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totally agree trek. i'm invested in gold and gas. some in copper but this will have its down day becasue of the short term demand drop. i dont think recession will drop gas prices as this is very supply/demand and recession wont influenece a great deal at all. high gas prices unless EU buckes and gives in which unlikley. germany are working hard to work around russian gas, eventually they will find away but at high cost and inconvience. euro is now under dollar, its falling apart
I don’t see any reductions to energy prices short term. I even suspect it’s going to get much worse.
All my opinion but I think China and Russia have stumbled on a rather unique playbook in the aftermath of covid. Covid has exposed the economic and political weaknesses in the west.
China have worked out that they CAN export inflation. So imo the lockdowns are exaggerated, they have same jabs, same boosters, same percentile inoculation.
They have a controlled population. That’s why they can switch off energy to residential areas due to drought affecting the hydro plant so that Tesla can keep the USD’s coming in! A controlled population just tolerates it !
Then compare to the West where historically hyper inflation leads to civil unrest.
Contrary to what many may think the US and NATO still have the upper hand in high tech firepower.
So the way you beat a democracy is to create an enemy within. Inflation, unions, political unrest, bankrupt social services. We will then do the rest ourselves. Remember the riots in London. There will be more.
Then notice how quiet Putin has been. Getting ready to switch the lights off to add to the turmoil.
Then you throw in a few well rehearsed cyberattacks to add to the chaos and see how China masters TikTok to put the searches they want to the top to focus mass behaviour. Same as they did in Kenya to help steer the election results.
The pay disputes are just the start. Our govt have to break the inflationary pay cycle. China/Russia know we spent out on covid.
For sure the Russian and Chinese people will suffer but they are tougher than us and no one will hear them scream!
It’s all happening in plain sight. We just don’t want to acknowledge it and worse when you rewind it’s an avoidable predicament that we find ourselves in. Chasing cheap, offshoring, blindly allowing access to hi tech to autocracies. Selling arms. Tolerating currency devaluation and copyright abuse. The list goes on!
Don’t get me wrong I am not say WW3 what I am saying is no way will China and Russia allow this opportunity to pass without a good attempt at hitting our economies and way of life hard. Just to level things a bit and coz they can!
Usual caveats
Trek
MIllerJackson this is very helpful, thank you for re-posting. I have a much better understanding of the implications for DEC of continued hedging and am therefore more confident of my investment here now. K
It’s not a snide comment it’s an observation. I’m sure China and India aren’t paying market prices but they are paying more than they did in Jan / Feb.
If Putin isn’t particularly bothered about his “voting” public then sanctions aren’t going to work quickly - nil signs of regime change yet!
Am sure the average Russian standard of living is dropping but in parallel so is Europe’s.
Assume you have lots of evidence of it working. Guess Abramovic is stuck in the Maldives rather than London - that must be a drag!
With a snide comments
Jim800
Do you really think China and India are paying market price?
Do you really think sanctions will have no effect on Russia's economy.
There's always one.
Agricore - I previously considered this exact issue in February this year. As you have sold out (presumably with good profits, well done!), this may no longer be relevant to you, but thought it might be helpful to others reading your post.
My understanding is based on p13 of the October 2021 Investor Presentation, and it is as follows:
1) Let us assume that DEC has a projected production volume of 50,000 MMcf for Q3 2023 and, at FY2021 year end, have hedged 50% of it at an average price of $3.00/Mcf. (That level of hedging for a period 21 months away would be broadly in line with the hedging strategy set out on p98 of the Capital Markets Day deck.)
2) Let’s further imagine that the Henry Hub gas price at 2021 year end was $4.00. The Company’s hedges at $3.00 for that Q3 2023 would be underwater – they would owe $1/Mcf on the hedged volume. In other words, the Company would (hypothetically) owe the counterparty $25m if those Q3 2023 hedges were (for some reason) suddenly unwound.
3) Of course, $25m in the red is pretty small beer, but $25m in the red for 10-12 future quarters can stack up pretty quickly. It is this ‘paper loss’ of multiple future quarters that is reflected in the accounts – see the 2021 HY accounts for a good example of this.
4) However, when we actually get around to Q3 2023, the Company will have that 50,000 MMcf of gas, and if it is able to sell it at $4.00 then it will have $200m of revenue from gas sales in the quarter. At that stage, DEC would have an actual cash loss of $25m on the hedging, but have made $50m more on gas sales (than if the price was $3.00).
Plainly, higher gas prices are a Good Thing for DEC because DEC produces and sells gas and never hedges 100% of its production. However, the 'mark to market' accounting rules produce some strange results due to the obligation to recognise paper losses from underwater hedge contracts, while not reflecting the cash gains that DEC would make if the gas price stays at the high level.
So, the answers to your questions are:
1) If gas prices never go down, then DEC simply sell the gas they have produced at very high prices, which is a Good Thing. The non-cash hedging loss (for each relevant quarter) will at that point become a cash loss - but that cash loss will be offset by very high revenue from sales of gas.
2) The hedging loss can be greater than operational profit because the hedging stretches a few years into the future (albeit not in respect of 100% of production), while the operational profit is a figure that refers to only six months' worth of DEC's activity (or 12 months for annual numbers). If you look back in the accounts to when the gas price fell significantly, then you will no doubt see hedging gains which exceeded the operational profit for the period being reported on.
It’s going to be a very tight winter and if it’s cold terrible. There’s simulations in all gov to work out how to play this through, shut downs in businesses, areas that matter less to have sufficient and prices through the roof. I don’t think they’ll price cap more gas business, might do windfall taxes again but a recession might bring prices down a bit next year. Really challenging for people, uk it’s £5k to £6 on annual energy, huge
The West bans Russian oil imports, price shoots up and Russia now gets more money for less volume from China and India. EU has Russian gas as a final bargaining chip until Russia decides to cut it off!
These sanctions and embargoes not exactly going to plan. Is there a Plan B?
Russia is completely shutting down supplies to the EU for MAINTAINANCE work for 3 days at the end of the month.I wonder how long 3 days stretches out to be?Answers on a post card
160 my next target
And the US now supplies more gas to Europe than Russia did at its peak!
3:30 in….
https://youtu.be/5IPzww2IHzM
Usual caveats
Trek
This may help. It’s not a tangible loss…
“ As the gain or losses on the speculative transactions are to be recorded immediately, it may result in an initial loss at the balance sheet date and subsequent gain at the end of the contract period or vice versa, which creates complexity in the accounts.”
Definitely succeeded in achieving ‘complexity’
https://www.educba.com/accounting-for-derivatives/
Usual caveats
Trek
Hi SD/Trek
Likewise I wish you well too. For me this was very much about an income stock where there was limited downside due to hedging. The nagging discomfort which culminated in selling was the two questions
1/ What if gas prices don't go down? (People are just assuming it will)
2/ Why was the hedging loss greater than operational profit? (Why wasn't it a component of reduced profit?)
For the hedging loss to exceed profit there must be 1 of 2 things happening. Either a leveraged bet or that a greater future duration is being bet this year compared to last (i.e. DEC are better further ahead than before). I'm not sure which or perhaps there's a different reason I am not thinking of. Anyway what troubled me was DEC's unwillingness to explain the hedging. It just seems the most obvious question I'd be expecting to be asked if these were my results. I'm an accountant but I can't fathom the answer from their last accounts. Anyway, I recognise DEC continues to do well and is in a sweet spot.
GLA
I bought more yesterday. The only thing stopping this share short term is a halt between Russia and urkraine. At which point however that large amounts of gas freely flow still is slim. We are going to see higher gas prices in US and a listing
One director sold stock net from options but still hold over 2m and two more directors bought on open market at 129 and 135!
Pretty good endorsement imo.
Usual caveats
Trek
Wow this share is moving. Tempted to sell if it wasn't for the hedging which gives one extra year of high profits.
DEC is listed on the is listed in the US on the over the counter market. Possibly why there is withholding tax.
Ace, I think you miss the point. Nobody really knows where oil and gas prices are going. Historically it's always been a fickle market. High prices have historically resulted in supply surges (new exploration, swing producers etc) and eventually price falls as supply starts to outstrip demand. I think one of the primary problems at the moment is a lack infrastructure and transport (the US has the capability to produce a lot more LNG but lacks the refineries and shipping to meet the current shortfall in Europe). Those potential c$2bn of profits may never crystallise and there are many factors that could result in oil and gas price collapse. It seems unlikely at the moment, at least in the short/medium term, but plenty of traders have been caught out by unexpected swings in the past. Rusty is not in the casino business. Hedging secures DEC's future. Playing the lottery doesn't.
"It is a bit strange the biggest gas producer in the US isn’t listed in the US too, surely this will bring quite a few new people on board ?"
DEC produces pro-forma 796 MMcfepd. That would put them around 18th largest in US behind the likes of EQT, ExxonMobil, Cabot Oil & Gas, Antero Resources, BP, Chesapeake Energy, Southwestern Energy, etc etc etc
Ref https://www.ngsa.org/
It’s all v strange here I thought 107 was cheap fair enough but it’s rerating much quicker than I expected.
Looks like the market liked the results. Interesting that PHNX another company I follow (NOT a tip it’s looking toppy now) also has had a good run partly on the basis that it manages inflationary pressures. I just wonder if the market is polarising towards these ‘lower risk’ higher yield stocks.
Well it’s a bout time imo! You don’t have to chase penny stocks to make a good return. That usually has the opposite effect!
With the ATH being broken this strongly and the vols we are seeing + the impending US listing 130-150 is looking more like our new trading range atm.
Usual caveats
Trek
It is a bit strange the biggest gas producer in the US isn’t listed in the US too, surely this will bring quite a few new people on board ?
Never goes up in a strait line but like you said Tom seems dec hold all the right cards atm.
Looks like the sp is going to rerate imo and with a big demand for gas coming this winter all looking good for DEC after all it is the largest gas co in the USA I believe
Agricore
As I see it sooner rather than later it will reverse. Gas and oil prices will fall but the hedges won't be paper wins. Which is what happened during COVID the hedges meant the company could pay dividends.