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Hi Agricore,
At least you have exited at an ATH. That in itself is an achievement!
If your expectation here was for significant capital gain I don’t think that this is that kind of stock.
I am here for income so not too bothered with intangible losses. I focus on the FCF, declines and divi cover. I also like the hedge as I want the yield.
So I think it’s fair to say that two people can look at the same stock and want something different and tolerate or not differing methodologies.
Anyways I appreciate your convictions and reasoning. Whether the conclusion is buy or sell as if we all had the same view there wouldn’t be a market!
Good luck with you next ventures. ATB.
Usual caveats
Trek
Hi all, thanks for your explanations and I contemplated the answers. Ultimately, I felt that I still didn't feel comfortable with the extent of the losses. I do get the hedging is profit foregone, but for the foregone profits to exceed the profits quite literally doesn't add up. The liability feels opaque and that equals risk.
So I decided to sell out of here for now.
AceofClubs
"Thank you for the advice on research, hedging, loan protection, the price of oil, what to bother about, moving on, signing off, et. al."
No problem glad to help.
Always going to be diametric views on hedging I guess when Henry Hub is on a roll.
I do think they will increase upside risk exposure as they were pretty clear during the presentation that macro for gas was favourable over the next few years.
The have more upside exposure +1 year out and could I guess not renew contracts as they expire.
But for now SP has closed solidly at an ATH! 131 resistance has been broken!
Let’s see a new trading range emerge!
Been a cracking week on the markets especially for my oil/gas plays!
Enjoy the sunshine
Usual caveats
Trek
Hello SD235,
Thank you for the advice on research, hedging, loan protection, the price of oil, what to bother about, moving on, signing off, et. al.
I feel sorry for you that you cannot read a view or opinion that deviates from your own without resorting to personal abuse.
AceofClubs
PS no need to sign off with AceofClubs your name is at top of the page.
". If you need protection when borrowing money the time to negotiate that protection is in the initial loan terms!!!"
They are not negotiating protection and they won't... obviously get protection (whatever that is) unless they hedge.
It's not that long when the price of oil went negative.
When you bought the shares you must have known about the hedging?
Hopefully you are capable of doing your research? If so, I assume you couldn't be bothered to do so?
Unhappy with DECs long term policy of hedging?
Move on.
"I don’t get why there is an issue from some over the hedging."
TheTrotsky encapsulates the issue accurately and concisely:
"It's the potential opportunity foregone (c$2bn) should the current market prices remain constant (essentially the additional profit that could have been booked if DEC hadn't hedged). It sounds bad but......."
In my opinion there is no but: for a company with a market cap of ~$1.3bn to forego a potential opportunity of ~$2bn not only sounds bad - it is bad. Rusty should leave the energy trading to the real professionals who live and die on getting it right. https://www.mercuria.com/trading/natural-gas
The financial derivatives appear equally confused and a mess. Bankers do not sell you derivatives for your benefit - it's for theirs and really are best avoided. If you need protection when borrowing money the time to negotiate that protection is in the initial loan terms!!!
I hold DEC and try not to cry myself to sleep.
AceofClubs
The lower interest rates may cover the cost of hedging.
There will come time when the hedge is above the price of oil/gas.
They also get a better interest rate on there debt because they have hedged that may note may cover the of hedging.
Very true Trek.
Just revisited the chart here. It is extremely bullish with 17 bullish events v 4 bearish.
Support is 118.16 for a 2-6 week view and resistance is 131.
We are well above the 20/50/200 dam’s obviously but interestingly we have a triple MA crossover of 4, 9 and 18 day averages which indicate a pop higher.
However, this share has historically traded in a range 100-125 for arguments sake. What I therefore see happening is it establishing a new higher range possible 120-140 or optimistically 130-150 rather than the huge breakout that the chart seems to be predicting, as that’s what charts do!
Still at 131 that’s an extra 10.4% back pa in divi’s paid quarterly, not bad eh!
Usual caveats
Trek
I don’t get why there is an issue from some over the hedging. It’s smart and one of the reasons I invested as it underpins the divi along with the fixed debt terms running parallel with asset amortisation.
The current hedging, 12months is 70-90% but for 12-24 months out it’s 50-70% and thereafter 30-50% which is well explained on slide 25 of the August presentation….
https://d1io3yog0oux5.cloudfront.net/_d9ab8b80310b7340103f6a137e004aa1/dgoc/db/557/4588/pdf/DEC_Corporate_Presentation_August_2022.pdf
If you look at the May 22 ppt
https://d1io3yog0oux5.cloudfront.net/_ce1aee62713d8ebaa7fcdcd0196384bc/dgoc/db/557/4579/pdf/DEC_Investor_Presentation_May_2022.pdf
Or the 2021 finals you can see the costs of the hedging.
https://d1io3yog0oux5.cloudfront.net/_df03494d82123e89b1e7438e084616bb/dgoc/db/562/4578/pdf/DEC_2021_FINAL_RESULTS_PRESENTATION.pdf
Both now removed. Must have been ‘swapped!’ Lol or just housekeeping but I can’t be arsed to go through the accounts
I am comfortable here unless we get Director selling of course which would be in complete opposition to current sentiment as they are getting huge cash divi’s. I wouldn’t necessarily believe any associated reasons for selling I would likely just sell as well!
But that’s not an issue we have. The only issues I have are the swaps slip up and the radio silence on the floods. Both of course may be complete non events.
But then if you can’t criticise your investments then the chance is you haven’t really researched them!
Usual caveats
Trek
The derivative financial instrument liabilities are not "real" liabilities. DEC has entered into hedging contracts to sell its oil and gas at given prices in the future and the derivative financial instrument liabilities represent the difference between the negotiated hedging prices and the current market prices for oil and gas. It's the potential opportunity foregone (c$2bn) should the current market prices remain constant (essentially the additional profit that could have been booked if DEC hadn't hedged). It sounds bad but, from the perspective of a company like DEC, certain, guaranteed cash flows avoid the potential for boom and bust and if the current market prices start to fall then it's feasible that the current liabilities could actually become assets (if the market prices for oil and gas fall below the hedged prices). Hedging removes risk from the business and leaves price speculation to the speculators (the speculators are in the money now but if there is a sharp fall in current oil and gas prices they could just as easily be out of the money).
Rusty's problem is that as the derivative financial instrument liability rises there will be increased pressure from certain quarters for DEC to significantly reduce the level of its future hedging (to bag more of that potential profit for DEC) but, as an experienced oilman, he knows that path would not be prudent and therefore it's not a topic that he cares to broach in public debate (it's not a debate he's going to win with people who are only focussed on the near term); instead, it's time for him to grit his teeth, ignore the naysayers and keep a steady ship.
Trek, you said:
>>> Not that I am a body language expert but at around 22:30 when Eric mentioned ‘swaps’ I don’t think Rusty was comfortable!
I asked a question exactly about this and it was also ignored. I've gone through the accounts trying to understand the hedging which is a mix of swaps, puts and calls and how they breezily explain it as a way to "strengthen the balance sheet".
But the point is that it's still a liability so it's "non-cash" until it needs to be settled one day...... WITH CASH!!!!
My current understanding is that they are are incurring future years hedging liability in 2022 but relate to 2023-2032. See note 13 in the accounts. They have to book it to the P&L as a loss (hence the $1.2bn 2022 H1 loss that you see). But on a realised derivatives (i.e. cash) basis there's a lower $468m charge leading to a different profit calculation where (along with ignoring other things like depreciation) they arrive at a $223m "adjusted" profit.
You do have to question how realistic it is to ignore the hedging in looking at the profit. What I think it boils down to is one of 2 futures:
1/ Gas (and oil) prices drop dramatically. The hedging reverses and the accumulated circa $1.6bn loss is reduced or even reversed to a net profit. The problem disappears. Agricore was worried about nothing.
2/ Gas (and oil) prices keep going higher, or at least remain as high as they are now. The hedging will keep accumulating and the realised "cash" element grows too. Eventually this cripples DEC, hedging is dropped. The share price plummets.
My question asked surely the hedging creates a problem and introduces a risk and much as avoids one. It is damaging and destabilising the balance sheet, and steps should be taken to reduce the hedging in an effort to bring the liability down to manageable levels. (and take advantage of growing prices).
Here’s the Q2 results ppt.
7 through to 8 mins, slide 8 and 9 about increasing the divi during the low HC prices and covid!
Rusty is right on his game! It’s an excellent presentation!
I liked the peer comparisons and peered into the bottom LH corner of the slides for references! Investors will know it’s a numbers selection and not apples and apples but nonetheless the gaps are very impressive!
I enjoyed Eric’s slot he certainly knew his numbers! He had a defo win about using the experienced O&G ‘old school’ engineers and asking them for their ideas to improve the business. That included plugging and well efficiency which later transcribed to tangible prod improvements!
I like that as it really shares the ownership of results! And have always employed such empowerment in a past life. It’s people that deliver the difference at the end of the day!
Anyways must say though, not that I am a body language expert but at around 22:30 when Eric mentioned ‘swaps’ I don’t think Rusty was comfortable! Well it was a different shuffle to the one at 27:30 mins in! Lol!
There’s always a moment and of course I most likely read it completely wrong!!
Still what a great presentation and add that to the director buying today albeit ‘small’ but at SP ath’s that’s a pretty good endorsement!
However, and I always call it as I see it even though I still have a significant position here.
I put forward a question asking if there was any operational impact from the severe floods in the Appalachian region and asked what the company was doing to help the community. Especially given the loss of life and the skills and equipment DEC have!
My question was not answered and nor was my earlier email now nearly two weeks ago on the same subject!!!
DEC quoted weather events in this presentation as a valid excuse for a dip in past performance!
Now like it or not the ‘silky guys’ have chosen to ignore the question and ride the wave!!
So investors be aware myself included! They are NOT imo trustworthy!!!!
They have deliberately chosen to avoid any discussion about one of the most significant weather events in the Appalachian region that has destroyed roads, power supplies and cost lives! Not even a comment to say only a few of our wells were effected or we have abandoned plugging whilst we help the community!!
I will be emailing the black hole IR team again!
https://www.investormeetcompany.com/investor/meeting/investor-presentation-147
Usual caveats
Trek