I really don't understand why DEC don't start dealing with this rubbish properly. Surely they should be able to simply challenge some of the stuff coming from paid analysts? They must understand that their accounts are complex so god knows why they don't start briefing people using simple words and pictures to clearly show how they are put together. Not everyone is an accountant!
They seriously need to up their PR game (unless of course there really is an issue somewhere...)
That said, I feel the information is there, and the onus is on the investor not DEC, to make the effort to understand their business model. If you don't, or don't want to, or can't you should nvest in BP/Esso/Shell not DEC.
I would usually agree with you but in this case I think DEC are exceptionally complicated and require full on accounting skills to unpick (which the majority of investors don't, and never will, have). That's pretty much shown by the large number of analysts etc that seem to be getting their information wrong (hopefully).
Unfortunately the market has made its mind up that the model is not sustainable. The falling share price makes new deals impossible and therefore unavoidably forces the business into a run off situation. Add the other many variables and it becomes toxic for a business which I have loved. No matter how I cut the numbers the market price here is less than the sum of the parts but I doubt that they will be achieved. Of all the stocks I own, I never expected this. What's your thoughts OB?
I think the current market price is sentiment driven. What happens when DEC release its trading statement, Q1 dividend, 2023 Annual Report, 2023 Sustainability Report, Q2, Q3, Q4 dividends, further SPVs..... there's an awful lot of newsflow before we can write this off as a run off model only, in my opnion. But even if it is condemned to that future, that is not necessarily a negative since the intrinsic value far exceeds its current price.
I settled on the proforma approach because the financials, with mixed hedging data, is too challenging to tease out the essentials. I have not attempted to incorporate adjustments for the land and SPV deals even though favorable to the net. DEC's financials are full of disclosure but in no way are they user friendly! I am hoping that the transaction statement due at month end and 4Q financials will provide more clarity.
While Alex has probably built a model of some kind, I can say that his interest rate expense number is pure nonsense by a factor of almost double.
In any event, in going back to the Nov 15 presentation pages 30-31 for hedging prices with which to make adjustment (adj table is under the proforma) to future revenues using the 2023 3Q as baseline, I find that the 2025 NG hedge pricing at 3.05 is far below the current forward NG average of 3.67 for 2025. Ditto for 2026: 2.97 vs 3.89 average. The net effect is that the 12.4% drop in hedge pricing for 2025 appears to have a very significant negative impact on DEC's net.
As to DEC's public relations, I agree with Ian. Every release has the name FT Consulting on it. DEC needs to dump these people and hire a firm with proven public relations crisis handling experience to start digging out of this debacle. I would think that Rusty, who is now sitting on some major personal losses on his 2.6M shares, would fire those who have allowed PR crisis to proceed unabated.
I will repeat that teasing comparable data out of DEC reports, particularly the 3Q update is very challenging. That said, I have uncovered some fresh tidbits on page 69 of the prospectus which details the actual NG/NGL/C pricing for 1H23 and those prices are well below the hedge prices I used from the presentation for 2023-2025.
I believe this means that a) the negative adjustments for 2024 and 2025 are unnecessary, b) without adjustment, the SS nets are positive $159M for 2024 and positive $117M for 2025, and c) that DEC is very likely to report 4Q23 and 2024 revenues well above 1H2023.
Thanks EarlA. I will certainly take a look at your calculations. Without checking I believe those hedges are required to satisfy the debt providers. They will always be contentious particularly when NG prices are higher but DEC must be confident on the implied margins. As the ABLs run off they have far greater flexibility for their fiture hedging strategy...a case hopefully of a short term diet for hearty meals later. My big concern is that every single nat resource company thrives by continually recycling cash into new reserves. The faster we can get stability in the share price then quicker we can acquire new assets. There are plenty out there and not many buyers
Wow, that certainly is an interesting article. the OB mentioned before that internationalization would converge the European prices with American prices, but this is the opposite scenario (US blocking export) with the same result... Looks like in any case the gas price will increase then haha
Tier 1 acreage has mainly been fracked. (Producers drill the best targets first). Depletion rates for fracked gas are far higher than trad wells (often 20-30%). You have to drill drill drill even to stand still. Tier 2 targets are more expensive and margins lower. It often needs NG prices @$4-5 to drill them. With billions spent on pipelines and new terminals, I can't see export restrictions unless NG was at $7-$8+ I would be happy at $5-$6!!
If the company has $1,740,556,000 of assets and approximately 70,000 wells then it would seem that if a well plug cost (on average) more than $24,865 then it won't have the funds to cover the decommissioning liabilities if it went bust tomorrow.
But why would you plug & abandon 68,000 wells in Jan 2024 that have a future NPV10 value of $8bn? If you add $8bn you arrive at over $143,000 per well.
You wouldn't and I'm not suggesting it'd happen. It's in response to these sentences from the article:
"if DEC went bust tomorrow then it would have $1,740,556,000 of net assets to deal with its liabilities - including ARO"
and
"How can you commit fraud when your assets already cover the very thing you are allegedly defrauding!"
I was merely commenting that the assets wouldn't cover the liabilities in that scenario (going bust tomorrow) if the plug costs were at the top end of the range quoted ($20,000-$25,000 a well).
Oak. I hope that you are right with your confident analysis. In close to 40 years I have never seen such an attack on a company which has always prided itself on its transparency
Fluffchucker; I've seen many such 'attacks' on stocks. Excepting I don't see it as an attack. I just see a company that is impacted by ESG, by flat/falling gas prices, by a (very) complex debt/options/accounting reporting structure that is easily misunderstood. I hold a number of oil/gas stocks which are down over 30% over 12 months (take WDS for example) and I do think holders are looking at DEC in isolation, not in the context of oil/gas stocks and the 'down' on the market generally
I agree. The advantage and disadvantage of DEC that its strategy is unique. I have always thought that this was for the private and not public markets. What we have here is a classic struggle between declining assets and sustainable cash flows to meet div payments, ARO's and replenishment of assets. There are a lot of moving parts complicated by an accounting rules which muddies the water even more. Clearly new deals are off the table and I think the one strategy which Rusty needs to state clearly and simply is that whilst the share price is at these levels they will continue BBs at scale, sell off more non core assets all of which will improve FCF particularly as the ABL's run off. I like Rusty but he has been absent from London which has not gone down well with II's. Some times it's best just to wait it out til better times return
I have been with DEC since the IPO. I have got to admit that either this is the biggest mispricing in history or there is a fundamental and fatal flaw that we are all missing.
Fluff, I feel the same way - hence me exploring each topic area trying to look at a "real world" view of each aspect - and it's not coming from some blinkered optimism although I often conclude there is optimism to see from the facts I see. If there's a fatal flaw I am the first who would want to spot it. But I've not seen any cohesive argument why this isn't a huge mispricing...... just FUD sniping repeating a mantra but lacking substance. I also come back to the thought that appears specifically aimed at DEC - there are far worse O&G companies than DEC who aren't suffering the same short attack. Why?
At some point I was thinking that if there are M&A in sight, or someone has realized this is a business they would like to acquire, perhaps they want the price to go down as much as possible. Who knows, perhaps some PE sniffing a cheap buy?
There must be predators looking at the value of DEC. The off balance sheet assets,the pipelines, the technical skills and the ARO experience. I would prefer a strategic partnership with a large O&G group where mature assets are passed on to DEC with a shared revenue model. New assets for DEC with no upfront finance but I am probably dreaming in colour!! Certainly Rusty has the contacts with people like the Rice brothers and others.
Thanks for the great articles and analysis OB. I've been especially interested in reading about DEC given everything that's been going on. I've read quite a few of your articles in the last few days and have seen it's your top idea for 2024 unsurprisingly ;) I'm not sure if I've missed it but what do you believe is fair value for DEC currently given the current softness in energy stocks ? Also I noticed that EPS estimates on stockopedia have just been reduced quite markedly - do you think that's in relation to the recent sale but also the higher interest costs indicated by the Investec analyst?
I really don't understand why DEC don't start dealing with this rubbish properly. Surely they should be able to simply challenge some of the stuff coming from paid analysts? They must understand that their accounts are complex so god knows why they don't start briefing people using simple words and pictures to clearly show how they are put together. Not everyone is an accountant!
They seriously need to up their PR game (unless of course there really is an issue somewhere...)
Ian mears; I agree your point, and yes the PR.
That said, I feel the information is there, and the onus is on the investor not DEC, to make the effort to understand their business model. If you don't, or don't want to, or can't you should nvest in BP/Esso/Shell not DEC.
I would usually agree with you but in this case I think DEC are exceptionally complicated and require full on accounting skills to unpick (which the majority of investors don't, and never will, have). That's pretty much shown by the large number of analysts etc that seem to be getting their information wrong (hopefully).
Unfortunately the market has made its mind up that the model is not sustainable. The falling share price makes new deals impossible and therefore unavoidably forces the business into a run off situation. Add the other many variables and it becomes toxic for a business which I have loved. No matter how I cut the numbers the market price here is less than the sum of the parts but I doubt that they will be achieved. Of all the stocks I own, I never expected this. What's your thoughts OB?
I think the current market price is sentiment driven. What happens when DEC release its trading statement, Q1 dividend, 2023 Annual Report, 2023 Sustainability Report, Q2, Q3, Q4 dividends, further SPVs..... there's an awful lot of newsflow before we can write this off as a run off model only, in my opnion. But even if it is condemned to that future, that is not necessarily a negative since the intrinsic value far exceeds its current price.
I quite like the idea of run off, which I see leaving us with a utility like well plugging company
After reading the Alex Smith comments on DEC, I wanted to see if he might have something. I began working on a Google Sheet (shared and open to comments: https://docs.google.com/spreadsheets/d/12hKqxzFgqgn-7d-7WjQvwjVycIlhLn9o5JV9prTCxyA/edit?usp=sharing) to better understand DEC's finances. There are many omissions, as detailed in the notes, but I think it covers the essentials.
I settled on the proforma approach because the financials, with mixed hedging data, is too challenging to tease out the essentials. I have not attempted to incorporate adjustments for the land and SPV deals even though favorable to the net. DEC's financials are full of disclosure but in no way are they user friendly! I am hoping that the transaction statement due at month end and 4Q financials will provide more clarity.
While Alex has probably built a model of some kind, I can say that his interest rate expense number is pure nonsense by a factor of almost double.
In any event, in going back to the Nov 15 presentation pages 30-31 for hedging prices with which to make adjustment (adj table is under the proforma) to future revenues using the 2023 3Q as baseline, I find that the 2025 NG hedge pricing at 3.05 is far below the current forward NG average of 3.67 for 2025. Ditto for 2026: 2.97 vs 3.89 average. The net effect is that the 12.4% drop in hedge pricing for 2025 appears to have a very significant negative impact on DEC's net.
As to DEC's public relations, I agree with Ian. Every release has the name FT Consulting on it. DEC needs to dump these people and hire a firm with proven public relations crisis handling experience to start digging out of this debacle. I would think that Rusty, who is now sitting on some major personal losses on his 2.6M shares, would fire those who have allowed PR crisis to proceed unabated.
I will repeat that teasing comparable data out of DEC reports, particularly the 3Q update is very challenging. That said, I have uncovered some fresh tidbits on page 69 of the prospectus which details the actual NG/NGL/C pricing for 1H23 and those prices are well below the hedge prices I used from the presentation for 2023-2025.
I believe this means that a) the negative adjustments for 2024 and 2025 are unnecessary, b) without adjustment, the SS nets are positive $159M for 2024 and positive $117M for 2025, and c) that DEC is very likely to report 4Q23 and 2024 revenues well above 1H2023.
Thanks EarlA. I will certainly take a look at your calculations. Without checking I believe those hedges are required to satisfy the debt providers. They will always be contentious particularly when NG prices are higher but DEC must be confident on the implied margins. As the ABLs run off they have far greater flexibility for their fiture hedging strategy...a case hopefully of a short term diet for hearty meals later. My big concern is that every single nat resource company thrives by continually recycling cash into new reserves. The faster we can get stability in the share price then quicker we can acquire new assets. There are plenty out there and not many buyers
Interesting article
https://blog.gorozen.com/blog/natural-gas-market?_hsmi=290658219&_hsenc=p2ANqtz-89UtXNvx5j_v8LqlWvM8zGustUgbVPhzJnpC_LFHfD2LnHXEMODBCRgebxGDDlxQAQEKZ_H4RFLQyFzQusda4u0M_O4Q
Wow, that certainly is an interesting article. the OB mentioned before that internationalization would converge the European prices with American prices, but this is the opposite scenario (US blocking export) with the same result... Looks like in any case the gas price will increase then haha
Tier 1 acreage has mainly been fracked. (Producers drill the best targets first). Depletion rates for fracked gas are far higher than trad wells (often 20-30%). You have to drill drill drill even to stand still. Tier 2 targets are more expensive and margins lower. It often needs NG prices @$4-5 to drill them. With billions spent on pipelines and new terminals, I can't see export restrictions unless NG was at $7-$8+ I would be happy at $5-$6!!
Thanks for your reassuring article.
If the company has $1,740,556,000 of assets and approximately 70,000 wells then it would seem that if a well plug cost (on average) more than $24,865 then it won't have the funds to cover the decommissioning liabilities if it went bust tomorrow.
But why would you plug & abandon 68,000 wells in Jan 2024 that have a future NPV10 value of $8bn? If you add $8bn you arrive at over $143,000 per well.
You wouldn't and I'm not suggesting it'd happen. It's in response to these sentences from the article:
"if DEC went bust tomorrow then it would have $1,740,556,000 of net assets to deal with its liabilities - including ARO"
and
"How can you commit fraud when your assets already cover the very thing you are allegedly defrauding!"
I was merely commenting that the assets wouldn't cover the liabilities in that scenario (going bust tomorrow) if the plug costs were at the top end of the range quoted ($20,000-$25,000 a well).
I see your point Matt. I'll alter the wording to say "largely or potentially wholly to cater" to better reflect this.
Oak. I hope that you are right with your confident analysis. In close to 40 years I have never seen such an attack on a company which has always prided itself on its transparency
Fluffchucker; I've seen many such 'attacks' on stocks. Excepting I don't see it as an attack. I just see a company that is impacted by ESG, by flat/falling gas prices, by a (very) complex debt/options/accounting reporting structure that is easily misunderstood. I hold a number of oil/gas stocks which are down over 30% over 12 months (take WDS for example) and I do think holders are looking at DEC in isolation, not in the context of oil/gas stocks and the 'down' on the market generally
I agree. The advantage and disadvantage of DEC that its strategy is unique. I have always thought that this was for the private and not public markets. What we have here is a classic struggle between declining assets and sustainable cash flows to meet div payments, ARO's and replenishment of assets. There are a lot of moving parts complicated by an accounting rules which muddies the water even more. Clearly new deals are off the table and I think the one strategy which Rusty needs to state clearly and simply is that whilst the share price is at these levels they will continue BBs at scale, sell off more non core assets all of which will improve FCF particularly as the ABL's run off. I like Rusty but he has been absent from London which has not gone down well with II's. Some times it's best just to wait it out til better times return
I have been with DEC since the IPO. I have got to admit that either this is the biggest mispricing in history or there is a fundamental and fatal flaw that we are all missing.
Fluff, I feel the same way - hence me exploring each topic area trying to look at a "real world" view of each aspect - and it's not coming from some blinkered optimism although I often conclude there is optimism to see from the facts I see. If there's a fatal flaw I am the first who would want to spot it. But I've not seen any cohesive argument why this isn't a huge mispricing...... just FUD sniping repeating a mantra but lacking substance. I also come back to the thought that appears specifically aimed at DEC - there are far worse O&G companies than DEC who aren't suffering the same short attack. Why?
At some point I was thinking that if there are M&A in sight, or someone has realized this is a business they would like to acquire, perhaps they want the price to go down as much as possible. Who knows, perhaps some PE sniffing a cheap buy?
There must be predators looking at the value of DEC. The off balance sheet assets,the pipelines, the technical skills and the ARO experience. I would prefer a strategic partnership with a large O&G group where mature assets are passed on to DEC with a shared revenue model. New assets for DEC with no upfront finance but I am probably dreaming in colour!! Certainly Rusty has the contacts with people like the Rice brothers and others.
Thanks for the great articles and analysis OB. I've been especially interested in reading about DEC given everything that's been going on. I've read quite a few of your articles in the last few days and have seen it's your top idea for 2024 unsurprisingly ;) I'm not sure if I've missed it but what do you believe is fair value for DEC currently given the current softness in energy stocks ? Also I noticed that EPS estimates on stockopedia have just been reduced quite markedly - do you think that's in relation to the recent sale but also the higher interest costs indicated by the Investec analyst?