It seems that, in the acquisition of the Oaktree assets, DEC is spending ~54% ($386m) of DEC's market capitalization to increase DEC's production (or production per share) by 15%. That is, per unit of production increase per share, the deal costs DEC 3.6 times as much as buying back its own shares.
Hi Teamwork, Page 151 of the annual report: "The Oaktree Participation Agreement ended in October 2023. While Oaktree continues to hold the working interests it acquired, the agreement to participate in future acquisition opportunities has expired." So I guess DEC faced a choice of buying the assets or the risk of Oaktree disposing of them to someone else. Other benefits include favourable payment terms (18 months), zero G&A (they are DEC operated assets) has attractions too.... and they are known assets. They also expose DEC to gulf pricing which may prove very well timed with LNG capacity ramping in 2024-2025.
Teamwork, I've worked through the NAV of the Oaktree holding and there are some interesting upsides to the purchase - I've updated the article. Meanwhile I remain keen to see buy backs like yourself
The SPV divestiture was not the Conoco assets. It was a package of wells in Appalachia.
They basically took this package of wells that had $35m of cash flows ($230m PV10), used that to finance out $162m via two different ABS notes. Then sold 80% of the remaining equity left in the assets.
Class A notes had an 8.24% interest rate, class B notes had a 12.72% interest rate. So in total, about $14.3m of interest. So the sold the equity tranche which had ~$20m of cash flows after interest for about ~2x.
They basically were able to create a sale at 5.7x by securitizing the asset and getting another party to assume the equity. Really smart IMO
I've misread Note 10 which says: "For the year ended December 31, 2023, the Group divested $202,886 in natural gas and oil properties related to the sale of equity interest in
DP Lion Equity Holdco LLC, the divested assets previously acquired as part of the ConocoPhillips Asset Acquisition, and other proved
properties and undeveloped acreage divestitures. "
I see the buyout of Oaktree as hugely bearish. If they saw the right risk premium being paid here they would not have sold. As a close follower of Oaktree and holder of its other high yielding assets / investments this to me looks like they folded their hand and see better prospects elsewhere for their capital. This + withdraw by Rusty on the tender offer looks like quite a number of losses for poor ‘ol Rusty. I am a long term holder here sitting on around 50% loss. Think I might fold too.
Don't you think there's a much more straightforward explanation?
Page 151 of the annual report: "The Oaktree Participation Agreement ended in October 2023. While Oaktree continues to hold the working interests it acquired, the agreement to participate in future acquisition opportunities has expired."
Seems to me that Oaktree didn't plan this as a long term holding and subsequently decided to fold but rather agreed to a fixed term which has now run its course.
Given that there are extended payment terms as part of the deal there appears to remain good relationships with Oaktree.
A) I simply don’t buy the tender offer rationale. If this is the case they would go after their corporate attorneys
B) I definitely don’t buy the ESG case either. If anything that is moving in the opposite direction and with odds on GOP secure presidency seems implausible. Most likely their risk models are flashing and better opportunities and ROI elsewhere.
All trust now gone with Hutson and this grossly incompetent management team . Sadly the shorters were correct all along. PI’s put our trust , money and future in the hands of this fraud. Many Pi’s have lost thousands and thousands and the dividend is utterly pitiful for long term holders. They should be locked up for the lies and deceit
Last week finally exited my #DEC position in full at a significant loss. I always enter a trade with the willingness to suffer pain as long as the fundamentals are clear. The simple truth is this business is now in the “too hard to understand” bucket. Based on 40 years investment exp this is a terrible sign and a reason to not invest or depart. Their financial engineering shenanigans are have been found lacking and all signs point to no imminent turnaround. Too many better opportunities. Money deployed to $PR, $FANG and $AM gradually over last few months as I shifted fully out of #DEC.
It's no secret that DEC has to replenish depleting assets in order to maintain its revenues; however DEC has managed to grow its revenue with a substantial dividend in place. I'm not a fan of debt laden companies; however the use and structure of ABS significantly mitigates the risk.
A 2/3 dividend cut is excessive by any measure. A 10% yield is not difficult to find among US energy royalties and trusts which leaves little incentive for share price growth. Nor does a reference to 3 years of stability provide investors with the expectation that growth will fund dividend increases. Finally, considering the size of the cut, a 3%-10% range on buybacks is not exactly thrilling.
And the revoked tender? A massive waste of money and a true black eye for DEC. I've long felt that DEC's public relations firm (FT Consulting) needs to be replaced. I add the lawyers to the list.
There are currently 4 US pipeline companies that yield around/at DEC's yield, who because of their long term utility like properties are considerably less risky, and unrefutably less complex/convoluted/specialised than DEC, who in resetting their dividend today, aren't rewarding the inherent moving part risks/uncertainties. In removing the dividend incentive/reward, they have inherently accepted that their (previously stated/projected/modelled ) modus operandi was failing, because those projections were presupposed although never tacitly stated by them, on constantly adding wells, because those they already had, alone were not enough to meet their projections. Diverting the dividend is shoring up, not growing. I sold my last today, and was frankly surprised it didn't drop 10%. I am a very very patient investor, but the issue for me, is not that they can't/won't make it work over time, but their moving of the goalposts, their abandonment of one of the tenets of their raison detre, means trust, integrity, feasibility is shot. A sad day for DEC and it's very patient supportive holders.
I built a proforma of DEC's finances going out 5 years to evaluate the sustainability of their production and business model prior to building a large position. It is clear that DEC's post ABS residual is not enough to keep the engine running on a long term basis without modest acquisitions. It is also clear that investing the available FCF post-dividends at current share prices is a viable alternative. Of course, that means that the company's scale declines modestly until the share price is corrected.
Rusty chose growth over his shareholders ... one of numerous investor relation mistakes which have compounded investor losses. I too am a patient investor but have lost confidence in management. I sold nearly 3/4 of my LSE holdings today. I think the NYSE shares will get a better bid and plan to scale out of those through the Ru2000 rebalances.
They chose 'growth' from a point of (to disguise) weakness. They should have managed/consolidated into strength (higher gas prices ) and then grown. That they couldn't
wait says beyond SAM (Smarter Accounting Management) they were running out of money. They could have reduced/better managed debt . That they didn't smacks of harkbacks and kickbacks to Rusty's finance days.
Shambolic and not a semblance of apology or accountability by Hutson on the Conference call to long term PI holders who put their trust in him. The SP will continue to collapse to an unrecognisable level as the II sell out. It’s already started and the US not open yet. All hell going to break loose this afternoon.
Not sure how many people will be ‘rejoicing’ depending on when they bought shares. Capital value down over 55% and dividend now slashed by roughly 60%. By anybody’s view that’s truly awful performance and the critics have been proved partially right in saying the dividend wouldn’t be maintained.
The real concern is the price of gas which has tanked and with reduced demand due to warmer weather the prospect doesn’t look great. The upside of that I suppose is that they will get more well closing business as other suppliers start to go out of business.
The critics would be right if the dividend were unaffordable but today's results clearly show that's not the case, nor is it the case going in FY24. Rebasing the dividend in an era of record low prices is a strategic choice not necessity.
To further pay down debt and increase buy backs has merit. But it's true you can put a negative slant on it also.
The rejoicing is for the strength of the business and prospects for future growth.
Also you assume the price of gas will remain this low. I believe that won't remain the case, but while it does, yes, DEC is well positioned to survive and to build value.
Hi OB, I don't see such as a negative slant; it's a pragmatic one, and I would counter that yours could be considered blindly euphoric. To state that the dividends are clearly affordable is rather disingenuous. This quarter, 12 months maybe, but it does rather beg the question if such is true, and the current assets are enough to pay dividends/debt/ARO why the need to divert the dividends to acquisitions? Their projections, in their results presentations, had no caveat, weren't based on an acquisition a year to fulfill. The diversion is an admittance that current assets will not meet promises,.and that whilst hedging can stop them from sinking, without a rising base price, they don't allow them to swim. That TODAY they didn't think, they could see out the interim into higher prices (and they will rise long term), and frankly they were struggling/didn't believe their current model could deliver as is. So they moved the goalposts - unfortunately they also disturbed their foundations, of viability and integrity. The problem wasn't the dividend, it was the value/SP destruction that made it look silly at current SP. The problem is, they no longer believe in their own model.
But I don't agree the diversion of dividends is "the need to divert the dividends to acquisitions". We now have what DEC are calling the Focus 5 priorities: so buy backs and paying down debt as well as acquisitions. The reality is that the current share price does not reflect the assets and earning capability of the company. Buy backs are a way to achieve superior shareholder returns if you are buying back assets at a substantial discount. Empirically it makes sense on paper. Also the reality is that we are now in an era of high(er) interest rates than the recent past where running a "cashless" company and "maxing out the credit card" does carry risk - even when you have mitigated that through ABS structures. Psychologically, the risk and the various attacks have probably caused a need for retrenchment and a pause/reset in their thinking. The "at least 3 years" and "fixed" suggests DEC is putting a line in the sand to say $0.29/Qtr is his new line in the sand and new goal post.
I don't say that to excuse Rusty nor to defend the decision. I agree it's a move of goalposts. Nor do I say it because I'm euphoric, it is just what I see are the facts. While I would have loved to continue to receive the same level of dividends I see the benefit of the focus on shareholder returns. I see DEC as being able to achieve that but also do see how some perhaps many shareholders will walk away.
At the risk of being cynical there is also, perhaps, an element of a brave new world of US investors and damn keeping the Europeans happy.
Hi OB; you rather sidestep my point. If the promised model worked, they don't need to acquire. Reduce costs/maximise production life, pay dividends, pay down debt was the model. If that model didn't work, why should the Focus 5? Spot price hasn't helped them, but they haven't helped themselves with projecting $4+ and 30 years + production. I think long term spot/realised price will rise, and in that, agree its undervalued. But it is clear they are struggling in the interim to get to that period, clear that the hedges are not working for them, just for the lenders. As for the attacks, well not really sure what you mean by that. The only thing I see that has attacked them is their own euphoric plan. If you refer to the likes of green newsletters/legislative questions/legal actions/short attacks, well they may all have their own anti business/energy agendas, but the truth is, the truth lies in the middle, in that they are exaggerated concerns and DEC's response is denial. Take the legal claims. Yes they are shooting an easy target, shooting high, but they will get something. Because it is quite obvious that for example, EQT selling for $200m wasn't to make $200m, it was to relieve them of $1b if liability. In the same way that all DEC's ABS's are used, yes, to gain funds/leverage up, but as SPVs, most importantly as separate entities, to absolve DEC parent of any ARO liability/recourse. Yes buybacks would be accretive, but only because the mkt concern at
2 of 2; ....their plan was negative, and so punneled their SP. If their plan was valid, observers would see that, and ignore short term gyrations. And the. Urgent SP wouldn't make them appear so accretive. And in such, I would struggle to see a new acquisition that would be more accretive than BBs so why the focus on acquisitions? Just run the current assets, buyback as you go from free cashflow/profits. Why haven't they used FCF to clear the first ABS (the lowest value and lowest coupon) and thus realise full unhindered benefit from thier accretive assets? Because they don't have the cash, and at current spot, the profits.
On a more positive note, at current mkt cap, I actually think the ARO business is worth more than DEC, because if you take the number of wells, the lack of trained staff/providers, and DECs current charge to others, the numbers are far more advantageous, predictable and sustainable. The next financial chicanery, will not be to spin off assets/ABS from a point of weakness/neccisity, but to spin of NextLVL to a point of strength. That's where the value, the money is, not in shifting plans.
As an investor on the West side of the pond, I received a very clear message that US investors are now the new priority. (See presentation slide 23: "YTD US E&P’s YTD up ~3% vs. UK E&P’s down ~19%"). Clearly, management made the decision to ditch European investors for a fresh set of US investors. I think the stock will see some recovery in the US but Rusty's net worth is not going to return to $75M+-. I think that's why he is open to the idea of a "partner".
I always viewed DEC as a 2+- year investment for share price recovery and a full exit at 12%-15% yield. On a long term basis, the biggest elephant in the room is Asset Retirement Obligations on 70K wells at an average well life of 50+- years. 200 well retirements is a pittance. ARO will be a major issue within a few years.
EarlA; yes ARO is a major issue, but it's also a major oppurtunity. I think the risk is quite low, as each of the SPVs of debt/assets, are not recourse to the group, the oppurtunity high, because if DEC soun NextLVL out now, to give itself a distance from DEC, and any asset folding/abandoned wells, and then diminish (divert) profit from DEC by charging in excess of $15k a well, leaving a life support DEC and a growing NextLVL to profit from a whike nations abandoned wells. I predict spin out before year end, and it's that company I would want to hold, with long term predictable sustainable earnings, utility like, within a positive societal/governance framework.
The question is whether the original business plan is sustainable. It must mkeep eating to survive and that's why the new acquisition rather than BBs. Listened to the earnings call and was not super impressed. Must admit disappointed after more than 6 years
Yes I understand why they did it but the market clearly still doesn’t like it. Down another 8% today. I’ve not had time to read the results properly but I did notice one line saying the current dividend is only affordable for three years? Not sure why that is the case?
Gas price is unknowable really but the big issue now is to much supply. Who knows how long that will take to correct itself.
The issue with the share price is difficult to resolve as it is driven more by sentiment than things like NAV (as with most shares really). Maybe over time it will improve, I hope so as I’m significantly underwater with this one!
Yes the 3 years caught my eye - I keep thinking of all those presentation projections showing a maintained dividend though debt clearance into a debt free cash throw off situation. I thought this was a 30 year plan.
Sadly there is nothing about Hutson that is strategically credible. As you say the dividend rebasing was not necessary to that level. He’s just royally shafted the long term holders who bought and supported his so called strategic promises then . Any assessment here of the future is just wishful thinking. He’ll ultimately shaft new shareholders without any thought for their trust in this business
Bottom line is Oaktree ‘cut bait’. There are today so many better places to deploy capital. Today likely to do same as Oaktree and double down on the two positions I like best in energy right now - Permian Resources and Kimbell Royalty. Effective management in both and strong and steady performance.
Sadly the critics have been proven 100% correct. Nothing but lies , mismanagement and lurching from one crisis to another. Why anybody would entrust their money with him is beyond me . I have been an advocate of his for many years and we get this huge kick in the bollocks for it.
Hutson is a crook and utterly untrustworthy. Don’t believe a single word this crook: fraudster says. He has destroyed wealth and health with his fraudulent mismanagement.
Another insult from this grossly incompetent greedy BOD. Freebie shares for achieving fuck all . An utter conspiracy to screw shareholders and line their own pockets . Milk the LSE shareholders then shaft them with a crashed share price and dividend. List in the US to ultimately milk those poor bastards with promises of a so called new strategy to strengthen the balance sheet and grow the business . House Brokers with their snouts in the trough continue to talk the new strategy up with ludicrous SP target that will never be achieved. The shorts vultures circle with increasing positions knowing this crooked BOD are incapable of delivering anything apart from lies and will change tactics at the drop of a hat.
Must admit I have been confused by the last few days. All resource companies need to replace depleting assets but is this a case of DEC constantly having to eat just to stand still? What you think Oak?
Fluff, my perspective (for example in this article which I've revised during this week - so worth a re-read) is to consider the depletion versus investment question. If there is a more than sufficient means to replace depletion then the business can not only stand still but move forward too. Over 5 years (see https://theoakbloke.substack.com/p/dec-iding-2024-strategy) I showed how DEC's PDP had grown, production had grown, adjusted EBITDA had grown.
The reality is natural gas is at $10.50 a barrel equivalent in the US should have smashed DEC. Yet due to its hedges (which lots of people said were foolish when has was at $60boe prices was ludicrous). Its hedges that "lost" nearly a billion dollars and that the market did not understand were there for a rainy day. It rained. And DEC has pulled through and made money even on those prices. I believe for a number of reasons, gas will rise in the coming few years, and DEC will prosper as LNG exports grow and its Central reserves tap far higher prices. Meanwhile hedges cover the bulk of 2024 and 2025 so there's ample insulation to suicidal prices.
Ironic you say that when your entire coverage of DEC is based on FUD! - FUD which has been comprehensively refuted by the annual results. Rather than having the good grace and fair balance to reflect on any of that, you continue to obsessively pursue a perma-bear approach while I set out the facts, good and bad, including those bad ones you now quote. Does that make me a perma-bull? I gave you the ammunition!
Even with gas prices at unrealistically low levels where the entire industry is shutting off supply as it is simply not profitable for anyone, the revised NPV is $2.9bn while the most perma-bear scenario of ARO is $2.5bn. So an excess of $0.4bn at the most unrealistic of futures.
Your original claim that you are just a "concerned citizen of Appalachia" who'd watched an episode of Bloomberg that spoke of a couple of leaking gas wells. Given the tremendous progress made and evidenced in the annual results clearly you have a different agenda.
You completely mischaracterized my arguments. They have nothing to do with leaking wells, but rather the massive AROs the company has no intention of retiring for decades...
"Tremendous progress" is laughable. The divi cut is just a sign that reality hit management like a ton of bricks. Let's hope they divert those savings to ARO retirement in the 4 digits per annum.
"Even with gas prices at unrealistically low levels where the entire industry is shutting off supply "
You must be unfamiliar with how U.S. Shale works. Most E&P producers in the U.S. care about oil, not gas. They drill shale oil wells which produces what they care about (oil) and as a byproduct also produces something they have little care for (gas). The gas is dumped on the market as a byproduct. Hence the longstanding U.S. nat gas glut.
And DEC has chosen (poorly) to concentrate in this commodity no one cares about in the U.S....
Oak Bloke is perma-bullish I see and somehow called me out in his article despite the lackluster FY results and stock price being cut in half in the past year.
"PV10 of reserves based on the 10 year strip rate is substantially down to $3.2bn vs my estimate (which was correct based on a pro rata of reserves but was not adjusting for price, i.e. at 2022 prices the same reserves would be valued at $5.9bn. "
So now you see the flaws of predicting cash flows decades out on a commodity that is significantly oversupplied in the U.S. with limited export options. Those flawed projections are used by Rusty to delay, delay, delay retirement of DEC's decrepit wells decades out. BTW using 2022 gas prices is absurd...prices were high due to Russia-Ukraine.
Tender was pulled...DEC is not run by the most competent, and they are gambling with AROs that will likely be inherited by several states & their taxpayers as a result.
" We also see a sensitivity analysis that the $1.7bn future ARO could grow to $2.5bn or could shrink to $1.6bn depending on how you discount cash flow and factor in timing and resources."
Yeah no kidding these estimates (along with PV-10) are extremely volatile based on a few variables which shows how much risk is embedded in Rusty's gamble on AROs.
The Oaktree transaction also looks like pure garbage.
Current natural gas prices are not sustainable. Hedging is still available at attractive prices starting out in 2025.
DEC is subject to the vagaries of natural gas prices and reserve replacement costs.
The time to replace reserves is when prices are low. I think without the acquisition DEC would have cut the dividend but not near the amount they chose to cut.
Natural gas prices will likely rebound by next winter and as long as DEC can hedge and increase the capacity to plug wells I think this is not a bad entry point. Currently I am underwater.
Nat gas is produced as a byproduct when shale wells are drilled in USA...hence the longstanding glut that is expected to continue. Meanwhile, the current White House has put a pause on LNG export terminal construction....
It seems that, in the acquisition of the Oaktree assets, DEC is spending ~54% ($386m) of DEC's market capitalization to increase DEC's production (or production per share) by 15%. That is, per unit of production increase per share, the deal costs DEC 3.6 times as much as buying back its own shares.
Hi Teamwork, Page 151 of the annual report: "The Oaktree Participation Agreement ended in October 2023. While Oaktree continues to hold the working interests it acquired, the agreement to participate in future acquisition opportunities has expired." So I guess DEC faced a choice of buying the assets or the risk of Oaktree disposing of them to someone else. Other benefits include favourable payment terms (18 months), zero G&A (they are DEC operated assets) has attractions too.... and they are known assets. They also expose DEC to gulf pricing which may prove very well timed with LNG capacity ramping in 2024-2025.
Lots to like I think.
...ahhh....but this comparison/calculation hinges on the market cap, which may increase or decrease in line with investor sentiment......
Teamwork, I've worked through the NAV of the Oaktree holding and there are some interesting upsides to the purchase - I've updated the article. Meanwhile I remain keen to see buy backs like yourself
The SPV divestiture was not the Conoco assets. It was a package of wells in Appalachia.
They basically took this package of wells that had $35m of cash flows ($230m PV10), used that to finance out $162m via two different ABS notes. Then sold 80% of the remaining equity left in the assets.
Class A notes had an 8.24% interest rate, class B notes had a 12.72% interest rate. So in total, about $14.3m of interest. So the sold the equity tranche which had ~$20m of cash flows after interest for about ~2x.
They basically were able to create a sale at 5.7x by securitizing the asset and getting another party to assume the equity. Really smart IMO
https://www.sustainablefitch.com/corporate-finance/sustainable-fitch-spo-provided-for-decs-kpi-linked-asset-backed-transaction-23-01-2024
I've misread Note 10 which says: "For the year ended December 31, 2023, the Group divested $202,886 in natural gas and oil properties related to the sale of equity interest in
DP Lion Equity Holdco LLC, the divested assets previously acquired as part of the ConocoPhillips Asset Acquisition, and other proved
properties and undeveloped acreage divestitures. "
I think it's what is known as an Oxford comma!
I see the buyout of Oaktree as hugely bearish. If they saw the right risk premium being paid here they would not have sold. As a close follower of Oaktree and holder of its other high yielding assets / investments this to me looks like they folded their hand and see better prospects elsewhere for their capital. This + withdraw by Rusty on the tender offer looks like quite a number of losses for poor ‘ol Rusty. I am a long term holder here sitting on around 50% loss. Think I might fold too.
Hi Arby
Don't you think there's a much more straightforward explanation?
Page 151 of the annual report: "The Oaktree Participation Agreement ended in October 2023. While Oaktree continues to hold the working interests it acquired, the agreement to participate in future acquisition opportunities has expired."
Seems to me that Oaktree didn't plan this as a long term holding and subsequently decided to fold but rather agreed to a fixed term which has now run its course.
Given that there are extended payment terms as part of the deal there appears to remain good relationships with Oaktree.
...not happy by the results either.... but do take into consideration:
->revoking of the tender offer is (allegedly) due to conflict with US law (i.e.: not in DEC hands to decide)
->Oaktree may be under pressure or feel it being opportune to steer away from "dirty" investments/ increase ESG sensitivity or such
A) I simply don’t buy the tender offer rationale. If this is the case they would go after their corporate attorneys
B) I definitely don’t buy the ESG case either. If anything that is moving in the opposite direction and with odds on GOP secure presidency seems implausible. Most likely their risk models are flashing and better opportunities and ROI elsewhere.
All trust now gone with Hutson and this grossly incompetent management team . Sadly the shorters were correct all along. PI’s put our trust , money and future in the hands of this fraud. Many Pi’s have lost thousands and thousands and the dividend is utterly pitiful for long term holders. They should be locked up for the lies and deceit
Last week finally exited my #DEC position in full at a significant loss. I always enter a trade with the willingness to suffer pain as long as the fundamentals are clear. The simple truth is this business is now in the “too hard to understand” bucket. Based on 40 years investment exp this is a terrible sign and a reason to not invest or depart. Their financial engineering shenanigans are have been found lacking and all signs point to no imminent turnaround. Too many better opportunities. Money deployed to $PR, $FANG and $AM gradually over last few months as I shifted fully out of #DEC.
It's no secret that DEC has to replenish depleting assets in order to maintain its revenues; however DEC has managed to grow its revenue with a substantial dividend in place. I'm not a fan of debt laden companies; however the use and structure of ABS significantly mitigates the risk.
A 2/3 dividend cut is excessive by any measure. A 10% yield is not difficult to find among US energy royalties and trusts which leaves little incentive for share price growth. Nor does a reference to 3 years of stability provide investors with the expectation that growth will fund dividend increases. Finally, considering the size of the cut, a 3%-10% range on buybacks is not exactly thrilling.
And the revoked tender? A massive waste of money and a true black eye for DEC. I've long felt that DEC's public relations firm (FT Consulting) needs to be replaced. I add the lawyers to the list.
There are currently 4 US pipeline companies that yield around/at DEC's yield, who because of their long term utility like properties are considerably less risky, and unrefutably less complex/convoluted/specialised than DEC, who in resetting their dividend today, aren't rewarding the inherent moving part risks/uncertainties. In removing the dividend incentive/reward, they have inherently accepted that their (previously stated/projected/modelled ) modus operandi was failing, because those projections were presupposed although never tacitly stated by them, on constantly adding wells, because those they already had, alone were not enough to meet their projections. Diverting the dividend is shoring up, not growing. I sold my last today, and was frankly surprised it didn't drop 10%. I am a very very patient investor, but the issue for me, is not that they can't/won't make it work over time, but their moving of the goalposts, their abandonment of one of the tenets of their raison detre, means trust, integrity, feasibility is shot. A sad day for DEC and it's very patient supportive holders.
I built a proforma of DEC's finances going out 5 years to evaluate the sustainability of their production and business model prior to building a large position. It is clear that DEC's post ABS residual is not enough to keep the engine running on a long term basis without modest acquisitions. It is also clear that investing the available FCF post-dividends at current share prices is a viable alternative. Of course, that means that the company's scale declines modestly until the share price is corrected.
Rusty chose growth over his shareholders ... one of numerous investor relation mistakes which have compounded investor losses. I too am a patient investor but have lost confidence in management. I sold nearly 3/4 of my LSE holdings today. I think the NYSE shares will get a better bid and plan to scale out of those through the Ru2000 rebalances.
They chose 'growth' from a point of (to disguise) weakness. They should have managed/consolidated into strength (higher gas prices ) and then grown. That they couldn't
wait says beyond SAM (Smarter Accounting Management) they were running out of money. They could have reduced/better managed debt . That they didn't smacks of harkbacks and kickbacks to Rusty's finance days.
And the tender offer pulled too.
Mr Market not impressed.
Shambolic and not a semblance of apology or accountability by Hutson on the Conference call to long term PI holders who put their trust in him. The SP will continue to collapse to an unrecognisable level as the II sell out. It’s already started and the US not open yet. All hell going to break loose this afternoon.
Mr Market's cheered up a bit.
Not me though. I'm out.
Not sure how many people will be ‘rejoicing’ depending on when they bought shares. Capital value down over 55% and dividend now slashed by roughly 60%. By anybody’s view that’s truly awful performance and the critics have been proved partially right in saying the dividend wouldn’t be maintained.
The real concern is the price of gas which has tanked and with reduced demand due to warmer weather the prospect doesn’t look great. The upside of that I suppose is that they will get more well closing business as other suppliers start to go out of business.
The critics would be right if the dividend were unaffordable but today's results clearly show that's not the case, nor is it the case going in FY24. Rebasing the dividend in an era of record low prices is a strategic choice not necessity.
To further pay down debt and increase buy backs has merit. But it's true you can put a negative slant on it also.
The rejoicing is for the strength of the business and prospects for future growth.
Also you assume the price of gas will remain this low. I believe that won't remain the case, but while it does, yes, DEC is well positioned to survive and to build value.
Hi OB, I don't see such as a negative slant; it's a pragmatic one, and I would counter that yours could be considered blindly euphoric. To state that the dividends are clearly affordable is rather disingenuous. This quarter, 12 months maybe, but it does rather beg the question if such is true, and the current assets are enough to pay dividends/debt/ARO why the need to divert the dividends to acquisitions? Their projections, in their results presentations, had no caveat, weren't based on an acquisition a year to fulfill. The diversion is an admittance that current assets will not meet promises,.and that whilst hedging can stop them from sinking, without a rising base price, they don't allow them to swim. That TODAY they didn't think, they could see out the interim into higher prices (and they will rise long term), and frankly they were struggling/didn't believe their current model could deliver as is. So they moved the goalposts - unfortunately they also disturbed their foundations, of viability and integrity. The problem wasn't the dividend, it was the value/SP destruction that made it look silly at current SP. The problem is, they no longer believe in their own model.
Hi Damien, you make interesting points.
But I don't agree the diversion of dividends is "the need to divert the dividends to acquisitions". We now have what DEC are calling the Focus 5 priorities: so buy backs and paying down debt as well as acquisitions. The reality is that the current share price does not reflect the assets and earning capability of the company. Buy backs are a way to achieve superior shareholder returns if you are buying back assets at a substantial discount. Empirically it makes sense on paper. Also the reality is that we are now in an era of high(er) interest rates than the recent past where running a "cashless" company and "maxing out the credit card" does carry risk - even when you have mitigated that through ABS structures. Psychologically, the risk and the various attacks have probably caused a need for retrenchment and a pause/reset in their thinking. The "at least 3 years" and "fixed" suggests DEC is putting a line in the sand to say $0.29/Qtr is his new line in the sand and new goal post.
I don't say that to excuse Rusty nor to defend the decision. I agree it's a move of goalposts. Nor do I say it because I'm euphoric, it is just what I see are the facts. While I would have loved to continue to receive the same level of dividends I see the benefit of the focus on shareholder returns. I see DEC as being able to achieve that but also do see how some perhaps many shareholders will walk away.
At the risk of being cynical there is also, perhaps, an element of a brave new world of US investors and damn keeping the Europeans happy.
Hi OB; you rather sidestep my point. If the promised model worked, they don't need to acquire. Reduce costs/maximise production life, pay dividends, pay down debt was the model. If that model didn't work, why should the Focus 5? Spot price hasn't helped them, but they haven't helped themselves with projecting $4+ and 30 years + production. I think long term spot/realised price will rise, and in that, agree its undervalued. But it is clear they are struggling in the interim to get to that period, clear that the hedges are not working for them, just for the lenders. As for the attacks, well not really sure what you mean by that. The only thing I see that has attacked them is their own euphoric plan. If you refer to the likes of green newsletters/legislative questions/legal actions/short attacks, well they may all have their own anti business/energy agendas, but the truth is, the truth lies in the middle, in that they are exaggerated concerns and DEC's response is denial. Take the legal claims. Yes they are shooting an easy target, shooting high, but they will get something. Because it is quite obvious that for example, EQT selling for $200m wasn't to make $200m, it was to relieve them of $1b if liability. In the same way that all DEC's ABS's are used, yes, to gain funds/leverage up, but as SPVs, most importantly as separate entities, to absolve DEC parent of any ARO liability/recourse. Yes buybacks would be accretive, but only because the mkt concern at
2 of 2; ....their plan was negative, and so punneled their SP. If their plan was valid, observers would see that, and ignore short term gyrations. And the. Urgent SP wouldn't make them appear so accretive. And in such, I would struggle to see a new acquisition that would be more accretive than BBs so why the focus on acquisitions? Just run the current assets, buyback as you go from free cashflow/profits. Why haven't they used FCF to clear the first ABS (the lowest value and lowest coupon) and thus realise full unhindered benefit from thier accretive assets? Because they don't have the cash, and at current spot, the profits.
On a more positive note, at current mkt cap, I actually think the ARO business is worth more than DEC, because if you take the number of wells, the lack of trained staff/providers, and DECs current charge to others, the numbers are far more advantageous, predictable and sustainable. The next financial chicanery, will not be to spin off assets/ABS from a point of weakness/neccisity, but to spin of NextLVL to a point of strength. That's where the value, the money is, not in shifting plans.
As an investor on the West side of the pond, I received a very clear message that US investors are now the new priority. (See presentation slide 23: "YTD US E&P’s YTD up ~3% vs. UK E&P’s down ~19%"). Clearly, management made the decision to ditch European investors for a fresh set of US investors. I think the stock will see some recovery in the US but Rusty's net worth is not going to return to $75M+-. I think that's why he is open to the idea of a "partner".
I always viewed DEC as a 2+- year investment for share price recovery and a full exit at 12%-15% yield. On a long term basis, the biggest elephant in the room is Asset Retirement Obligations on 70K wells at an average well life of 50+- years. 200 well retirements is a pittance. ARO will be a major issue within a few years.
EarlA; yes ARO is a major issue, but it's also a major oppurtunity. I think the risk is quite low, as each of the SPVs of debt/assets, are not recourse to the group, the oppurtunity high, because if DEC soun NextLVL out now, to give itself a distance from DEC, and any asset folding/abandoned wells, and then diminish (divert) profit from DEC by charging in excess of $15k a well, leaving a life support DEC and a growing NextLVL to profit from a whike nations abandoned wells. I predict spin out before year end, and it's that company I would want to hold, with long term predictable sustainable earnings, utility like, within a positive societal/governance framework.
The question is whether the original business plan is sustainable. It must mkeep eating to survive and that's why the new acquisition rather than BBs. Listened to the earnings call and was not super impressed. Must admit disappointed after more than 6 years
Yes I understand why they did it but the market clearly still doesn’t like it. Down another 8% today. I’ve not had time to read the results properly but I did notice one line saying the current dividend is only affordable for three years? Not sure why that is the case?
Gas price is unknowable really but the big issue now is to much supply. Who knows how long that will take to correct itself.
The issue with the share price is difficult to resolve as it is driven more by sentiment than things like NAV (as with most shares really). Maybe over time it will improve, I hope so as I’m significantly underwater with this one!
Yes the 3 years caught my eye - I keep thinking of all those presentation projections showing a maintained dividend though debt clearance into a debt free cash throw off situation. I thought this was a 30 year plan.
Sadly there is nothing about Hutson that is strategically credible. As you say the dividend rebasing was not necessary to that level. He’s just royally shafted the long term holders who bought and supported his so called strategic promises then . Any assessment here of the future is just wishful thinking. He’ll ultimately shaft new shareholders without any thought for their trust in this business
Bottom line is Oaktree ‘cut bait’. There are today so many better places to deploy capital. Today likely to do same as Oaktree and double down on the two positions I like best in energy right now - Permian Resources and Kimbell Royalty. Effective management in both and strong and steady performance.
Sadly the critics have been proven 100% correct. Nothing but lies , mismanagement and lurching from one crisis to another. Why anybody would entrust their money with him is beyond me . I have been an advocate of his for many years and we get this huge kick in the bollocks for it.
Hutson is a crook and utterly untrustworthy. Don’t believe a single word this crook: fraudster says. He has destroyed wealth and health with his fraudulent mismanagement.
Another insult from this grossly incompetent greedy BOD. Freebie shares for achieving fuck all . An utter conspiracy to screw shareholders and line their own pockets . Milk the LSE shareholders then shaft them with a crashed share price and dividend. List in the US to ultimately milk those poor bastards with promises of a so called new strategy to strengthen the balance sheet and grow the business . House Brokers with their snouts in the trough continue to talk the new strategy up with ludicrous SP target that will never be achieved. The shorts vultures circle with increasing positions knowing this crooked BOD are incapable of delivering anything apart from lies and will change tactics at the drop of a hat.
Must admit I have been confused by the last few days. All resource companies need to replace depleting assets but is this a case of DEC constantly having to eat just to stand still? What you think Oak?
Fluff, my perspective (for example in this article which I've revised during this week - so worth a re-read) is to consider the depletion versus investment question. If there is a more than sufficient means to replace depletion then the business can not only stand still but move forward too. Over 5 years (see https://theoakbloke.substack.com/p/dec-iding-2024-strategy) I showed how DEC's PDP had grown, production had grown, adjusted EBITDA had grown.
The reality is natural gas is at $10.50 a barrel equivalent in the US should have smashed DEC. Yet due to its hedges (which lots of people said were foolish when has was at $60boe prices was ludicrous). Its hedges that "lost" nearly a billion dollars and that the market did not understand were there for a rainy day. It rained. And DEC has pulled through and made money even on those prices. I believe for a number of reasons, gas will rise in the coming few years, and DEC will prosper as LNG exports grow and its Central reserves tap far higher prices. Meanwhile hedges cover the bulk of 2024 and 2025 so there's ample insulation to suicidal prices.
Please write a blog on i3 Energy
Hi Deep
This is from a few months back and I may well look at i3 again soon.
https://theoakbloke.substack.com/p/i3e-i3-energy
https://theoakbloke.substack.com/p/a-dec-of-top-trumps
Like I foretold, dividend needed to be cut drastically.
Beware of any investment blog author who uses terms like "FUD"
Ironic you say that when your entire coverage of DEC is based on FUD! - FUD which has been comprehensively refuted by the annual results. Rather than having the good grace and fair balance to reflect on any of that, you continue to obsessively pursue a perma-bear approach while I set out the facts, good and bad, including those bad ones you now quote. Does that make me a perma-bull? I gave you the ammunition!
Even with gas prices at unrealistically low levels where the entire industry is shutting off supply as it is simply not profitable for anyone, the revised NPV is $2.9bn while the most perma-bear scenario of ARO is $2.5bn. So an excess of $0.4bn at the most unrealistic of futures.
Your original claim that you are just a "concerned citizen of Appalachia" who'd watched an episode of Bloomberg that spoke of a couple of leaking gas wells. Given the tremendous progress made and evidenced in the annual results clearly you have a different agenda.
You completely mischaracterized my arguments. They have nothing to do with leaking wells, but rather the massive AROs the company has no intention of retiring for decades...
"Tremendous progress" is laughable. The divi cut is just a sign that reality hit management like a ton of bricks. Let's hope they divert those savings to ARO retirement in the 4 digits per annum.
"Even with gas prices at unrealistically low levels where the entire industry is shutting off supply "
You must be unfamiliar with how U.S. Shale works. Most E&P producers in the U.S. care about oil, not gas. They drill shale oil wells which produces what they care about (oil) and as a byproduct also produces something they have little care for (gas). The gas is dumped on the market as a byproduct. Hence the longstanding U.S. nat gas glut.
And DEC has chosen (poorly) to concentrate in this commodity no one cares about in the U.S....
https://ycharts.com/indicators/permian_region_total_natural_gas_production#:~:text=Permian%20Region%20Total%20Natural%20Gas%20Production%20is%20at%20a%20current,8.19%25%20from%20one%20year%20ago.
Oak Bloke is perma-bullish I see and somehow called me out in his article despite the lackluster FY results and stock price being cut in half in the past year.
"PV10 of reserves based on the 10 year strip rate is substantially down to $3.2bn vs my estimate (which was correct based on a pro rata of reserves but was not adjusting for price, i.e. at 2022 prices the same reserves would be valued at $5.9bn. "
So now you see the flaws of predicting cash flows decades out on a commodity that is significantly oversupplied in the U.S. with limited export options. Those flawed projections are used by Rusty to delay, delay, delay retirement of DEC's decrepit wells decades out. BTW using 2022 gas prices is absurd...prices were high due to Russia-Ukraine.
Tender was pulled...DEC is not run by the most competent, and they are gambling with AROs that will likely be inherited by several states & their taxpayers as a result.
" We also see a sensitivity analysis that the $1.7bn future ARO could grow to $2.5bn or could shrink to $1.6bn depending on how you discount cash flow and factor in timing and resources."
Yeah no kidding these estimates (along with PV-10) are extremely volatile based on a few variables which shows how much risk is embedded in Rusty's gamble on AROs.
The Oaktree transaction also looks like pure garbage.
Current natural gas prices are not sustainable. Hedging is still available at attractive prices starting out in 2025.
DEC is subject to the vagaries of natural gas prices and reserve replacement costs.
The time to replace reserves is when prices are low. I think without the acquisition DEC would have cut the dividend but not near the amount they chose to cut.
Natural gas prices will likely rebound by next winter and as long as DEC can hedge and increase the capacity to plug wells I think this is not a bad entry point. Currently I am underwater.
Nat gas is produced as a byproduct when shale wells are drilled in USA...hence the longstanding glut that is expected to continue. Meanwhile, the current White House has put a pause on LNG export terminal construction....
Do with that info what you will
https://ycharts.com/indicators/permian_region_total_natural_gas_production#:~:text=Permian%20Region%20Total%20Natural%20Gas%20Production%20is%20at%20a%20current,8.19%25%20from%20one%20year%20ago.