Natural gas futures through 2029 are comfortably in the $3's and $4's with not a $2 handle to be found after October 2024. I'm sure that fact is not lost on Rusty and the folks at DEC as they hedge future production.
I've done more DD than most on DEC and have yet to find a hole in the investment thesis. I was pretty confident in my assessment of the retirement obligations but your research went well beyond mine and found no holes. This looks like the proverbial $10 bill lying on the sidewalk. I have a very large position.
Purely from an informational point, we (on the other side of the pond) put gasoline in our vehicles and heat our homes with natural gas.
I've worked through the forward hedges in the annual report and the floor these provide is very encouraging, particularly as we head back towards a lower inflation environment. Thank you for putting me right on gas being gasoline. On this side of the pond gas and natural gas are synonymous terms which is why the American word always feels out of place to our ears.
Maybe you can answer this question: When I look at OG or gold stocks there is lot of talk about where the margins will be when oil/gold goes to price x or y. Many don't seem to hedge the price risk like $DEC. Why do some companies invest millions with the risk of being wiped out if the price of oil/gold crashes? It seems such a basic and obvious thing to do. I feel confortable judging the financials of a company but I don't feel comfortable trying to predict the oil/gas/gold price know what I mean? Investing in hedged companies like $DEC leads to uncorrelated returns (from a fundamental stand point - the SP is a different issue). Isn't it weird? Or do those other companies buy puts and hide them somewhere in their balance sheet?
Hi Phoenix, HOC which I've written about in another post, extensively hedge their gold/silver production. They have forward hedges at prices over the current gold price. Generally, though hedging means compromising profit. Limiting your downside means limiting your upside and selling below the current market price. Hedging also requires expertise. DEC have inhouse experts but many O&G firms are run by engineers, not finance folk. As Rusty likes to say they love drilling more and more holes. If you hedge then these, by definition, must appear on the balance sheet. An auditor would always focus on any hedging for fair value recognition too - again a reason why not all firms hedge. It can be a headache for them. I think the main reason firms don't hedge is they believe they can manage risk and cash flow using reserves from good years tide them over in the lean years.
Many natural resource companies do hedge, just not to the very large degree DEC does. Consider that if you have a strong belief that the commodity price is going higher, you want to invest with a company that is hedged as little as possible. Companies which a large hedge book are shunned during commodity bull markets. I was in that camp coming out of the 2000 commodity washout. DEC's hedge book should make it more attractive under current (short term) bearish conditions in the gas market.
Adding a little dimension to OB's "value recognition" comment, hedge books must be marked to market even when the company has production in place to meet the hedge obligations. Wild swings in commodity prices above/below hedge values causes wild swings on the income statement. There are many investors who won't touch DEC because of the multi-million dollar hedge losses they've had but those are paper losses, not real losses.
Earla; yes DEC do hedge, to me aggressively, forsaking upside, to eradicate downside. I do wonder whether that is solely because that is DEC's way or because the ABS conditions require minimum (high) hedging. I guess we will find out in about 3 years, when the minimum % hedged required in those ABSs drops.
When I look at the NG market and the LNG market globally, it looks pretty well supplied. Yes more LNG export facilities are coming on line but so is more NG. I want to own a producer which is nearly fully hedged on a forward basis and does so as part and parcel of their business plan. Keep an eye on the 3+ year forward futures contracts. If prices head south, DEC's revenues are going to shrink.
Dear Earl, Dear Oak, thank you both for your great explanations. As a banker I am used to the approach of hedging the vast majority of interest rate and fx risks in order to focus on a diversified book of credit risk. This hedged approach leads to lower yet more reliable margins which allows the banking industry to leverage with huge amounts of debt. So there is no standard approach in the commodity industry of hedging x% of the commodity price risk. That's a very valuable insight!
OB, good rational thoughts in an irrational market. The short term gas price drop creates a negative halo effect for the hard of research across the whole sector, as does the El Nino commentary and memories of 2015/16. I think DEC is being sold down as a sector sell off rather than on company merit. The company performance however remains exceptional and the dividend enables a wait for rebalanced to occur.
just stumbled upon Afentra #AET which sounds like a tiny version of $DEC. Buying the breadcrumbs from big oil with artistic financing. Seems like most of oil and gas sector doesn't hedge as exquisitly as $DEC. That's a major factor. It allows you judge a company based on the fundamentals without having to predict or being dependent on the future price of oil or gas. Maybe Afentra is worth a look by OAK. :-)
Natural gas futures through 2029 are comfortably in the $3's and $4's with not a $2 handle to be found after October 2024. I'm sure that fact is not lost on Rusty and the folks at DEC as they hedge future production.
I've done more DD than most on DEC and have yet to find a hole in the investment thesis. I was pretty confident in my assessment of the retirement obligations but your research went well beyond mine and found no holes. This looks like the proverbial $10 bill lying on the sidewalk. I have a very large position.
Purely from an informational point, we (on the other side of the pond) put gasoline in our vehicles and heat our homes with natural gas.
I've worked through the forward hedges in the annual report and the floor these provide is very encouraging, particularly as we head back towards a lower inflation environment. Thank you for putting me right on gas being gasoline. On this side of the pond gas and natural gas are synonymous terms which is why the American word always feels out of place to our ears.
Maybe you can answer this question: When I look at OG or gold stocks there is lot of talk about where the margins will be when oil/gold goes to price x or y. Many don't seem to hedge the price risk like $DEC. Why do some companies invest millions with the risk of being wiped out if the price of oil/gold crashes? It seems such a basic and obvious thing to do. I feel confortable judging the financials of a company but I don't feel comfortable trying to predict the oil/gas/gold price know what I mean? Investing in hedged companies like $DEC leads to uncorrelated returns (from a fundamental stand point - the SP is a different issue). Isn't it weird? Or do those other companies buy puts and hide them somewhere in their balance sheet?
Hi Phoenix, HOC which I've written about in another post, extensively hedge their gold/silver production. They have forward hedges at prices over the current gold price. Generally, though hedging means compromising profit. Limiting your downside means limiting your upside and selling below the current market price. Hedging also requires expertise. DEC have inhouse experts but many O&G firms are run by engineers, not finance folk. As Rusty likes to say they love drilling more and more holes. If you hedge then these, by definition, must appear on the balance sheet. An auditor would always focus on any hedging for fair value recognition too - again a reason why not all firms hedge. It can be a headache for them. I think the main reason firms don't hedge is they believe they can manage risk and cash flow using reserves from good years tide them over in the lean years.
Many natural resource companies do hedge, just not to the very large degree DEC does. Consider that if you have a strong belief that the commodity price is going higher, you want to invest with a company that is hedged as little as possible. Companies which a large hedge book are shunned during commodity bull markets. I was in that camp coming out of the 2000 commodity washout. DEC's hedge book should make it more attractive under current (short term) bearish conditions in the gas market.
Adding a little dimension to OB's "value recognition" comment, hedge books must be marked to market even when the company has production in place to meet the hedge obligations. Wild swings in commodity prices above/below hedge values causes wild swings on the income statement. There are many investors who won't touch DEC because of the multi-million dollar hedge losses they've had but those are paper losses, not real losses.
Earla; yes DEC do hedge, to me aggressively, forsaking upside, to eradicate downside. I do wonder whether that is solely because that is DEC's way or because the ABS conditions require minimum (high) hedging. I guess we will find out in about 3 years, when the minimum % hedged required in those ABSs drops.
When I look at the NG market and the LNG market globally, it looks pretty well supplied. Yes more LNG export facilities are coming on line but so is more NG. I want to own a producer which is nearly fully hedged on a forward basis and does so as part and parcel of their business plan. Keep an eye on the 3+ year forward futures contracts. If prices head south, DEC's revenues are going to shrink.
Dear Earl, Dear Oak, thank you both for your great explanations. As a banker I am used to the approach of hedging the vast majority of interest rate and fx risks in order to focus on a diversified book of credit risk. This hedged approach leads to lower yet more reliable margins which allows the banking industry to leverage with huge amounts of debt. So there is no standard approach in the commodity industry of hedging x% of the commodity price risk. That's a very valuable insight!
OB, good rational thoughts in an irrational market. The short term gas price drop creates a negative halo effect for the hard of research across the whole sector, as does the El Nino commentary and memories of 2015/16. I think DEC is being sold down as a sector sell off rather than on company merit. The company performance however remains exceptional and the dividend enables a wait for rebalanced to occur.
just stumbled upon Afentra #AET which sounds like a tiny version of $DEC. Buying the breadcrumbs from big oil with artistic financing. Seems like most of oil and gas sector doesn't hedge as exquisitly as $DEC. That's a major factor. It allows you judge a company based on the fundamentals without having to predict or being dependent on the future price of oil or gas. Maybe Afentra is worth a look by OAK. :-)
maybe that lawsuit is the reason for the decline https://www.coalvalleynews.com/news/diversified-agrees-to-settle-federal-lawsuit-over-death-of-employee-at-logan-county-gas-well/article_d963d182-e350-5a05-acc1-e43ffcace2f3.html