DEC-iding 2024 Strategy

One of the Oak Bloke Top 20 2024

Photo by Tingey Injury Law Firm on Unsplash

Dear reader,

Rusty interviewed with Proactive to speak to DEC’s plans for 2024.

Creative and innovative capital structures is a proven capability of DEC.

Rusty speaks to an “extremely difficult 2023”. Lots of redemptions, high interest rates. He speaks of 2022 and 2023 that were “marginal years” for growth (!) and 2024 is now the year to acquire assets. Nearly $570m of acquisitions over 2 years doesn’t feel marginal to me which suggests Rusty has plans for something large(r). Tiene los grandes cojones.

For 2024 there are three focus points:

1. DEC is focused on further acquisitions (especially NGLs/Oils), but also Central Region, with access to the Gulf and for LNG export. (incidentally Gulf Coast Natural Gas Prices currently are no different to Henry Hub currently - and can be found here)

2. DEC is focused on driving down costs further, improving margins and cashflows. (The Oak Bloke has already had to reduce his cost model from $0.20/BOE increase to a $0.10/BOE increase to not be too optimistic. What happens to profit if Rusty achieves further cost reductions?

3. “The Stock price is a good bargain for us” he says. “Buy backs are a good use for some of our capital”.

For this article DEC-iding strategy - I’ve been compiling some facts around acquisitions. We know that DEC has acquired some assets at a PV40, and at PV17 and sold them for PV10. We know that the reserves have grown since inception but where are they as we begin 2024? Strange folk and shorters seek to spin a lie that DEC is “running out of production”. That somehow if you double or triple count the same costs, invent some fantasy costs and dress it up well enough, repeat it enough times, and repeat it enough times you can make it look like DEC is desperate and hiding something.

They also point to DECLINE and get confused in their naivety (or dark intentions) that this word also means DEPLETION. It doesn’t. Decline is the natural reduction of the flow of gas. Depletion is that the gas is no longer there. (If I had a pound for every time I’ve had to say this….) We also know DEC has undeveloped assets with a value of $279m but might be as much as $500m (once they are developed they become proven)

So the best to know whether you can trust DEC in 2024 for, let’s say the next 4 years, is to imagine you could go back 4 years. Has DEC actually achieved anything or it spinning plates and perhaps lies?

The way to answer that is draw up a 4 year comparison. To this end I’ve mapped out DEC’s acquisition, production and reserves data for the past 4 years. I’ve split 2023 into 2 halves since we don’t have the 2023 annual report yet. I’ve asterisked estimates but otherwise I’ve taken the numbers from DEC reports and presentations. In 2H23 minus 2 in the acquisitions columns refers to divestments. Going across the page

“Total PDP (MMBOE)” refers to the remaining millions of BOE of reserves.

“Production (MMBOE)” is DEC’s annual production (i.e. the quantity of depletion to be deducted from the reserves).

“PV10 to Total” refers to the value in $ millions of the net present value of the PDP reserves discounted by 10%. ($5,904m in 2H23 is an estimate using 826.6/854 x $6,100m).

“Acquisition #” is the number of acquisitions and divestments in the period,

“Cost $m” is the cost of those,

“MMBOEPD” is the production rate acquired,

“MMBOE” are the reserves acquired.

“PDP PV10” is the net present value of the reserves acquired, and

“undev PV10” is the undeveloped Tanos II (minimum value) in $ m.

The four year outcome

What becomes clear is that for about $1.2bn net investment (so $300m a year average) and a net change of around $500m additional net debt from its 31/12/2019 results to its 31/12/2023 results DEC has been able to sustain the following:

• 4 years of ARO liability recognition and accretion ($196.9m to $448m+2H23 accretion TBC) - so DEC is progressively accruing for the liability as depletion continues.

• 4 years of ARO reduction (via well retirement and plugging)

• 4 years of dividends

• Bought back shares

• GROWN its PDP reserves by a NET 46% (563m to 826.6m BOE)

• GROWN its production rate by a NET 44% (95k to 136.8k BOEPD)

• GROWN its adjusted EBITDA by a NET 97.5% from $273.3m to $540m

• GROWN an Asset Retirement Business Next LVL to be the largest in Appalachia

• Reduced its per BOE operating costs by nearly half from $3.31 in 2019 to $2.53 in 2020 to $1.69 per BOE in 2023.

• Netting the debt against the PV10 value at 31/12/2019 there was a future PV10 value of $1.4bn ($2bn less $0.6bn). 4 years later that has grown to an estimated $4.8bn (or nearly $5.1bn if we include the undeveloped acreage)… Assuming you believe discounting the value of future cash flows by 10% a year is reasonable too. (At PV6 the number would be a lot higher)

All of that despite/during the events of the past 4 years…. Wars x 2, Inflation Crisis x 1, Supply Chain Crisis x 1, Covid Crisis x 1, Gas Supply Glut Crisis x 1!

And this is a company people think it’s wise to try to short! It beggars belief!

Costs per Boe 2020

Run rate and reserves at 31/12/2019

DEC’s Balance Sheet Long Term Liabilities 31/12/2019

How do I feel about further acquisitions?

The management skill I’ve witnessed from Rusty and the DEC team and continue to see is impressive. If Rusty feels he can achieve more of what he’s achieved the past 4 years I’m not going to complain. DEC’s ability to navigate difficulty and emerge victorious, and to do the right thing, and to be the Right Company at the Right Time.

The fact that the dividends are incredibly good whether you bought yesterday at £9.20 or some time ago at £20.00, the 14%-30% returns are amazing. But Rusty has been clear over time that the capital allocation for dividends has always been to allocate around 40% of FCF (free cash flow) to dividends. In 1H23 free cash flow was $80m. I do believe in 2H23 it will be higher. But assuming this level of FCF is repeated in 2H23 then 40% of the full year FCF is $64m. At 40% of FCF that equates to a reduced dividend of 12.5% at today’s yield or about 5.5%-6% for those who bought in at higher prices. In other words 60% is reserved for other purposes. In DEC-iding to speak I explored the options of unchanged dividends and other purposes. I’m not advocating a particular course of action and I know some readers are upset by the prospect of a possible dividend cut, but that interview with Rusty sets out the stall, I feel.

In the interview Rusty’s thinking is acquisitions first - especially to tap into Gulf Coast pricing, continued cost cutting and further buy backs. Is the writing not on the wall for a 2024 reset?

Conclusion

Looking at DEC over a 4 year lens gives an astonishing perspective of the value that’s been built here and clearly Rusty does not see the next 4 years (and beyond) as a defensive retreat, and just as a dwindling run off of assets milking dividends of a sleepy cash cow. Instead, growth, efficiency and actively chucking weak DEC-hands and DEC-shorters off the ship are the priorities - in that order.

I think while the allure of a quiet life with ample dividends would be a path for DEC, I am excited by the further value his financial wizardry, and quality team can build here.

This is not advice

Oak

PS because I know there’s a variety of opinions with my readers here’s a poll where you can express your view: