DEC-ade planning
DEC Sustainability shows forethought and planning
Dear reader
Today’s sustainability “Priorities & Performance” report gives important nuggets to unpack:
First of all as at the end of 2023, DEC has ~64,200 gross wells, including 56,700 wells in the Appalachian Basin and 7,500 wells in the Central Region.
Plugging
In 2024 it plans to retire “at least” 200 wells, and including 3rd party at “at least” 400 wells.
NexLVL now have 17 Rigs and nearly 120 personnel. They turned over $28m in 2023.
Dec’s expanded well retirement capability supports a regional leadership position in responsible asset retirement. Rusty says: “There is an opportunity to grow our retirement capacity further, to further support states’ efforts to eliminate orphan wells. But also the potential for expanded services including the generation of voluntary and regulated carbon credits related to well retirement of orphan wells held by state governments. “
MERP
Reduced methane intensity by 33% year-over-year to 0.8 MT CO2e per MMcfe; a 50% reduction as compared to 2020 baseline (1.6 MT CO2e per MMcfe) and projected to be below U.S. Inflation Reduction Act-established methane fee threshold
Installed air compression on 50 well pads by year end to replace natural gas-driven pneumatic devices
Even though it has hit its 2023 target of a 50% reduction 7 years ahead it is targetting a 8% further reduction in 2024 from 0.8MT Co2e/MMcfe to 0.76.
Conducted ~246,000 voluntary emission detection surveys; maintaining ~98% no-leak rate company-wide on surveyed assets
Completed handheld emission surveys on 100% of Central Region’s wells
Awarded OGMP 2.0 Gold Standard Pathway for second consecutive year; advanced to Level 4 on 8 out of 10 categories after appropriately addressing reciprocating compressor rod packing
Strengthened community outreach efforts include $2.1 million in grants, programs, and community support
Converted a large West Virginia combustion engine compression facility to electric compressors to achieve operational status by year end
Plans for 2024
Continue OGMP 2.0 measurement efforts, working toward Gold Standard Compliance by July 2024
Utilize carbon pricing in strategic decisions to pursue or pass on potential acquisitions —
Conduct heat recovery pilot project
Ascertain impact of new emissions regulations on methane intensity reduction initiatives and targets and use to determine changes, if any, to methane intensity targets and/or net zero goal
Establish Pneumatics Task Force to provide strategy and effectuate plan to abate emissions from company-wide natural gas powered pneumatic controllers and pumps
Evolve frequency of leak surveys on upstream assets to align with production contributions and revised EPA regulations to maintain >95% no-leak rate —
Redeploy continuous monitoring devices to higher production volume well pads to obtain OGMP Level 5 data Compliance in selected operated production areas
Perform LDAR for midstream facilities not currently covered
Explore opportunities for alternative wellbore uses
DEC leases or owns more than eight million acres of land across its footprint. While not all of this acreage is equally suitable for solar project development, certain acreage has become an avenue for DEC to opportunistically participate in renewable energy solutions with third parties via waiving our surface rights on this acreage while reserving access to road and pipeline rights of way that are necessary for its operations.
DEC is exploring new technologies to expand the use of renewable and alternative energy in operations, including waste heat recovery and solid oxide fuel cells. Additionally, we are exploring the use of wellbores for mechanical battery energy storage to aid in the energy transition by providing off-peak energy storage.
This is what a “Mechanical battery” is/does:
DEC is also exploring using exhausted wells for Carbon capture utilization and storage (CCUS) - why plug it when you can fill it? More on that in a minute.
It is also exploring partnerships to evaluate potential of using its midstream infrastructure for future hydrogen applications.
Penultimate Thought - what if we are seeing a strategy emerge?
The sustainability report doesn’t contain any new reveals. But the report reflects a solid, well-thought out piece of work which provides an extensive factual basis to refute the spurious allegations made against DEC, and read alongside the 2019 - 2022 reports sets DEC apart from its peers. Perhaps I’ve been unlucky in my searching but I do not believe peers like EQT produce a 280 page annual report. They have a 1 page of their web site to say they care deeply about ESG. So why write 280 pages per year?For sure that it serves as a waypoint into 2024 as DEC focus on its next goal - net zero.
What if this there’s a broader strategy? The sustainability report suggests that to be the case.
Just like in judo, use your opponents strength against him or her. Allow your weakness to become your strength. What weakness? ARO. Asset retirement. What if the asset can be repurposed into something new? That’s a game changer.
When Rusty is continually positioning the company as a “responsible steward”, why is he saying those words? DEC’s strengthening credentials and capabilities as a capable public service partner (despite the very specific and very highly targeting of DEC by its detractors) and the NextLVL $28m and growing business. A simple piece of maths is the plugging industry needs to grow to 40k wells capacity. Why? If there are 1.5m onshore orphan wells and 1m on shore owned wells, that’s 2.5m wells in the US. If DEC can do 400 wells a year x 100 = 40k. 2.5m/40k = 62.5 years. By 2090 all wells are plugged.
Assuming NextLVL can capture 10%-20% you’re talking a $300m-$600m turnover business in its own right. But that’s if we are plugging. What if we are not?
What if the US could “go big” on CCUS? (Carbon capture utilization & storage)
Bill Gates thinks we must. McKinsey thinks we must.
That’s not only a 100X opportunity but a 120X investment PER ANNUM into CCUS. Every year between now and 2050.
The IRA has provided a significant boost to tax credits from $50 to $85 per ton of CO2, for sequestered industrial or power emissions, and from $50 to $180 a ton for emissions captured from the atmosphere and sequestered. The model I expect DEC would follow would be to run a 2nd set of pipes from power stations and large industrial users back to CCUS-ready wells and for DEC to do the sequestering. On the basis of 3m tonnes/year that’s $255m of tax credits - and that leaves DEC with a zero tax bill each year (based on current profits).
Conclusion
The fact that DEC could go - is going - from being painted as the public enemy to public saviour is (ironically) an “inconvenient truth” for detractors. As Rusty keeps reminding us, they are the Right Company at the Right Time.
Right company… to do what?
Right time… for what?
I believe the answer is taking an active role in Energy production but also in Net Zero.
Where is any of that in the price of DEC? Well, reader, it isn’t.
This is not advice
Oak
Disclaimer: While Micro cap and Nano cap holdings might have a higher risk and higher volatility than companies that are traditionally defined as "blue chip", DEC is a FTSE250 company and soon to be a Russell 2000 index company.
Nice write-up based on a much larger nice write-up. I believe that DEC is on top of the methane problem and faces little risk in that department. They get an A+ on methane.
However when it comes to Asset Retirement Obligations there is far too much conjecture and hope involved for my investment comfort. Further, I have little doubt that NextLVL has, or will have, sturdy competition given the huge amounts of money floating out of government coffers to fund well retirements. The spread between $20K+- for DEC's own wells and $120K+- for government funded retirements is just too juicy and does not pass the smell test.
I think the investment case for DEC needs to be based on the near certainties of the near few years. The economics of the business look reasonably solid; however the treadmill of decline dictates continuing acquisitions. DEC's slashing of the dividend thoroughly discredited the case for sustainable cash flows from paid off wells. (I am in the camp that the size of the reduction was unnecessary.)
What has not changed is the Asset Retirement Obligations. DEC had 70K wells, which assuming a 50 year life (probably a stretch), requires an average retirement rate of 14K wells per year. I'm certain that the 6000+- wells spun off into the SPV were not DEC's oldest wells so their age profile has quite likely gotten older.
Accepting the ARO risk and a modest portion of commodity risk was acceptable at a 15% yield when I began purchasing DEC stock on the LSE. A 9% yield does not do it for me, especially when compared to lesser risks in energy at similar (mineral royalties) or slightly lower yields (pipelines).
One other point relevant to the investment case. I have been watching for some positive analyst coverage and for aggressive stock buybacks using what were our dividends. I've seen neither ... so far.
The methane issue looks like it’s been put to bed which is a plus sign. Also looks like sentiment is shifting a degree as the share price has started to climb. Only got to increase another 90% and it will be back to where it started a while ago. Although then the yield would be somewhat less which was the original attraction of the share in the first place.
ARO does look like a future issue and I wouldn’t be surprised if it crops up again but it may depend on who is the next president. If it’s trump then nobody will care but if it’s Biden then there may be more scrutiny industry wide.
The whole carbon credit section of the article is pie in the sky and really needs a bit more rigour. I’m fairly certain the credit is for the company implementing the CCS so it would be the power station, not the owner of the well it’s stored in, or the builder of the direct air CCS. Cost to build and implement at a power station is expensive and probably not in DEC’s skill base. Direct air is a whole different ball game with costs estimated at $600 a ton and nobody has a plan to scale it up properly to the hundreds of millions of tons range needed.
Blithely mentioning pipelines kind of glosses over the issue of building thousands of miles to connect power stations to thousands of different wells. I would assume the wells would still have to be plugged at some point to seal them permanently once full of CO2?