Hi OB. I have a few comments and questions about your post.
1. "The true level of net reduction (i.e. depletion) in 2023 is 5.8% per annum of proven reserves - and slowing." Could you please tell us where this figure comes from?
2. "Just because production drops 10% a year it does NOT mean remaining resources do." I assume the 10% figure (which you've also mentioned in previous posts) comes from this statement in DEC's last trading update: "Maintained industry-leading consolidated corporate decline rate of ~10%". It's not clear to me what DEC means by this, but let's accept that they're talking about a production decline, not a reserves decline. Then I take your point. Nevertheless, it's production that pays the bills in the short term, not remaining reserves. So I don't understand why your 3-year projection uses a production decline rate of 5.8% rather than something nearer 10%.
3. I would also note that DEC's 50-year ARO projection says that it assumes a "4.5% long term production decline rate". If their current production decline rate is 10%, this suggests that they expect production to fall faster than 4.5% in the near term but slower later, giving some sort of 4.5% overall average. I don't know how they calculated this average, but I hope they've allowed for the fact that early declines have a bigger effect on total production than later declines. In any case, early production is more valuable than later production (because of the time value of money), and I don't think the projection takes that into account, since it uses undiscounted values. I don't know what the overall effect of these factors is, and perhaps DEC has allowed for them, but to me it's another source of uncertainty.
4. Continuing on the subject of the value of time-distant production... Let's assume you're right that the price of gas will rise over the medium term for the reasons you've given. That seems reasonable, though not certain. What about the very long term? DEC's 50-year projection assumes a gas price of $4.91/MMbtu from years 10 to 50. Since the projection was published in late 2022, let's take year 50 to be 2072. If we remain on target to achieve net zero in 2050, it seems likely that gas demand will fall off well before 2072. Won't that result in lower prices? It seems like DEC's projection is probably based on an assumption that carbon capture will allow us to keep burning gas at the current rate indefinitely. Maybe, but that's very speculative, and not what the IPCC and other experts are assuming. Even if you and DEC are prepared to take that risk, US legislators may not be, as it's US taxpayers who will be stuck with the ARO costs if the assumption doesn't play out.
I'm still holding onto my DEC shares, as it doesn't seem worth selling at such a low price. But I feel far less optimistic than you.
1. 5.8% is based on Reserves at 30/06/23 were 830mmboe. Production 1H23 was 25.697mmboe. So 25.697/855.697 = 5.8% (annualised)
2. To assume a 10% drop would also assume zero workovers, shutins and capillary string ... zero Smarter Asset Management. Zero development. Even zero improvement to methane leaks - sell the gas don't leak it. Is that at all realistic? I don't believe so.
3. I take your point about the time value of money. But DEC provide NPV calculations based on a 10% discount to future incomes and costs. Their calculations show income far in excess of projected cost, and this has been explained in my articles, in DEC's presentations and also in reader comments. You'll forgive me if I consider this asked and answered numerous times already.
4. On any measure US gas is extremely cheap. If prices revert to "normal" then DEC's profitability simply goes through the roof. But let's assume this never, ever happens, and instead gas dwindles towards zero demand long term. What would DEC do? Expertise in energy production, management and drilling are a set of core competencies useful in a future net zero world. Leaving aside the simple fact that DEC's intrinsic value lies far below its current market price - even applying severe assumptions like $2.50mmbtu prices. There are many forms of future value that DEC and its gas wells would provide. Carbon capture, hydrogen power, thermal power storage, geothermal energy, and simply tackling the estimated 1.5m orphan oil and gas wells mean DEC doesn't need to worry - in my opinion. 1.5m orphan wells far exceeds the 0.068m increasingly better managed DEC wells. There's a fixation with US taxpayers or legislators going after DEC specifically, which in an election year, where DEC is not even in the upper 50% of offenders based on estimated progress is just bizarre.
Well today is one to remember! The short attack is well planned as I think the company is in a closed period prior to it's financial update. I believe that prevents BBs? The question is what does DEC do now. Cutting the div would only give support to the argument that the business is a scam. I just can't believe it. What options do you think are open Oak?
Even though there have been no RNS about IIs selling, the way the share price is behaving does suggest there has been a big seller in the background for some time, and I think we all know there are many ways for IIs to obfuscate their selling or keep it below notifiable thresholds. I read recently somewhere that there is a new ESG regulation which will make it very hard for UK/EU income funds to hold DEC which could explain this (and also motivated the US listing), but frustratingly can't find it now, was mentioned on twitter
Concerning liquidity, I think what scares people is the fact that there is little cash, and ample short term liabilities. They fail to understand that as the amortizing debt is repaid, there is more headroom to increase the RCF - which requires asset backing. They can review the RCF ceiling every 6 months I believe or as needed. As debt is repaid, assets become unencumbered, providing headroom for RCF increases. So basically the debt payback schedule sort of gives a guide to increases in RCF capacity which then is used for dividend or buyback(which saves on dividend payments at lower interest than the dividend yield)... They can play that for a long time, even without monetizing the land or creating SPVs. The only negative thing about a low share price I can see is that they commonly used shares as part of an acquisition of assets... Which would be suboptimal at these prices, but Rusty knows that I believe. I could imagine him using the land assets or some other means.
Splended writeup as always. I've been applauding you on twitter pointing out three recent publications that allow different views on #dec: your articles, Alberts NPV Flow Chart and the recent First Berlin update. https://twitter.com/Phoenix_FFM/status/1748732891142541364 First Berlin is paid for so I don't know what to make of it. Albert and Oak are "independent" which surely is valuable. I'll be trying to figure out the different conclusion of Albert vs Oak. I think the secret is in the difficulty to understand the complex accounting which makes the company look bad. Oak is an accountant which is so valuable especially in the case of analyzing this stock.
Hi Oak, in order to figure out the liquidity we would need to know how much amortization they pay, right? They pay interest and amortization monthly but I couldn't find any number/percentage how much they amortize on the loans. Makes a big difference regarding liquidity.
CAPEX: I see very different values for capex in different publications. Looking at your writeup above CAPEX is fully covered in the op cost of $ 9.81 per BOEPD, correct?
Hi Phoenix, no, if you look at Note 7 of the interim "adjusted EBITDA" is a profit figure and $9.81 of op costs don't include the consumption of capex which is depreciation (the "D" of EBITDA) nor amortisation (the "A" of EBITDA). Amortisation isn't linked to cashflow either. Amortisation is like depreciation but to do with non-tangibles. For DEC the only amortisation I believe is connected with the ABS loans and deferred finance costs.
Thanks for the clarification Oak! I am still trying to understand the numbers and compare your conclusions with the report from First Berlin and Albert discounted cash flow analyses https://www.youtube.com/watch?v=Sf-8dBlT7XM interest (your number seems more precise) and capex assumptions (he uses $ 60m p.a.) are the main differences and he uses 3bn liabilities to calculate EV (roughly $ 3.5bn) whereas dec see their EV at $2.5 bn as of sept 2023.
The plugging costs of $21,000 per well are for the present time. If one assumes a constant 2% inflation over the next 50 years, the plugging costs would be $56,523 in year 50.
A rough calculation of the number of well retired each year (based on the DEC timeline) multiplied by the inflation linked costs at that point in time, gives around $2.7B in total retirement costs. That's approximately $1B more than DEC have in their publications.
I believe DEC's projections are based on today's prices, which is fair if you apply that basis to both costs and revenue. If you add inflation to the costs you should also add inflation to gas prices. Since we don't know what future inflation will be, it's simplest to leave it out altogether when calculating whether revenue will cover costs.
That said, DEC's gas price projections are based on futures prices (out to 10 years I believe), and I would think that the market has factored some degree of inflation into those prices. So strictly I think we should knock something off those futures prices to get an inflation-free gas price.
Okay, that could make sense. Although I can now see why people are put off by the accounting methods used by DEC.
On Slide 14 of the DEC "Asset Retirement Supplement" they have a "PV Comparison" (PV being Present Value). For "Undiscounted (a)" the cash flow from assets is $15.2B and the related retirement obligations are $1.6B. So there is the answer - inflation is already taken into account by nature of it being a PV value.
That does raise another question however. If the PV plugging liability is $1.6B why do DEC only account for $465M under the ARO? The Oak Bloke has previously covered this in "Dec-tecting fact and fiction?" but I'm not convinced by that.
Oak Bloke pointed out that DEC accounted for $27M as "Accretion of asset retirement obligation". The rough maths from the post being, if they kept doing that for the next 50 years they would have $1.35B to cover well plugging from that accumulated accretion. We also need to add the ARO of $448.5M for a total figure of about $1.8B. That's obviously greater than the PV plugging costs of £1.6B so all is good, right?
Well, no IMHO. Because the Future Value (FV) liability for plugging isn't $1.6B. At a discount rate of 3.24% (from Slide 14) that FV plugging cost is $7.88B! So they are $6B short of the FV liabilities aren't they?
Perhaps I'm also missing the FV element in Oak Blokes calculation as well. Taking the numbers we have for discount rate, current ARO, accretion and time period (50 years), DEC could accumulate $5.47B towards the FV plugging costs. Still doesn't cover the $7.88B above however 8-(
DEC would need to up the accretion figure by $20M per annum to hit that number.
At this point, we come back to the $15.2B of cash flow from assets. Clearly that could cover the plugging liabilities and still deliver over $7B of FCF for other purposes. However my head now hurts so I'll need to give that more thought.
"That does raise another question however. If the PV plugging liability is $1.6B why do DEC only account for $465M under the ARO?"
That's the discounted value, the PV. In principle, you could invest that amount now and it would cover the estimated retirement costs, if the investment yielded 3.24% (real).
Of course, this assumes that DEC has correctly estimated the retirement cost per well and when those costs will be payable, that the retirement costs won't rise by more than general inflation, and that they've done the calculation correctly. Also, the latest interim report has more up-to-date figures, such as 448.5M instead of 465M.
Hi, great discussion. Indeed it makes my head spin a bit, too
I think the crux of the argument is sth as follows:
currently they have well plugging costs of 21K. The costs could rise to 25K per well in future and the ARO PV would cover that.
If the costs rise more (as your calculation of 3.24% for 50 years implies), i the ARO is not enough (and also Oak Bloke's 50K worst case wouldn't be sufficient)...
BUT: Next LVL earns revenue that with rising inflation would serve to offset some of DEC's internal well plugging costs, wouldn't it?
So, unless we know the margin they achieve on the 3rd party plugging operations we cannot 100% calculate that. However, your assumption of 3.24% inflation net above of what they can charge for NextLVL 3rd party plugging services is a bit draconian I think.
In other words, I believe your calculations (I relaly appreciate you sharing them) reflect a scenario where Next LVL cannot pass on inflation to customers to offset the internal costs. Or am I confused now?
There is a somewhat more fundamental issue with my calculation of the FV for the plugging liabilities. With the simple formula =FV(3.24%, 50, 0, 1600) the assumption is that all the liabilities fall in the final year. As DEC are decommissioning wells over the whole 50 year time period, this obviously isn't the case.
So, I've modified my approach and gone back to calculating the annual cost each year of plugging accounting for inflation.
The result is that the total plugging costs FV come down from $8.33B to $4.48B. That actually is about $1B less than the FV of the ARO ($5.55B) so it looks like it's on track to cover the liabilities.
Perhaps. My "Scratch" worksheet was an attempt to understand that. If I assume $25,000 per well in 50 years (yes, I know I've changed the number, but DEC quote a range of $21k-$25k) then with a 2% inflation rate, I can only get to about $1.2B of costs (about $500M less than DEC claim).
Co-incidentally, I can get a current value plug cost of $21k and a future value cost of $25k AND a total cost of about $1.7B dollars by using an inflation rate of 0.3% per annum. I don't think this is realistic however (so I called the worksheet "Unrealistic - PV").
I think I read somewhere in OB’s posts that some wells (fract wells?) can be a lot more expensive to plug and remediate so maybe this is contributing to the difference.
Yes, horizontal wells cost more than vertical. But the numbers are averages that DEC provide, so I think that is already accounted for.
Your point on discounted back to NPV looks to have been the missing piece I was looking for. However, it opens up another question that I can't answer!
A collapse of this magnitude normally implies the company or person running it is fraudulent. There are far more sellers than buyers obviously. Your II figures may be out of date.
If everything is fine as you suggest then what does it say about the LSE, FCA and the huge power short sellers possess over UK markets? With a 1% short position only? Frightening. FCA get a grip!!
1. In the last accounts there wasn't negative equity. Equity was $560m. In prior accounting periods the way IFRS9 forces the hedging liability to be reported can produce a distorted view. You can read and understand this through reading my articles like https://theoakbloke.substack.com/p/dec-the-halls
2. Where is the evidence that IIs are selling? 41% of shares are held by IIs and according to Renfinitiv data IIs have been net buyers not sellers. Aberdeen, Blackrock, Vanguard all large buyers in the past 12 months. You do need to understand that prices can go down due to shorting and not just to selling. Also typically IIs sells can be seen through RNS declaration of interests as they move past key percentage holdings.
3. Often they can't due to closed periods. DEC's BoD already own 3.55% of the company (as at the 2022 annual report) and a large part of ongoing potential remuneration is in shares. Potential since it is performance based.
An excellent piece again OB. I bottled out this am and sold some.... but realised I was an idiot and bought them back again!! I do think today was the last shake of the 🌲 by the 🐻s....
Hi Fluff, it's 40 days until ex-dividend but 6-11 days until the trading update. If I were shorting I'd be very twitchy about each of those number of days remaining. There's probably a lot of people who've stop lossed their short at £10 so a break beyond that will cause significant covering. Having said "no reason for the price drop" the trading update shouldn't be anything other than positive, so while there could be some further volatility in the coming week beyond that I'd be very surprised if we don't see a strong rebound..... but I'm trying not to be too much the optimist so that one's just between you and I!
Seen the 'no reason for share price collapse' many many times before and like here it does not help. Usually there is a reason. Is Rusty in reality a Ted Beneke? Democrats detest him - why? Hit job.
Think the bigger risk to long term shareholders is a hostile take over at a price much lower than the long term £1 -£1.20 (pre consolidation) purchase out there.
Hi Jim, that's entirely possible although such a move wouldn't depress the price which were the risks I tried to contemplate in this article. It would explain my thought "the only fraud I can detect are the people claiming fraud"
Hi OB. I have a few comments and questions about your post.
1. "The true level of net reduction (i.e. depletion) in 2023 is 5.8% per annum of proven reserves - and slowing." Could you please tell us where this figure comes from?
2. "Just because production drops 10% a year it does NOT mean remaining resources do." I assume the 10% figure (which you've also mentioned in previous posts) comes from this statement in DEC's last trading update: "Maintained industry-leading consolidated corporate decline rate of ~10%". It's not clear to me what DEC means by this, but let's accept that they're talking about a production decline, not a reserves decline. Then I take your point. Nevertheless, it's production that pays the bills in the short term, not remaining reserves. So I don't understand why your 3-year projection uses a production decline rate of 5.8% rather than something nearer 10%.
3. I would also note that DEC's 50-year ARO projection says that it assumes a "4.5% long term production decline rate". If their current production decline rate is 10%, this suggests that they expect production to fall faster than 4.5% in the near term but slower later, giving some sort of 4.5% overall average. I don't know how they calculated this average, but I hope they've allowed for the fact that early declines have a bigger effect on total production than later declines. In any case, early production is more valuable than later production (because of the time value of money), and I don't think the projection takes that into account, since it uses undiscounted values. I don't know what the overall effect of these factors is, and perhaps DEC has allowed for them, but to me it's another source of uncertainty.
4. Continuing on the subject of the value of time-distant production... Let's assume you're right that the price of gas will rise over the medium term for the reasons you've given. That seems reasonable, though not certain. What about the very long term? DEC's 50-year projection assumes a gas price of $4.91/MMbtu from years 10 to 50. Since the projection was published in late 2022, let's take year 50 to be 2072. If we remain on target to achieve net zero in 2050, it seems likely that gas demand will fall off well before 2072. Won't that result in lower prices? It seems like DEC's projection is probably based on an assumption that carbon capture will allow us to keep burning gas at the current rate indefinitely. Maybe, but that's very speculative, and not what the IPCC and other experts are assuming. Even if you and DEC are prepared to take that risk, US legislators may not be, as it's US taxpayers who will be stuck with the ARO costs if the assumption doesn't play out.
I'm still holding onto my DEC shares, as it doesn't seem worth selling at such a low price. But I feel far less optimistic than you.
1. 5.8% is based on Reserves at 30/06/23 were 830mmboe. Production 1H23 was 25.697mmboe. So 25.697/855.697 = 5.8% (annualised)
2. To assume a 10% drop would also assume zero workovers, shutins and capillary string ... zero Smarter Asset Management. Zero development. Even zero improvement to methane leaks - sell the gas don't leak it. Is that at all realistic? I don't believe so.
See Page 25 of DEC's presentation at:
https://d1io3yog0oux5.cloudfront.net/_83ef0d67f6942b4b0ee7d291ac98ea22/dgoc/db/581/5825/pdf/DEC+Corporate+Presentation+%28November+2023%29.pdf
3. I take your point about the time value of money. But DEC provide NPV calculations based on a 10% discount to future incomes and costs. Their calculations show income far in excess of projected cost, and this has been explained in my articles, in DEC's presentations and also in reader comments. You'll forgive me if I consider this asked and answered numerous times already.
4. On any measure US gas is extremely cheap. If prices revert to "normal" then DEC's profitability simply goes through the roof. But let's assume this never, ever happens, and instead gas dwindles towards zero demand long term. What would DEC do? Expertise in energy production, management and drilling are a set of core competencies useful in a future net zero world. Leaving aside the simple fact that DEC's intrinsic value lies far below its current market price - even applying severe assumptions like $2.50mmbtu prices. There are many forms of future value that DEC and its gas wells would provide. Carbon capture, hydrogen power, thermal power storage, geothermal energy, and simply tackling the estimated 1.5m orphan oil and gas wells mean DEC doesn't need to worry - in my opinion. 1.5m orphan wells far exceeds the 0.068m increasingly better managed DEC wells. There's a fixation with US taxpayers or legislators going after DEC specifically, which in an election year, where DEC is not even in the upper 50% of offenders based on estimated progress is just bizarre.
Well today is one to remember! The short attack is well planned as I think the company is in a closed period prior to it's financial update. I believe that prevents BBs? The question is what does DEC do now. Cutting the div would only give support to the argument that the business is a scam. I just can't believe it. What options do you think are open Oak?
Even though there have been no RNS about IIs selling, the way the share price is behaving does suggest there has been a big seller in the background for some time, and I think we all know there are many ways for IIs to obfuscate their selling or keep it below notifiable thresholds. I read recently somewhere that there is a new ESG regulation which will make it very hard for UK/EU income funds to hold DEC which could explain this (and also motivated the US listing), but frustratingly can't find it now, was mentioned on twitter
Concerning liquidity, I think what scares people is the fact that there is little cash, and ample short term liabilities. They fail to understand that as the amortizing debt is repaid, there is more headroom to increase the RCF - which requires asset backing. They can review the RCF ceiling every 6 months I believe or as needed. As debt is repaid, assets become unencumbered, providing headroom for RCF increases. So basically the debt payback schedule sort of gives a guide to increases in RCF capacity which then is used for dividend or buyback(which saves on dividend payments at lower interest than the dividend yield)... They can play that for a long time, even without monetizing the land or creating SPVs. The only negative thing about a low share price I can see is that they commonly used shares as part of an acquisition of assets... Which would be suboptimal at these prices, but Rusty knows that I believe. I could imagine him using the land assets or some other means.
https://www.snowcapresearch.com/shortcampaigns
Yet another shorting attack and report out. Short positions are rising.
What's the response now?
They seem convinced this company is a con.
Another short attack coupled with some rather dubious PR supportive of their position
Splended writeup as always. I've been applauding you on twitter pointing out three recent publications that allow different views on #dec: your articles, Alberts NPV Flow Chart and the recent First Berlin update. https://twitter.com/Phoenix_FFM/status/1748732891142541364 First Berlin is paid for so I don't know what to make of it. Albert and Oak are "independent" which surely is valuable. I'll be trying to figure out the different conclusion of Albert vs Oak. I think the secret is in the difficulty to understand the complex accounting which makes the company look bad. Oak is an accountant which is so valuable especially in the case of analyzing this stock.
Hi Oak, in order to figure out the liquidity we would need to know how much amortization they pay, right? They pay interest and amortization monthly but I couldn't find any number/percentage how much they amortize on the loans. Makes a big difference regarding liquidity.
CAPEX: I see very different values for capex in different publications. Looking at your writeup above CAPEX is fully covered in the op cost of $ 9.81 per BOEPD, correct?
Hi Phoenix, no, if you look at Note 7 of the interim "adjusted EBITDA" is a profit figure and $9.81 of op costs don't include the consumption of capex which is depreciation (the "D" of EBITDA) nor amortisation (the "A" of EBITDA). Amortisation isn't linked to cashflow either. Amortisation is like depreciation but to do with non-tangibles. For DEC the only amortisation I believe is connected with the ABS loans and deferred finance costs.
Thanks for the clarification Oak! I am still trying to understand the numbers and compare your conclusions with the report from First Berlin and Albert discounted cash flow analyses https://www.youtube.com/watch?v=Sf-8dBlT7XM interest (your number seems more precise) and capex assumptions (he uses $ 60m p.a.) are the main differences and he uses 3bn liabilities to calculate EV (roughly $ 3.5bn) whereas dec see their EV at $2.5 bn as of sept 2023.
Has anyone reached out to Eric Williams, the ex CFO? His Linked In page suggests he chose unemployment over continuing in his post. Why?
The plugging costs of $21,000 per well are for the present time. If one assumes a constant 2% inflation over the next 50 years, the plugging costs would be $56,523 in year 50.
A rough calculation of the number of well retired each year (based on the DEC timeline) multiplied by the inflation linked costs at that point in time, gives around $2.7B in total retirement costs. That's approximately $1B more than DEC have in their publications.
See https://docs.google.com/spreadsheets/d/133kimAoAQazN6smtVu7eFw-iZpKyVr4AN-9eWHpS8U4/edit?usp=sharing for my numbers.
I believe DEC's projections are based on today's prices, which is fair if you apply that basis to both costs and revenue. If you add inflation to the costs you should also add inflation to gas prices. Since we don't know what future inflation will be, it's simplest to leave it out altogether when calculating whether revenue will cover costs.
That said, DEC's gas price projections are based on futures prices (out to 10 years I believe), and I would think that the market has factored some degree of inflation into those prices. So strictly I think we should knock something off those futures prices to get an inflation-free gas price.
Okay, that could make sense. Although I can now see why people are put off by the accounting methods used by DEC.
On Slide 14 of the DEC "Asset Retirement Supplement" they have a "PV Comparison" (PV being Present Value). For "Undiscounted (a)" the cash flow from assets is $15.2B and the related retirement obligations are $1.6B. So there is the answer - inflation is already taken into account by nature of it being a PV value.
That does raise another question however. If the PV plugging liability is $1.6B why do DEC only account for $465M under the ARO? The Oak Bloke has previously covered this in "Dec-tecting fact and fiction?" but I'm not convinced by that.
Oak Bloke pointed out that DEC accounted for $27M as "Accretion of asset retirement obligation". The rough maths from the post being, if they kept doing that for the next 50 years they would have $1.35B to cover well plugging from that accumulated accretion. We also need to add the ARO of $448.5M for a total figure of about $1.8B. That's obviously greater than the PV plugging costs of £1.6B so all is good, right?
Well, no IMHO. Because the Future Value (FV) liability for plugging isn't $1.6B. At a discount rate of 3.24% (from Slide 14) that FV plugging cost is $7.88B! So they are $6B short of the FV liabilities aren't they?
Perhaps I'm also missing the FV element in Oak Blokes calculation as well. Taking the numbers we have for discount rate, current ARO, accretion and time period (50 years), DEC could accumulate $5.47B towards the FV plugging costs. Still doesn't cover the $7.88B above however 8-(
DEC would need to up the accretion figure by $20M per annum to hit that number.
At this point, we come back to the $15.2B of cash flow from assets. Clearly that could cover the plugging liabilities and still deliver over $7B of FCF for other purposes. However my head now hurts so I'll need to give that more thought.
"That does raise another question however. If the PV plugging liability is $1.6B why do DEC only account for $465M under the ARO?"
That's the discounted value, the PV. In principle, you could invest that amount now and it would cover the estimated retirement costs, if the investment yielded 3.24% (real).
Of course, this assumes that DEC has correctly estimated the retirement cost per well and when those costs will be payable, that the retirement costs won't rise by more than general inflation, and that they've done the calculation correctly. Also, the latest interim report has more up-to-date figures, such as 448.5M instead of 465M.
There's no reason to use a future value.
Understood.
Problem, as I see it is, that if you plug the following into a spreadsheet:
=FV(3.24%, 50, 27.5, 448.5) you get $5.5B for the ARO.
Then use the same assumptions for the plugging liability:
=FV(3.24%, 50, 0, 1600) you get $8.33B.
DEC aren't paying enough in accretions to close the gap between the two. They would need to add $23M per annum (almost double it).
Hi, great discussion. Indeed it makes my head spin a bit, too
I think the crux of the argument is sth as follows:
currently they have well plugging costs of 21K. The costs could rise to 25K per well in future and the ARO PV would cover that.
If the costs rise more (as your calculation of 3.24% for 50 years implies), i the ARO is not enough (and also Oak Bloke's 50K worst case wouldn't be sufficient)...
BUT: Next LVL earns revenue that with rising inflation would serve to offset some of DEC's internal well plugging costs, wouldn't it?
So, unless we know the margin they achieve on the 3rd party plugging operations we cannot 100% calculate that. However, your assumption of 3.24% inflation net above of what they can charge for NextLVL 3rd party plugging services is a bit draconian I think.
In other words, I believe your calculations (I relaly appreciate you sharing them) reflect a scenario where Next LVL cannot pass on inflation to customers to offset the internal costs. Or am I confused now?
There is a somewhat more fundamental issue with my calculation of the FV for the plugging liabilities. With the simple formula =FV(3.24%, 50, 0, 1600) the assumption is that all the liabilities fall in the final year. As DEC are decommissioning wells over the whole 50 year time period, this obviously isn't the case.
So, I've modified my approach and gone back to calculating the annual cost each year of plugging accounting for inflation.
The result is that the total plugging costs FV come down from $8.33B to $4.48B. That actually is about $1B less than the FV of the ARO ($5.55B) so it looks like it's on track to cover the liabilities.
Matt, would those additional inflated costs just get discounted back to current cost on a NPV for any provision requirements though?
Perhaps. My "Scratch" worksheet was an attempt to understand that. If I assume $25,000 per well in 50 years (yes, I know I've changed the number, but DEC quote a range of $21k-$25k) then with a 2% inflation rate, I can only get to about $1.2B of costs (about $500M less than DEC claim).
Co-incidentally, I can get a current value plug cost of $21k and a future value cost of $25k AND a total cost of about $1.7B dollars by using an inflation rate of 0.3% per annum. I don't think this is realistic however (so I called the worksheet "Unrealistic - PV").
I think I read somewhere in OB’s posts that some wells (fract wells?) can be a lot more expensive to plug and remediate so maybe this is contributing to the difference.
Yes, horizontal wells cost more than vertical. But the numbers are averages that DEC provide, so I think that is already accounted for.
Your point on discounted back to NPV looks to have been the missing piece I was looking for. However, it opens up another question that I can't answer!
Yet they can still hold the likes of Shell and BP? Hypocrisy.
A collapse of this magnitude normally implies the company or person running it is fraudulent. There are far more sellers than buyers obviously. Your II figures may be out of date.
If everything is fine as you suggest then what does it say about the LSE, FCA and the huge power short sellers possess over UK markets? With a 1% short position only? Frightening. FCA get a grip!!
1. How do you explain the negative equity and why would the Democrats, Bloomberg and others target an 'innocent' company?
2. A collapse of this magnitude is not caused by PIs. Institutions are selling out - why? What do they know?
Should they not be buying for the 30% yield and bargain share price?
3. Why are directors not buying stock?
1. In the last accounts there wasn't negative equity. Equity was $560m. In prior accounting periods the way IFRS9 forces the hedging liability to be reported can produce a distorted view. You can read and understand this through reading my articles like https://theoakbloke.substack.com/p/dec-the-halls
2. Where is the evidence that IIs are selling? 41% of shares are held by IIs and according to Renfinitiv data IIs have been net buyers not sellers. Aberdeen, Blackrock, Vanguard all large buyers in the past 12 months. You do need to understand that prices can go down due to shorting and not just to selling. Also typically IIs sells can be seen through RNS declaration of interests as they move past key percentage holdings.
3. Often they can't due to closed periods. DEC's BoD already own 3.55% of the company (as at the 2022 annual report) and a large part of ongoing potential remuneration is in shares. Potential since it is performance based.
An excellent piece again OB. I bottled out this am and sold some.... but realised I was an idiot and bought them back again!! I do think today was the last shake of the 🌲 by the 🐻s....
Hi Fluff, it's 40 days until ex-dividend but 6-11 days until the trading update. If I were shorting I'd be very twitchy about each of those number of days remaining. There's probably a lot of people who've stop lossed their short at £10 so a break beyond that will cause significant covering. Having said "no reason for the price drop" the trading update shouldn't be anything other than positive, so while there could be some further volatility in the coming week beyond that I'd be very surprised if we don't see a strong rebound..... but I'm trying not to be too much the optimist so that one's just between you and I!
Seen the 'no reason for share price collapse' many many times before and like here it does not help. Usually there is a reason. Is Rusty in reality a Ted Beneke? Democrats detest him - why? Hit job.
Think the bigger risk to long term shareholders is a hostile take over at a price much lower than the long term £1 -£1.20 (pre consolidation) purchase out there.
Hi Jim, that's entirely possible although such a move wouldn't depress the price which were the risks I tried to contemplate in this article. It would explain my thought "the only fraud I can detect are the people claiming fraud"