"Your 21.75% (using current yield) dividend for the next 50 years is secure. That will cost $2.8bn."
I don't think this is correct. As far as I can see, the 50-year-scenario chart doesn't clearly define what it means by "Base Dividends" of $2.8bn, but that figure can't be the total cost of paying the current dividend over 50 years, as that would be very roughly 50 years x 17c x 1bn shares = $8.5bn. (I'm assuming that the numbers in the chart are not discounted to give a NPV, since there's no mention of a discount rate.)
I've never thought that the current dividend was intended to be paid for the full 50 years. That didn't stop me investing.
I would also point out that the chart's figures assume a gas price of $4.66 over the first 10 years (a price which is not currently being achieved), followed by a price of $4.91 thereafter. (And I don't think we can avoid this issue by appealing to general inflation to increase gas prices. If we did that, we should also correspondingly inflate future capping costs, and discount future dividends.)
All in all I don't think the situation is quite as rosy as you suggest.
Hi Richard, as you possibly know this chart and the assumptions therein are taken straight from DEC's presentation and not one that I've produced, as such. You raise valid points about the assumptions DEC make and this requires further scrutiny. Have you ever raised these points with DEC? This chart has been used in presentations for several years. I'd say it's not a new chart.
Hi. Yes, I'm aware that the chart is from DEC. I was already familiar with it. And no, I haven't raised it with DEC. But since my previous comment I've noticed a footnote in the chart which makes things clearer:
'Dividends held flat at 17c per share for 5 years and then 40% of Free Cash Flows, plus all residual cash flows after debt repayment ("Variable Dividend")'
This is much clearer than the similar sentence under 'Major Assumptions' near the top of the chart. It now appears that 'Base Dividend' means 17c per share for 5 years and then 40% of FCF. Since the chart clearly shows FCF declining over time, this must mean that the base dividend is projected to decline over time, and not to remain constant at 17c.
ARO from DEC assumes a well output decline rate of 4% per year. This is not correct as the last well output decline rate was 10% (3Q 2023 Trading Statement).
So given the output is waaay less and the well lifetime is much less, DEC is telling porkies.
Reduction of flow, which then needs workover or shut in, and actual depletion of resources are not the same thing. Once you think in those terms then the ARO calculation suddenly makes sense. See:
The average age of DECs wells is 20 years, so 30 years not 50+ baseline would be more appropriate. That life span is a major assumption. The ABS debt- this is being amortised at a greater rate than DECs own 2031 fulfilment projection, and far greater than issuance requirement. Aside from the fact that DEC's November US update states ALL 5 ABS's credit rating maintained, (they seem to have lost their 6th ABS - have they paid one off?), they seem to be over amortising on a straight line basis, rather than prioritising (reducing) the highest cost (VI) over the lowest cost (I). This seems a missed opportunity. The pedestrian rate of well work overs with 2 months payback also seem a missed opportunity. (Those concerned with DECs ABS debt should Google Fitch's ratings on DEC's ABSs - the detail/conditions are extremely informative not least for the hedging conditions/life of assets secured against).
Fantastic! Thank you for the follow-up. I have done a lot of DD on DEC as well as research on the Asset Retirement Obligations but my work on ARO pales in comparison to what you have written here. The 20:1 reverse split coupled with the US listing on December 11 should eventually help the share price but I'm a happy camper collecting the fat dividend while I wait.
Hi. Thanks for your posts about DEC.
You wrote:
"Your 21.75% (using current yield) dividend for the next 50 years is secure. That will cost $2.8bn."
I don't think this is correct. As far as I can see, the 50-year-scenario chart doesn't clearly define what it means by "Base Dividends" of $2.8bn, but that figure can't be the total cost of paying the current dividend over 50 years, as that would be very roughly 50 years x 17c x 1bn shares = $8.5bn. (I'm assuming that the numbers in the chart are not discounted to give a NPV, since there's no mention of a discount rate.)
I've never thought that the current dividend was intended to be paid for the full 50 years. That didn't stop me investing.
I would also point out that the chart's figures assume a gas price of $4.66 over the first 10 years (a price which is not currently being achieved), followed by a price of $4.91 thereafter. (And I don't think we can avoid this issue by appealing to general inflation to increase gas prices. If we did that, we should also correspondingly inflate future capping costs, and discount future dividends.)
All in all I don't think the situation is quite as rosy as you suggest.
Hi Richard, as you possibly know this chart and the assumptions therein are taken straight from DEC's presentation and not one that I've produced, as such. You raise valid points about the assumptions DEC make and this requires further scrutiny. Have you ever raised these points with DEC? This chart has been used in presentations for several years. I'd say it's not a new chart.
Hi. Yes, I'm aware that the chart is from DEC. I was already familiar with it. And no, I haven't raised it with DEC. But since my previous comment I've noticed a footnote in the chart which makes things clearer:
'Dividends held flat at 17c per share for 5 years and then 40% of Free Cash Flows, plus all residual cash flows after debt repayment ("Variable Dividend")'
This is much clearer than the similar sentence under 'Major Assumptions' near the top of the chart. It now appears that 'Base Dividend' means 17c per share for 5 years and then 40% of FCF. Since the chart clearly shows FCF declining over time, this must mean that the base dividend is projected to decline over time, and not to remain constant at 17c.
The total Future Value (FV) of the $1.6B plugging costs is $8.33B using a 3.24% discount rate and 50 year period.
The total FV of the current ARO ($448.5M) plus 50 yearly accretions of $27.5M is $5.55B using the same discount rate.
Which appears to leave a $2.78B discrepancy between the two (not enough to cover liabilities).
To get the two to close would require DEC adding $23M more per annum in accretions to ARO.
Looks like I didn't account for the plugging costs being incurred throughout the 50 year period - https://theoakbloke.substack.com/p/dec-ent-future/comment/47771119
I now think DEC are running a surplus on ARO! Easy to see how the numbers are hard to get your head around.
ARO from DEC assumes a well output decline rate of 4% per year. This is not correct as the last well output decline rate was 10% (3Q 2023 Trading Statement).
So given the output is waaay less and the well lifetime is much less, DEC is telling porkies.
Reduction of flow, which then needs workover or shut in, and actual depletion of resources are not the same thing. Once you think in those terms then the ARO calculation suddenly makes sense. See:
https://theoakbloke.substack.com/i/138131419/depletion-can-dec-produce
Detailed as ever. Some thoughts.
The average age of DECs wells is 20 years, so 30 years not 50+ baseline would be more appropriate. That life span is a major assumption. The ABS debt- this is being amortised at a greater rate than DECs own 2031 fulfilment projection, and far greater than issuance requirement. Aside from the fact that DEC's November US update states ALL 5 ABS's credit rating maintained, (they seem to have lost their 6th ABS - have they paid one off?), they seem to be over amortising on a straight line basis, rather than prioritising (reducing) the highest cost (VI) over the lowest cost (I). This seems a missed opportunity. The pedestrian rate of well work overs with 2 months payback also seem a missed opportunity. (Those concerned with DECs ABS debt should Google Fitch's ratings on DEC's ABSs - the detail/conditions are extremely informative not least for the hedging conditions/life of assets secured against).
Fantastic! Thank you for the follow-up. I have done a lot of DD on DEC as well as research on the Asset Retirement Obligations but my work on ARO pales in comparison to what you have written here. The 20:1 reverse split coupled with the US listing on December 11 should eventually help the share price but I'm a happy camper collecting the fat dividend while I wait.