DEC still getting bashed in the market. The economics have changed re BBs IMO. As you earlier pointed out the BBs (to the extent quoted in early 23 was not possible) but more headroom should be available in '24 as the ABL's are paid down and net results of the recent spin off of none core Tanos assets. An interesting one!
Anyone holding for a decent period of time is now deeply underwater. The massive dividends don't offset the capital losses and the chances of this bouncing back any time soon to the £30 level touted by some analysts is slim.
Yes, you should hold for a few more years like any sensible investor, but you could also get caught out by a low ball offer to take DEC private. Mention of an offer around £14 based on a premium to 30 day average share price would still only get you back to 70p in old money.
Good time to buy in an make a quick profit on the other hand but that's not much consolation to long term holders.
So not 20s any more - well guessed! But still quite young for not having hair - I would agree!
Interestingly they have changed their name recently from White Point Research to Snowcap Advisers UK LTD. Clearly, a new name was needed to restart the track record...
I am sure that OB has watched the Emeth value discussion on DEC when many of today's issues were discussed at length. More importantly IMO it starts from a position of healthy sceptism. For those that have an interest, a good watch IMO (far better than others that start and end with the P&L! ) https://youtu.be/-NfRXZ-OZ3o?si=RS9kz92xDTNEgZ7I
Thanks for the analysis. Just amazing how much this share moves down on the slightest negatively viewed news/opinion piece, some very nervous private investors seem to be so ready to sell. Slightly surprised the institutional investors haven't topped up significantly if they believe in the model enough not to sell out over the last 12 months?
Notwithstanding whatever errors might be in the short report, this business is built on a lot of assumptions far out into the future and most well retirements are not to occur for 25 years from now!
Any material deviation in strip prices or its supposed low cost well retirement via Next LVL in particular would make this company unable to fulfill its massive AROs. Many of its wells are remote, deep in forests. I''m highly skeptical they'll be cheap to retire. It's likely the wells being retired now are the easy and cheap ones.
In the case it cannot retire AROs, they'll be dumped on the taxpayer. The company meanwhile is paying out massive cash in dividends which won't be accessible to taxpayers in that scenario. The rate of well retirement now is miniscule and the company should do the responsible thing and cut its dividend and massively escalate retirement of wells now, not decades from now.
"Many of its wells are remote, deep in forests." <- Is that fact or fiction?! Do you have any evidence whatsoever to this?
A portion of profits and a portion of cash flow is being paid in dividends so is "massive cash" an accurate description? I've demonstrated how DEC's assets today cover today's and tomorrow's ARO. That's before considering future profits.
It's interesting how DEC is being singled out for its ARO commitment, when there are O&G producers in harsher climates (Alaska for example), producers with deep sea offshore operations and producers in unstable developing-world countries where the future retirement/P&A costs are dramatically higher. What makes you think DEC, particularly, will "dump on the taxpayer"?
Also you should read the ARO comparatives I've made to the likes of Seplat, Energean, EQT. Have you any examples where comparable O&G producers do something different with ARO?
I'm frankly surprised by your comment to "massively escalate retirement" because you appear in your own substack to be commercially aware. Do you not understand that in any extractive business you continue to extract product and generate profit until it is no longer economic to do so, subject to safety and legal constraint factors?
70,000 wells in Appalachia--have you ever visited Appalachia ? This is not Texas. Many of these wells are very old in remote regions difficult to access with heavy equipment needed to plug wells.
By your calculations, if it cost $25k per well, diversified spent a measly $5M retiring 200 wells in 2022 while sending out over $140M in dividends to shareholders! Meanwhile they negotiated with states to reduce the number of wells they can retire. That is a big discrepancy and tells you where this company's priorities lie: sending out cash and leaving a pittance for well retirement.
This company is not even planning to retire most of its wells decades from now. By then, Rusty and the shareholders will have made off with all their dividend checks and will leave taxpayers holding the bag on the massive AROs.
DEC's assets are by and large depleting wells and many produce so little they might as well produce zero. Other O&G producers at least have large amount of yet to be drilled reserves in the ground to produce more from in the future and they have oil, not just concentrated in nat gas like DEC is which is in a multi-decade glut in the United States. DEC only has depleted and declining reserves (which means cash flows) of a commodity that is massively oversupplied in the U.S. (nat gas) whose pricing could very well stay low and go materially lower from where it is today for decades as nat gas is produced as a byproduct from shale drilling.
I can tell from your substack you are heavily biased so I am sure I will not get through to you. Of course a couple of decades from now when DEC files for BK having retired a small fraction of its wells all the shareholders/management can say "we couldn't have known" and will walk away from DEC and dump its AROs onto society having taken their massive dividends out of the company over the years. That is an extremely irresponsible way to run a business which owns the largest number of wells by far in the U.S.
1. There are 1.5 million abandoned gas and oil wells in the USA. About 22 times as many as DEC owns. My hope is you focus your energy on finding a solution for those, rather than maintaining a seemingly odd focus specifically on DEC, inventing stories about wells that are deep in the forest when you lack any facts.
2. It is not fair to expect a company that is responsibly producing natural gas with increasingly lower levels of emissions to decommission its wells ahead of the end of their lives, unless there are specific safety or environmental issues. The fact you believe this must be done without delay just demonstrates that you are caught up with the hysteria and/or hidden agenda by certain people, and certain reports (like Ted'n'Kathy wrote) who appear to want to see DEC fail. Are you connected to or actually do you represent one of these activist groups, perhaps?
3. DEC is helping State Governments (like WV in Appalachia) to sort out abadoned wells in Appalachia. You should welcome that, shouldn't you?
4. I am glad the US government is addressing emissions as the US has enormous methane emissions - while where I live in the UK and all across Europe there are virtually none detectable on a world map. It is deeply shameful that such emissions should continue and urgent action must be taken is my belief. It is to be welcomed that your country has introduced MERP and other measures even if those may be under threat depending on who wins your Presidency in 2024. For my part, I am proud that DEC has progressed its own emissions (and taken on poorly performing wells and improved those) to the point where I anticipate it will be subject to no fines in 2024 and beyond as its NGSI is below 0.20%. Fines on firms ignoring their environmental responsibilities are to be welcomed. You speak to a paltry $5m but that's just decommissioning end of life wells. That number doesn't include the full ARO accrual, the investment into NextLVL, and equipment, the investment into Capex to detect and reduce emissions, as well as the other giving DEC carries out as part of its social responsibility programme. You are being selective with the facts.
Europe largely addressed its coal (and O&G) pollution decades ago and my hope is that you focus your energy on larger sources of methane in your country. Why don't you resolve to spend your time singling out coal mining, rather than focusing on responsible firms like DEC? Coal, of course, is enormous in Appalachia - but far more enormously polluting. DEC, again, is part of the solution replacing coal energy production with natural gas.
Because I believe in sharing FACT not FICTION let me explain why you should change focus. Yale study found Coal costs US taxpayers up to $500b per annum.
Half a trillion is 300X the size of a DEC's ARO. EVERY YEAR. In 71 years time when DEC finally ends production that will have grown to 21,300X the size of DEC's ARO. Have you got your priorities right do you think?
As part of being a responsible investor, I have closely reviewed DEC's sustainability report and will hold DEC's Directors to account to ensure the company continues to make progress. The dividends investors receive are around 30% of operating profit leaving 70% to invest in the business and pay down debt. This proportion is not an unreasonable ratio in any business - and to illustrate this Exxon for example pays a similar percentage to its investors.
I am sure there were all sorts of size organisations and individuals who abandoned those 1.5m O&G wells in the USA. So your "to big to fail" theory and comparison to banking doesn't actually make any sense. You presumably are aware of the multiplier effect of banking and loans and how a domino effect can ensue. What domino effect would occur if DEC failed? How would or could it affect other O&G firms (or banks?). O&G firms do not lend to one another, so how could a "too big to fail" like the banks occur. You make no sense.
To summarise, I considered all your points and I share your concern that DEC should act responsibly and plan ahead for its future responsibilities. It is my belief that it is doing so, and it is also my belief that as a shareholder the BoD are answerable to myself and all other shareholders and if I had any concerns I would write to them to express those concerns. You should consider becoming a DEC shareholder too to enjoy those same rights.
But you appear to have a very specific agenda against DEC. It is my hope that you consider using your energy for more important work than taking the time to create fiction on the Oak Bloke's substack about DEC's wells "deep in a forest" and worrying about scenarios that haven't happened, I believe won't happen, and that in any case pale into insignificance to a broader set of concerns affecting Appalachia, the US and indeed the world.
Pointing to some random coal "healthcare costs" article is an interesting way to deflect attention from the topic on hand (Diversified Energy AROs). I'm sure some climate advocates will be able to do the same calculation with Diversified's nat gas & methane emission impact on healthcare costs too...
I also don't care about 1.5M abandoned wells right now. The topic at hand is Diversified which has accumulated a large number of depleted wells, the more than anyone by far. For one company to own # of wells equal to 5% of all abandoned wells from 150+ years of drilling tells you that's a pretty big concentration.
Diversified, if it chooses this business model, should focus on doing the right thing and allocating more cash to well retirement. A large number of its wells (10% in Pennsylvania) are not producing anything at all per Bloomberg. And every year its aging wells decline in production significantly. Unlike Diversified, Exxon has boatloads of reserves in the ground yet to be drilled which also includes oil (not just nat gas). Guyana is one example. The company will be exploring and producing for decades. Exxon comparison makes no sense.
Instead, Diversified tells states it will retire a minuscule number of wells while paying out ~$150M in annual cash dividends (which according to the company would be enough to retire 6,000 wells):
"In Appalachia the rust accumulates. State records show that more than 1 in 10 of Hutson’s wells there aren’t producing anything at all. Among them is one known as Fee A 36, almost hidden by weeds in a forest in central Pennsylvania...Even Diversified acknowledges this well can’t be resurrected. But its deal with Pennsylvania requires it to plug only 20 wells a year, and there are hundreds of wells to retire. Fee A 36 will have to wait its turn."
Source: Bloomberg ("An Empire of Dying Wells").
As an American taxpayer, I very much care whether I will end up having to pick up the tab for a company that chooses to pay out cash by the boatload to its shareholders instead of doing the prudent thing. You may not care, but I do.
Bank counterparty risk is irrelevant here. The fact is that this company failing would significantly harm states and taxpayers. It's like regulating a nuclear power plant or a big bank with insured depositors. It needs to happen.
Ignoring the Coal Mining article and the wider topic of environmental harm demonstrates that you do not actually care about discussing such harms - your interest is with DEC specifically.
You do not comment whether you are connected with a group seemingly tasked to achieve harm to DEC's reputation so it is fair to conclude you probably are.
Quoting a 3 year old TV documentary as evidence, which was produced to entertain an audience and drive Bloomberg Subscriptions - and which by their own admission was unscientific just demonstrates a level of desperation on your part. Taking the time to write here to inventing facts about "many wells deep in the forest" borders on the ridiculous.
Once again I will appeal to you to do something sensible instead. Since you are fixated on DEC why don't you reach out to DEC to ask to visit one of their wells and see for yourself? Or visit a well which is on public lands. I would be genuinely very interested to hear of any malpractice you can cover, if you can. Quoting an entertainment documentary which picked a few select wells that were part of a very new acquisition DEC made from 3 years ago actually reinforces the reality that your attention should lie with organisations who ARE poor stewards rather than with DEC itself.
Accusing people who have a different investment thesis than yours of being part of a group to harm your stock (short sellers, environmentalists etc) has never proven to be a winning investment strategy. I belong to no such group.
The coal mining is irrelevant to the topic at hand--Diversified's responsibility of its AROs. Diversified produces gas from old wells. It does not drill new gas wells so it has no impact on whether the U.S. transitions from coal to gas.
I would trust Bloomberg journalists who looked at state records of wells and concluded "1 in 10" is non-producing than an overseas investor in a stock who clearly has a vested interest in people believing something about a company.
It takes quite a hike in the forest to get to some of these wells. Will it cost less than $25k to plug them? Or you're going to dismiss the video as "2 years old" and "fake news"?
Why would I ask DEC to visit "one of" their wells? That would be a cherry picked side show. Why don't we look at how much Next LVL bills states to retire wells:
"However, when examining approximately $12.6 million in plugging agreements between Next LVL Energy—a Diversified Energy subsidiary—and the West Virginia Department of Environmental Protection funded by federal grants and covering 100 orphan wells, researchers determined that Next LVL Energy’s average plugging cost could be as high as $126,000 per well."
Also, you ask why Diversified is "singled out" for its AROs. Isn't it obvious?
The same reason a Too Big to Fail bank is singled out by regulators/Congress and given more restrictions on capital requirements (CET1/etc) than a small community bank.
DEC is now Too Big To Fail because it has so many wells and if it fails it would force taxpayers to socialize a massive amount of losses.
Hence, DEC should be answerable to Congress/regulators and forced to keep more capital on its balance sheet out of prudence just like the TBTF banks. DEC's own actions means it will not be able to hide from regulators and will only come more under scrutiny (well deserved).
Everyone obviously is entitled to their opinions and those that believe that the ARO obligations obviously will not be shareholders. However their ARO provisions are subject to a number of audits from PWC, state regulators etc. wells are plugged when they stop producing . Why would they plug wells now some of which have another 30 years of production and probably longer if NG is at $5.00?
If you believe that the dividend is sustainable for the foreseeable future as I do, then you can calculate fair value based on your expected yield. Given the current PR disaster, I would be happy with a 15% yield at $23 and then look to 12%. To my knowledge, the Investec "analyst" has not published his details so all speculation but based on his expected outcome, I think his work is based on fiction.
Thanks for the new piece OB. I'd written a comment on a previous article but unsure if you'd seen it. I was wondering what you believe is fair value for DEC currently given softness in energy stocks? Also I mentioned that EPS concensus estimates (taken from stockopedia) have been reduced quite markedly and do you think that's in relation to the recent asset sale but also the higher interest costs indicated by the Investec analyst?
I can see how you can reach fair value north of £30 a share - and also on comparative valuations to its peers. The softness in natural gas prices due to an unseasonably warm winter in the northern hemisphere and abundant supply from shale gas which I believe are temporary. Energy itself is not cheap. As I've already said, gas is 4X the price outside N.America, and that's on dramatically lower pricing than recent times. Brent is $79 - that's not cheap either. I have tried to follow Stockopedia EPS for DEC but cannot understand how they arrive at their numbers, nor where the consensus view is coming from (not Stifel, First Berlin, Cavendish, Berenberg). Are there higher interest costs on the ABS fixed rate debt, and on the remaining RCF debt which is linked to the overnight rate? Or did the analyst make a mistake? (Also they changed their mind from can't afford debt to can't afford dividend)
I cover each of these points further in my prior articles, so worth reading those again.
Thanks OB, good to know your view on fair value and seems reasonable to expect hardening of pricing at some point. If the EPS forecasts on stocko are not accurate then £30 doesn't seem too much of a stretch. Noted re the other points, I don't have a clear picture on the rates; the analyst flipping from one reason to the other doesn't seem they have a real grip on this though maybe their point shoud be they don't believe they can sustain both at these levels. I'll re-read prev articles. All the best.
I did a lot of digging this morning when the short attack from the twins hit.
This report was cited by the short sellers: Signal Climate Analytics: Methane Emissions: Disclosure vs Real Transparency (Nov 2023) and I found it online before it was removed. Lots of detail on all the bad guys of which DEC is the worst. Looking for balance, I found another article suggesting that measuring methane on-site produces variable results. So what about from hundreds of miles into space?
I think the whole short attack was a real stretch. The US market seems to agree since it recovered and closed above the hourly downtrend line for the second day in a row.
I think you make many good points in your piece; however some further digging is required. Thank you.
Very pleasing inline result this morning on the Q4 update. More to follow in due course.
DEC still getting bashed in the market. The economics have changed re BBs IMO. As you earlier pointed out the BBs (to the extent quoted in early 23 was not possible) but more headroom should be available in '24 as the ABL's are paid down and net results of the recent spin off of none core Tanos assets. An interesting one!
Anyone holding for a decent period of time is now deeply underwater. The massive dividends don't offset the capital losses and the chances of this bouncing back any time soon to the £30 level touted by some analysts is slim.
Yes, you should hold for a few more years like any sensible investor, but you could also get caught out by a low ball offer to take DEC private. Mention of an offer around £14 based on a premium to 30 day average share price would still only get you back to 70p in old money.
Good time to buy in an make a quick profit on the other hand but that's not much consolation to long term holders.
Traced them down to companies house:
https://find-and-update.company-information.service.gov.uk/company/11566952
So not 20s any more - well guessed! But still quite young for not having hair - I would agree!
Interestingly they have changed their name recently from White Point Research to Snowcap Advisers UK LTD. Clearly, a new name was needed to restart the track record...
I am sure that OB has watched the Emeth value discussion on DEC when many of today's issues were discussed at length. More importantly IMO it starts from a position of healthy sceptism. For those that have an interest, a good watch IMO (far better than others that start and end with the P&L! ) https://youtu.be/-NfRXZ-OZ3o?si=RS9kz92xDTNEgZ7I
Thanks for the analysis. Just amazing how much this share moves down on the slightest negatively viewed news/opinion piece, some very nervous private investors seem to be so ready to sell. Slightly surprised the institutional investors haven't topped up significantly if they believe in the model enough not to sell out over the last 12 months?
Jim, a good point on institutions. Albeit they haven't sold down either, so be more of a proportion allocation thing I guess.
Damn Oak, that was a banger of a rebuttal!
I'll be spreading the word. Very sharp Oak! Pure gold!
Splendid analysis Oak. Thank you 🙏
Notwithstanding whatever errors might be in the short report, this business is built on a lot of assumptions far out into the future and most well retirements are not to occur for 25 years from now!
Any material deviation in strip prices or its supposed low cost well retirement via Next LVL in particular would make this company unable to fulfill its massive AROs. Many of its wells are remote, deep in forests. I''m highly skeptical they'll be cheap to retire. It's likely the wells being retired now are the easy and cheap ones.
In the case it cannot retire AROs, they'll be dumped on the taxpayer. The company meanwhile is paying out massive cash in dividends which won't be accessible to taxpayers in that scenario. The rate of well retirement now is miniscule and the company should do the responsible thing and cut its dividend and massively escalate retirement of wells now, not decades from now.
"Many of its wells are remote, deep in forests." <- Is that fact or fiction?! Do you have any evidence whatsoever to this?
A portion of profits and a portion of cash flow is being paid in dividends so is "massive cash" an accurate description? I've demonstrated how DEC's assets today cover today's and tomorrow's ARO. That's before considering future profits.
It's interesting how DEC is being singled out for its ARO commitment, when there are O&G producers in harsher climates (Alaska for example), producers with deep sea offshore operations and producers in unstable developing-world countries where the future retirement/P&A costs are dramatically higher. What makes you think DEC, particularly, will "dump on the taxpayer"?
Also you should read the ARO comparatives I've made to the likes of Seplat, Energean, EQT. Have you any examples where comparable O&G producers do something different with ARO?
I'm frankly surprised by your comment to "massively escalate retirement" because you appear in your own substack to be commercially aware. Do you not understand that in any extractive business you continue to extract product and generate profit until it is no longer economic to do so, subject to safety and legal constraint factors?
70,000 wells in Appalachia--have you ever visited Appalachia ? This is not Texas. Many of these wells are very old in remote regions difficult to access with heavy equipment needed to plug wells.
By your calculations, if it cost $25k per well, diversified spent a measly $5M retiring 200 wells in 2022 while sending out over $140M in dividends to shareholders! Meanwhile they negotiated with states to reduce the number of wells they can retire. That is a big discrepancy and tells you where this company's priorities lie: sending out cash and leaving a pittance for well retirement.
This company is not even planning to retire most of its wells decades from now. By then, Rusty and the shareholders will have made off with all their dividend checks and will leave taxpayers holding the bag on the massive AROs.
DEC's assets are by and large depleting wells and many produce so little they might as well produce zero. Other O&G producers at least have large amount of yet to be drilled reserves in the ground to produce more from in the future and they have oil, not just concentrated in nat gas like DEC is which is in a multi-decade glut in the United States. DEC only has depleted and declining reserves (which means cash flows) of a commodity that is massively oversupplied in the U.S. (nat gas) whose pricing could very well stay low and go materially lower from where it is today for decades as nat gas is produced as a byproduct from shale drilling.
I can tell from your substack you are heavily biased so I am sure I will not get through to you. Of course a couple of decades from now when DEC files for BK having retired a small fraction of its wells all the shareholders/management can say "we couldn't have known" and will walk away from DEC and dump its AROs onto society having taken their massive dividends out of the company over the years. That is an extremely irresponsible way to run a business which owns the largest number of wells by far in the U.S.
1. There are 1.5 million abandoned gas and oil wells in the USA. About 22 times as many as DEC owns. My hope is you focus your energy on finding a solution for those, rather than maintaining a seemingly odd focus specifically on DEC, inventing stories about wells that are deep in the forest when you lack any facts.
2. It is not fair to expect a company that is responsibly producing natural gas with increasingly lower levels of emissions to decommission its wells ahead of the end of their lives, unless there are specific safety or environmental issues. The fact you believe this must be done without delay just demonstrates that you are caught up with the hysteria and/or hidden agenda by certain people, and certain reports (like Ted'n'Kathy wrote) who appear to want to see DEC fail. Are you connected to or actually do you represent one of these activist groups, perhaps?
3. DEC is helping State Governments (like WV in Appalachia) to sort out abadoned wells in Appalachia. You should welcome that, shouldn't you?
4. I am glad the US government is addressing emissions as the US has enormous methane emissions - while where I live in the UK and all across Europe there are virtually none detectable on a world map. It is deeply shameful that such emissions should continue and urgent action must be taken is my belief. It is to be welcomed that your country has introduced MERP and other measures even if those may be under threat depending on who wins your Presidency in 2024. For my part, I am proud that DEC has progressed its own emissions (and taken on poorly performing wells and improved those) to the point where I anticipate it will be subject to no fines in 2024 and beyond as its NGSI is below 0.20%. Fines on firms ignoring their environmental responsibilities are to be welcomed. You speak to a paltry $5m but that's just decommissioning end of life wells. That number doesn't include the full ARO accrual, the investment into NextLVL, and equipment, the investment into Capex to detect and reduce emissions, as well as the other giving DEC carries out as part of its social responsibility programme. You are being selective with the facts.
Europe largely addressed its coal (and O&G) pollution decades ago and my hope is that you focus your energy on larger sources of methane in your country. Why don't you resolve to spend your time singling out coal mining, rather than focusing on responsible firms like DEC? Coal, of course, is enormous in Appalachia - but far more enormously polluting. DEC, again, is part of the solution replacing coal energy production with natural gas.
Because I believe in sharing FACT not FICTION let me explain why you should change focus. Yale study found Coal costs US taxpayers up to $500b per annum.
(Source: https://e360.yale.edu/digest/coal-costs-us-half-trillion-annually-in-hidden-costs-study-says).
Half a trillion is 300X the size of a DEC's ARO. EVERY YEAR. In 71 years time when DEC finally ends production that will have grown to 21,300X the size of DEC's ARO. Have you got your priorities right do you think?
As part of being a responsible investor, I have closely reviewed DEC's sustainability report and will hold DEC's Directors to account to ensure the company continues to make progress. The dividends investors receive are around 30% of operating profit leaving 70% to invest in the business and pay down debt. This proportion is not an unreasonable ratio in any business - and to illustrate this Exxon for example pays a similar percentage to its investors.
I am sure there were all sorts of size organisations and individuals who abandoned those 1.5m O&G wells in the USA. So your "to big to fail" theory and comparison to banking doesn't actually make any sense. You presumably are aware of the multiplier effect of banking and loans and how a domino effect can ensue. What domino effect would occur if DEC failed? How would or could it affect other O&G firms (or banks?). O&G firms do not lend to one another, so how could a "too big to fail" like the banks occur. You make no sense.
To summarise, I considered all your points and I share your concern that DEC should act responsibly and plan ahead for its future responsibilities. It is my belief that it is doing so, and it is also my belief that as a shareholder the BoD are answerable to myself and all other shareholders and if I had any concerns I would write to them to express those concerns. You should consider becoming a DEC shareholder too to enjoy those same rights.
But you appear to have a very specific agenda against DEC. It is my hope that you consider using your energy for more important work than taking the time to create fiction on the Oak Bloke's substack about DEC's wells "deep in a forest" and worrying about scenarios that haven't happened, I believe won't happen, and that in any case pale into insignificance to a broader set of concerns affecting Appalachia, the US and indeed the world.
Oak
Pointing to some random coal "healthcare costs" article is an interesting way to deflect attention from the topic on hand (Diversified Energy AROs). I'm sure some climate advocates will be able to do the same calculation with Diversified's nat gas & methane emission impact on healthcare costs too...
I also don't care about 1.5M abandoned wells right now. The topic at hand is Diversified which has accumulated a large number of depleted wells, the more than anyone by far. For one company to own # of wells equal to 5% of all abandoned wells from 150+ years of drilling tells you that's a pretty big concentration.
Diversified, if it chooses this business model, should focus on doing the right thing and allocating more cash to well retirement. A large number of its wells (10% in Pennsylvania) are not producing anything at all per Bloomberg. And every year its aging wells decline in production significantly. Unlike Diversified, Exxon has boatloads of reserves in the ground yet to be drilled which also includes oil (not just nat gas). Guyana is one example. The company will be exploring and producing for decades. Exxon comparison makes no sense.
Instead, Diversified tells states it will retire a minuscule number of wells while paying out ~$150M in annual cash dividends (which according to the company would be enough to retire 6,000 wells):
"In Appalachia the rust accumulates. State records show that more than 1 in 10 of Hutson’s wells there aren’t producing anything at all. Among them is one known as Fee A 36, almost hidden by weeds in a forest in central Pennsylvania...Even Diversified acknowledges this well can’t be resurrected. But its deal with Pennsylvania requires it to plug only 20 wells a year, and there are hundreds of wells to retire. Fee A 36 will have to wait its turn."
Source: Bloomberg ("An Empire of Dying Wells").
As an American taxpayer, I very much care whether I will end up having to pick up the tab for a company that chooses to pay out cash by the boatload to its shareholders instead of doing the prudent thing. You may not care, but I do.
Bank counterparty risk is irrelevant here. The fact is that this company failing would significantly harm states and taxpayers. It's like regulating a nuclear power plant or a big bank with insured depositors. It needs to happen.
Ignoring the Coal Mining article and the wider topic of environmental harm demonstrates that you do not actually care about discussing such harms - your interest is with DEC specifically.
You do not comment whether you are connected with a group seemingly tasked to achieve harm to DEC's reputation so it is fair to conclude you probably are.
Quoting a 3 year old TV documentary as evidence, which was produced to entertain an audience and drive Bloomberg Subscriptions - and which by their own admission was unscientific just demonstrates a level of desperation on your part. Taking the time to write here to inventing facts about "many wells deep in the forest" borders on the ridiculous.
Once again I will appeal to you to do something sensible instead. Since you are fixated on DEC why don't you reach out to DEC to ask to visit one of their wells and see for yourself? Or visit a well which is on public lands. I would be genuinely very interested to hear of any malpractice you can cover, if you can. Quoting an entertainment documentary which picked a few select wells that were part of a very new acquisition DEC made from 3 years ago actually reinforces the reality that your attention should lie with organisations who ARE poor stewards rather than with DEC itself.
Accusing people who have a different investment thesis than yours of being part of a group to harm your stock (short sellers, environmentalists etc) has never proven to be a winning investment strategy. I belong to no such group.
The coal mining is irrelevant to the topic at hand--Diversified's responsibility of its AROs. Diversified produces gas from old wells. It does not drill new gas wells so it has no impact on whether the U.S. transitions from coal to gas.
I would trust Bloomberg journalists who looked at state records of wells and concluded "1 in 10" is non-producing than an overseas investor in a stock who clearly has a vested interest in people believing something about a company.
https://www.youtube.com/watch?v=6c-WCg2Y7sE&t=490s
It takes quite a hike in the forest to get to some of these wells. Will it cost less than $25k to plug them? Or you're going to dismiss the video as "2 years old" and "fake news"?
Why would I ask DEC to visit "one of" their wells? That would be a cherry picked side show. Why don't we look at how much Next LVL bills states to retire wells:
"However, when examining approximately $12.6 million in plugging agreements between Next LVL Energy—a Diversified Energy subsidiary—and the West Virginia Department of Environmental Protection funded by federal grants and covering 100 orphan wells, researchers determined that Next LVL Energy’s average plugging cost could be as high as $126,000 per well."
https://democrats-energycommerce.house.gov/sites/evo-subsites/democrats-energycommerce.house.gov/files/evo-media-document/12182023-letter-to-diversified-energy.pdf
Also, you ask why Diversified is "singled out" for its AROs. Isn't it obvious?
The same reason a Too Big to Fail bank is singled out by regulators/Congress and given more restrictions on capital requirements (CET1/etc) than a small community bank.
DEC is now Too Big To Fail because it has so many wells and if it fails it would force taxpayers to socialize a massive amount of losses.
Hence, DEC should be answerable to Congress/regulators and forced to keep more capital on its balance sheet out of prudence just like the TBTF banks. DEC's own actions means it will not be able to hide from regulators and will only come more under scrutiny (well deserved).
Everyone obviously is entitled to their opinions and those that believe that the ARO obligations obviously will not be shareholders. However their ARO provisions are subject to a number of audits from PWC, state regulators etc. wells are plugged when they stop producing . Why would they plug wells now some of which have another 30 years of production and probably longer if NG is at $5.00?
If you believe that the dividend is sustainable for the foreseeable future as I do, then you can calculate fair value based on your expected yield. Given the current PR disaster, I would be happy with a 15% yield at $23 and then look to 12%. To my knowledge, the Investec "analyst" has not published his details so all speculation but based on his expected outcome, I think his work is based on fiction.
Thanks for the new piece OB. I'd written a comment on a previous article but unsure if you'd seen it. I was wondering what you believe is fair value for DEC currently given softness in energy stocks? Also I mentioned that EPS concensus estimates (taken from stockopedia) have been reduced quite markedly and do you think that's in relation to the recent asset sale but also the higher interest costs indicated by the Investec analyst?
I can see how you can reach fair value north of £30 a share - and also on comparative valuations to its peers. The softness in natural gas prices due to an unseasonably warm winter in the northern hemisphere and abundant supply from shale gas which I believe are temporary. Energy itself is not cheap. As I've already said, gas is 4X the price outside N.America, and that's on dramatically lower pricing than recent times. Brent is $79 - that's not cheap either. I have tried to follow Stockopedia EPS for DEC but cannot understand how they arrive at their numbers, nor where the consensus view is coming from (not Stifel, First Berlin, Cavendish, Berenberg). Are there higher interest costs on the ABS fixed rate debt, and on the remaining RCF debt which is linked to the overnight rate? Or did the analyst make a mistake? (Also they changed their mind from can't afford debt to can't afford dividend)
I cover each of these points further in my prior articles, so worth reading those again.
Thanks OB, good to know your view on fair value and seems reasonable to expect hardening of pricing at some point. If the EPS forecasts on stocko are not accurate then £30 doesn't seem too much of a stretch. Noted re the other points, I don't have a clear picture on the rates; the analyst flipping from one reason to the other doesn't seem they have a real grip on this though maybe their point shoud be they don't believe they can sustain both at these levels. I'll re-read prev articles. All the best.
I did a lot of digging this morning when the short attack from the twins hit.
This report was cited by the short sellers: Signal Climate Analytics: Methane Emissions: Disclosure vs Real Transparency (Nov 2023) and I found it online before it was removed. Lots of detail on all the bad guys of which DEC is the worst. Looking for balance, I found another article suggesting that measuring methane on-site produces variable results. So what about from hundreds of miles into space?
https://drive.google.com/file/d/1DzQSELxb32Ni00k9RYV7q_KmK0TS_WRi/view?usp=drive_link
https://drive.google.com/file/d/1MbsA-zsbHXZCcwN6Wlw5TiHkmVvMQmcq/view?usp=drive_link
I think the whole short attack was a real stretch. The US market seems to agree since it recovered and closed above the hourly downtrend line for the second day in a row.
I think you make many good points in your piece; however some further digging is required. Thank you.