Member Info for AceofClubs

Hello Trotsky,
My figure of $1,737,889 is the “Net Cash In investing activities”, 2022 - $386,457 2021 - $627,712, 2020 - $256,863, 2019 - $466,887.
My interest was piqued by the SeekingAlpha article indicating companies with high and continuing capital investment requirements find it difficult/impossible to maintain high dividend pay-outs. I think DEC falls into the high and continuing category.
I am trying to avoid being dazzled by the current 15% equity yield and look behind it to try to work out how sustainable is the DEC business model? It was never the 15%, 50 year annuity, that DEC attempted to portray – but then my time horizon does not extend 50 years.
Yes, the acquisition of additional producing assets enabled net cash from operations to grow 39% between 2019 & 2022 – but the debt pile grew 131%.
Evaluating DEC is not easy but has to be done against a background of very high but volatile NG prices.
My disquiet is that the returns to equity holders are relatively small – the 15% yield is a function of the current share price. $143,455 was paid out to equity holders in 2022, bondholders cost $222,486 in debt issuance costs, interest paid and hedge modifications associated with bondholder requirements.
Where does DEC go from here? I cannot see it has the capacity to raise more equity or debt to purchase yet more producing assets. Unable to carry on running will the treadmill it is on carry it backwards?
High risk sometimes brings high rewards – I don’t need to chase this further. Others of a different opinion are able to fill their boots.
AceOfClubs
All figures are $000’s.

Hello Jim800,
I would like to think that you are fully aware that the numbers I have quoted are as laid out in the DEC acccounts and are denominated in $000's. I apologise that I have clearly assumed too much.
AceofClubs

I have previously described DEC as being in the category of businesses that have to run hard for returns to shareholders to stand still. Those returns have turned negative lately.
This article https://seekingalpha.com/article/4594985-what-i-wish-i-knew-before-becoming-dividend-investor has made me look again at DEC, although I am a total return not dividend investor.
The article prompted my interest in DEC's CapEx expenditure, in this case not the cost of well drilling, but the cost of acquiring pre-drilled wells - my eyes have been opened wider.
In the four financial years 2019-2022 DEC generated $1,228,812 net cash from operations but spent $1,737,919 on asset acquisitions (CapEx). Borrowings (current & non-current), increased from $622,501 to $1,440,329.
I have 1.8% of my total investments in DEC at an average £1.06.
I am not buying any more at 90p, not by nature a trader.
AceofClubs

Looks only fair value at 80p. 20% discount to NAV is reasonable in the current macro climate. Not going back to £1.50 anytime soon. I regard this as one of the better managed property companies with some growth prospects and scope to increase the dividend. It has some very low interest rate loans locked in but they won't last forever. I have held for 10+ years.
AceofClubs

Hello Nick1234,
You write like you have some current inside knowledge of Aviva's general insurance operations.
It is easy to grow organically in an insurance market; you just have to be the cheapest in the marketplace and brokers will flock to you. Unfortunately being the cheapest in the marketplace is ther most difficult place to write profitable business.
Being "very aggressive" sounds like being very cheap - I do hope they know what they are doing.
AceofClubs

If you want to read only "positive" and "happy clappy" comments and opinions on this board (and most others on LSE) there are plenty of cheerleaders to choose from; nobody needs another one.
I prefer to start with the facts and appraise from there.
Recent facts around Burford are in rather short supply - where are the 2022 accounts? Red flag?
Burford is on its fourth CFO since August 2019. When long time associate of Bogart (Jim Kilman) was appointed to replace Mrs Bogart it was pointed out: "given the complexity of Burford's accounting, the CFO should be an accountant who has demonstrated a strong commitment to ethics - investment bankers don't often qualify on that front".
Ken Brause, appointed to replace Kilman in April 2021 came from OnDeck, a "Wonga" type operation aimed at small businesses, although I don't know if they had sliders and puppets.
On the Ken Brause watch OnDeck crashed from a $1.9B valuation to a $90m rescue. Sounds familiar? Who would have seriously thought he was a suitable candidate for a listed company with a questionable accounting past?
With the current unresolved accounting issues I cannot see Jordan Licht (appointed September 2022) lasting beyond the end of 2023.
When available, the 2022 accounts should make interesting if lengthy reading.
Why bother with accounts you may well ask when judgements are far more exciting? All of those fantastic IRR's and ROIC's are regularly quoted and yet Burford consistently returns a negative cash flow at the operating level. It has an insatiable appetite for debt and equity.
I do not expect 2022 to be any different.
Plenty of positive and laudatory posts on this board if that is your bag.
AceofClubs (and Spades & Plums apparently)
P.S. comments re Lionel Hutz were "tongue-in-cheek".

Thank you for confirmation by your intemperate comments that the answer is a big fat 0. Sorry to burst your bubble JammyC; Lionel Lutz is a fictional character.
On a more serious note; the time for measuring any level of success is when any money is paid and received; everything else is wishing and hoping. Would the US want to see Argentina bullied into paying up? Possibly not with China aching to be Argentina's new best friend. Burford is a high risk punt - it may pay off to be invested, but only for true believers.
AceofClubs

https://www.reuters.com/world/americas/imfs-lower-bar-argentina-already-looks-too-high-2023-04-05/
Remind us all again please - just how many billions of dollars has Judge Preska's judgement added to Burford's bank account?
AceofClubs

The description "high risk" is my opinion of the status of DEC equity. I derive that opinion from the available evidence the most obvious of which is the current yield, the result of the current dividend level and the market derived share price. The market does not allow 15% yields to be available for very long unless, in its opinion, associated with high risk, or elevated peril if you prefer.
Shell is my low risk holding in the O&G sector - it yields just over 4%. If DEC were yielding 4% share price would be ~ 350p.
AceofClubs

Gavster-NBC - 28 March, posed the question we would all like the answer to:
"IMO This shows the market is reflecting on the biggest question "What happens in 2024 ?"
The current market reflection is that DEC equity is a high risk investment and is demanding a 15% dividend; bondholders concur.
Looking back to the last ABS bond issue of 31 October 2022 the bondholders demanded a notional coupon of 7.5%, upfront fees and discounts of 8.8% and long term gas and oil hedging swaps. Those upfront fees and discounts make the true annual cost to DEC 8.16%, when the Fed Rate was 3.25%. Forget the Fitch BBB+ investment grade rating, that's closing in on junk bond territory.
2023 income looks secured by hedges. DEC have been rather coy about the value of their 2024 hedges although it is only a few weeks ago $4+ was readily available.
I remain invested, but DEC sits in the high risk pile.
AceofClubs

From the Burford Capital press release dated 6 September 2022:
"As Burford looks to complete its transition to a full US SEC-registered issuer and position itself more prominently with US investors, Mr Licht brings deep US capital markets and investor experience,’ the company said. Chief Executive Officer Christopher Bogart said: ‘Jordan brings an impressive combination of deep finance, market and strategic skills to continue elevating Burford's finance function, and we are excited to have him join the senior management team as Ken's successor.’
Clearly too much excitement not enough depth.
AceofClubs

180p is a p/e of 7.2 - IGG available at 6. No reason to get involved above 150p.
AceofClubs

https://www.reuters.com/markets/fitch-downgrades-argentinas-sovereign-credit-rating-c-2023-03-24/
Sysco, a somnolent Judge Preska, delayed accounts, these would appear to be the least of Burford's problems.
AceofClubs

Hello asp1,
My understanding of why DEC hedge their output and their business model is basically the same as yours. However, does the business model demand the extent of commodity hedging that DEC indulges in? I think not. I can believe that management have painted themselves into a corner with their bondholders and agreed to undertakings that are very, very favourable to bondholders. These terms have the potential to do serious damage to equity holders as is evidenced by the 2021 and 2022 accounts.
Your example on the commodity hedging is incorrect. There is no loss booked in the P&L if the spot price is above the hedged price. The loss is purely an "opprtunity cost", painful as it is to this investor on the scale suffered by DEC. I cannot believe that DEC set out with any intention to incur these "opportunity costs" but they have been forced into them by their obligations to bondholders?
You state that this business model requires a high degree of financial capability. Having built up such enormous realised and potential financial derivative losses DEC have demonstrated financial ineptitude.
The realised and potential losses in the commodity hedges are probably the result of onerous obligations to bondholders. The potential financial derivative losses worry me far more, are not intentional, and are even larger than the company borrowings. DEC ended 2022 with a total deficit on its balance sheet.
DEC has surfed the wave of a commodity boom in natural gas; as all surfers know - waves peter out.
AceofClubs

"AoC, you make this point repeatedly. "
“Those who cannot remember the past are condemned to repeat it."
DEC pays such a high % dividend because the market demands an extravagent premium to hold its equity. That is not an expression of market confidence in future financial or managerial performance. Those with the confidence to buy have enjoyed great opportunity and will be pleased: just be aware of what you are buying into.
The dividends paid in 2022 is on P131 of the Annual Report - any error is that of the company.
Market capitalisation will vary daily with the share price: I chose a round number purely for comparison purposes.
AceofClubs

The DEC Annual Report is 191 pages of words and numbers and Rusty has subsequently added quite a few more. I find the numbers more informative than the words so I will share a few that caught my attention. All numbers are (000’s).
Context.
In 2022 shareholders were paid gross $143,455 in dividends. It is dividends that holders seem to focus on as a sign of great success, so always have this number in mind when considering the others.
Comprehensive Income Statement (Page 128).
Losses at DEC grew from $325,509 to $625,410 in 2022. Revenue grew by 90.5%., losses by 92.1%. Shareholders ended 2022 with a much larger business declaring much larger losses. Why so?
Commodity Price Hedging (Page 48).
In 2021 commodity price hedging cost DEC $320,656 in opportunity cost revenue that was generated for the benefit of the hedging counter-parties. In 2022 DEC expanded this opportunity cost to $895,802 (do compare that to the dividends paid!) These numbers are not some theoretical book-keeping entry; they represent the cash that ended up in somebody else’s pocket in 2021 and 2022.
Financial Instrument Hedging
The Comprehensive Income Statement informs us that the potential cost to DEC of their financial instrument hedging increased by $1,758,693 in 2022 – in the context of a company with a market capitalisation of $1,100,000. Financial derivatives now sit in the Balance Sheet (Page 129) as a potential $1,471,641 liability of which $293,840 is current.
All theoretical you may think. The Cash Flows Statement (Page 131) tells us otherwise.
In 2022 DEC paid, in cash, $133,573 to modify commodity hedges and $105,316 to modify financial hedges: total $238,889 (dividends paid $143,455).
In 2023 the commodity hedges will almost certainly recover some of the losses of the past two years. The financial hedges, a complete mish-mash of Swaps, Basis Swaps, Put Options, Call Options, Swaptions, and various other offsetting transactions are more potentially damaging in 2023. I am rather perplexed that these hedging liabilities continue to grow in a rising interest rate environment. What were they hedging against? Lower interest rates?
The opportunity and cash costs of the hedging policies in 2021 & 2022 dwarf any return to shareholders.
I remain invested for 2023 but cannot see beyond that.
AceofClubs

Missing from the market at the moment is confidence. Banking is a confidence trick; stop believing and it doesn't work anymore. The major US banks have stepped in to save First Republic but the market is worried they no longer have the firepower left to save another significant collapse. The Fed will be doing all it can to restore order but once the withdrawals start nobody wants to be at the back of the queue. Can the banks recycle the withdrawals quickly enough to restore confidence? There are an awful lot of banks in the US, many surprisingly small.
Crypto, of any flavour, is the biggest confidence trick of all.
Cash is king in this scenario, just like in all the others.
AceofClubs

Burford Capital was listed on NYSE in October 2020. Did they think that Mrs Bogart's kitchen table "valuation" of cases in progress would be acceptable to the SEC? The current person holding the job title of CFO, Jordan Licht, has a track record that should make him unemployable in a listed company and would be extremely beholding to anybody prepared to employ him.
The only profit this business has ever declared is as the result of valuations attributed by Mrs Bogart. The two CFO's appointed after Muddy Waters have had all the authority of glove puppets. What have all those expensive, experienced, knowledgeable, "independent directors" been doing?
Wholesale reform needed if there is a viable business to be salvaged here.
AceofClubs

"tastytrade total revenue for Q3 FY23 YTD was £122.8 million up 50% (Q3 FY22 YTD: £81.8 million) or 36% on a pro forma basis. On a USD pro forma basis, tastytrade revenue was up 19%, with the benefit of interest income offsetting a softer trading revenue performance."
"US interest income was £32.7 million for Q3 YTD (Q3 FY22 YTD: £0.6 million)"
"Within exchange traded derivatives, tastytrade total revenue for the quarter of £44.9 million was up 57%, driven by a significant increase in interest income. On a USD basis, the growth rate was 42%"

They never spell it out but it is now apparent that IG paid 33% of its capitalisation for a "corner shop" business that has struggled up to ~£120m p.a. non-interest revenue, aided by a depreciating £. Profitability, or otherwise, is never mentioned so I have to assume we can fear the worst.
Cost control has been ignored in the "surge for growth" - which overall is non-existent. Shareholders would be better off if the directors were paid to just sit on their hands.
A basically solid business in desperate need of some sound leadership.
AceofClubs

"When markets decline AUM decline in tandem; it really doesn't take a degree to work that one out." Indeed it really doesn't Trotsky. However, it may take a degree to work out that it doesn't have to be like that.
Blackstone, also an asset management business, where I have a much larger holding, increased their AUM in 2022 from $880.9B to $975.0B - mere chance or good management? If you are prepared to accept decline when markets decline then you may as well buy an index fund.
It is now a well established practice for managements to adjust IFRS results, usually a loss, into a profit. Some are possibly justified but too many are blatant manipulation and deception. The point is that Phoenix results plod along, returns to shareholders gently decline and most holders sleep soundly at night, probably because of advancing years.
AceofClubs