce emissions from these wells and ensure proper closure. Does DEC have any marginal wells that can be plugged to claim credits for?
Protecting health
A laudable part of MERP is to use funds to mitigate the health effects of methane and associated pollution in low-income and disadvantaged communities. Rightly so. There’s no financial benefit to DEC-hands but there is the knowledge that the law helps to drive equity to those affected by unscrupulous operators.
Conclusion
In every cloud is a silver lining. In DEC’s cloud is a genius business strategy which is proving itself before your eyes.
MERP offers further reasons for optimism but also a shield to DEC - since it already provides appropriate measures to control methane - what does the probe expect to achieve on top of this?
A final thought
Could I draw you back to the useful data table I referred to earlier.
Proved reserves are 830 million Boe, the market cap is £564m, that’s 68p per barrel of oil equivalent.
The PV-10 value of $6.1bn is assuming to discount the future cash generated by DEC by 10% a year. $6.1bn or £4.8bn translates to a 8.5X return on today’s market price.
Remember too, 8.5X is based on proved reserves so is the value before further accretive acquisitions, as well as before developing unproven reserves like I explored in my article DEC-ember burn given the extensive undeveloped acreage which could yield up to 1X more ($500m possibly).
This is not advice.
Have a good weekend reader.
Oak