Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
"A chalk and cheese comparison?" Crescent Point Energy +14%, Gulfport Energy +53% - DEC - 30%: more like the good and the ugly comparison!
"You have to take the rough with the smooth" There is far too much rough and very little smooth. I am not against hedging, just boneheaded hedging to meet the requirements of bondholders.
"I disagree with your comments about the cash flow. Under IFRS working capital adjustments are included in operating cash flow" The figures I posted earlier reflected that. In 2023 "working capital adjustments" constituted 36% of operating cash flow !
"I have never seen such disproportionate hedging originated value destruction as has been disclosed by DEC; well Enron maybe" Can you point me to even more disproportionate "hedging originated value destruction" than DEC has achived?
The Enron jibe was tongue in cheek.
Ending on a cheery note: Malcy remains positive about the prospect of even more debt - so at the moment grin and bear it seems the order of the day.
AceOfClubs
“I would suggest the fact that you can currently get a risk free return of c6% compared to less than 3% 12 months ago has played a part.” All of my other O/G holdings are significantly up since January 1, DEC has declined ~30%.
“Some people have been pontificating about DEC's risky derivative trading and production issues without providing any tangible evidence.” The evidence has been provided and is very tangible. The DEC accounts disclose the huge amounts of cash foregone by DEC’s derivative trading; they also disclose the declining cash flow at the operating production level.
“Hedging is the backbone of the oil/gas and farming industries.” Very true; but it is generally used selectively and intelligently to protect and hopefully enhance a business. DEC are constrained by their obligations to bondholders to use hedging in a blunt and rigid manner to protect the bondholders: equity holders can go to hell in a handcart. I have never seen such disproportionate hedging originated value destruction as has been disclosed by DEC; well Enron maybe.
The news that the syndicated RCF has had its limit raised by $50m (that’s an average of $3.6m per participating bank) should ensure our dividend cheques don’t bounce and all those monthly payments on the ABS loans go through on 30 September – that’s a relief – for now.
AceOfClubs
Gavster-NBC - the only information I have is already in the public domain. DEC, to their credit, put out a lot in their financial reports.
Production decline was 8.5% at the interim in 2022 and I can't find it right now but I think I read it was 10% for the y/e 2022. The Tanos acqusition only raised production 4% at 30 June 2023. For me, 6 months ended 31 December 2023 is peak production. Onwards it's all naturally in decline - not unique to DEC - just the way it is. Their decline rate may be less than an industry average but tht's only because their wells are older than the industry average. They don't have a magic formula or magic wells.
I don't pay much attention to the SAM puff. I am sure the tweaks to maximise production, minimise cost, are widely known and practiced in the industry. There aren't too many out there practising Dumb Asset Management.
AceOfClubs
Lots of posts about the continued share price decline and its causes.
Trying to keep it straightforward:
Cash Flow from Operating Activities has been in decline for the 18 months to 30 June 2023 - despite multiple acquisitions funded by expensive debt and even more expensive equity.
The cash hungry debt pile and the cash hungry equity pile have both been growing - when cash gets tight which pile will be fed first? Will the RCF lenders be prepared to see their money fed to equity holders or will they have a quite word in Rusty's ear?
DEC have committed to pay the dividend in December 2023. I think the 6 months ended 31 December 2023 will be maximum production and cash generation levels for DEC.
In 2024 we already know prices for DEC production will be lower than 2023 - their hedges tell us that. I think absolute production volumes will also decline in 2024, possibly sharper than anticipated.
If I am correct the result will be a dividend cut/halt. What will that do for the share price? It may even raise it - stranger things have been known to happen.
Rusty's new best friend, Howard Marks of Oaktree Capital, is a creditor whose business is becoming a predator - he loves Chapter 11 scenarios.
An old but still pertinent quote from Mr Marks: "Creditors are about to become the owners of many companies, equity holders will be wiped out. When you buy with borrowed money there are some environments you can't withstand."
I think there will have to be some careful steering of DEC to avoid trouble ahead.
AceOfClubs
Those of a different opinion can joyfully fill their boots - I'm not buying.
I have held too large a tranche of IGG since I can't remember when; average cost £6.20.
The Julie Felix reign has been an unmitigated disaster for shareholders, if very rewarding for Julie Felix personally. Why do I write that? The numbers tell me.
IGG Annualised Total Return: 1Yr -9.53% 3Yr -2.36% 5Yr 0.65%
FTSE 100 ATR 1Yr 9.97% 3Yr 12.52% 5Yr 4.80%
I and all other shareholders would have been much better off with the money in a FT100 tracker. Tasty Trade was a hopeless buy and it has subsequently had huge amounts of cash thrown at it to try to hide/rectify that.
The whole BoD is culpable for letting this happen.
IGG sits in the "too cheap to sell bucket".
AceOfClubs
From the 2022 published accounts:
"For the year ended 31 December 2022, the total loss on derivative financial instruments of $1,759 million increased by $784 million compared to a loss of $975 million in 2021. Adjusting our unsettled derivative contracts to their fair values drove a loss of $861 million in 2022, an increase of $209 million, when compared to a loss of $652 million in 2021. While this loss certainly reflects the increase in commodity markets in relation to our hedge floor, the magnitude of the loss is amplified due to the increase in the size of our long-dated hedge portfolio, which has increased meaningfully with the addition of four new ABS notes in 2022 that each contain long dated hedge portfolios that in some cases extend through the life of the note.
For the year ended 31 December 2022, the total CASH loss on settled derivative instruments was $897 million, an increase of $575 million over 2021. The CASH loss on settled derivative instruments relates to higher commodity market prices than we secured through our derivative contracts. With dividend distributions and scheduled debt principal payments central to our strategy, to protect our downside risk we routinely hedge at levels that, based on our operating and overhead costs, provide a healthy margin even if it means foregoing potential price upside."
They lost CASH on their hedging greater than the market capitalisation of DEC in a single year, 2022. Something along the lines of children and matches springs to mind. I am not against hedging per se, but DEC are stuffed and trussed tighter than a Christmas turkey.
Probably I, just like the market, don't understand the business model.
AceOfClubs
The DEC business model is to have income exceed expenditure. Unfortunately, they find themselves in the vice like grip of the bondholders and no doubt RCF lenders. They have to hedge (forward sell at a fixed price) to comply with ABS and no doubt RCF covenants. This hedging produced a cash benefit in the first half of 2023 and probably will in the second half too. However, at 30June 2023, every subsequent year, forward hedging was underwater against market pricing. There is hope that there is something left over for equity dividends, but as the market is demanding 16% to hold DEC equity that is not a certain or cheap option. Equity is costing DEC approx twice the cost of debt because the business model is constrained to return both capital and interest to bond and debt holders; equity holders hope and pray.
With the volatility of pricing in the NG market and its regional nature in the USA only adding to the mix, DEC is not in an awful lot of control of its own destiny. (Other views are available.)
AceOfClubs
Hello Trek,
So it is Eric Williams that has been shown the door - or is it not?
I am sure you don't really need all the 000's repeated ad nauseam after every number - do you?
A more concerning feature is the substantial and repeated selling of DEC equity by Brad Gray; but perhaps Mr Gray is a sharp cookie, he certainly got much better prices than available to sellers today. - but you don't see him buying at current price levels.
I am not in the Chapter 11 camp but I fear the dividend is under strain which will only increase with the lower hedged prices achieved for 2024 v 2023.
AceOfClubs
First Posted - 31 May 2023
"Bradley Grafton Gray (Chief Financial Officer) has been a heavy and consistent seller of DEC equity to the tune of 1,991,667 shares since May 2021 I calculate, his last tranche of 250,000 only a couple of weeks ago.
For all our head scratching and pontificating, if anybody knows what is really happening with the DEC finances it is (or should be); Mr Gray."
From the 3 September 2023:
"It’s at times like this that a company needs a Finance Director, with a steel backbone, to tell the dominant CEO the facts of financial life. It must be a nightmare juggling the cash flow against the monthly demands for capital and interest payments on all those ABS Notes and keeping the RCF lenders on board ($265,000 drawn at 30 June 2023).
By the way Trek, it's Eric Williams not Brad Gray who has been shown the door.
Perhaps Eric spoke truth unto power once too often? - but do draw your own conclusions.
AceOfClubs
Year end 1 April - audited accounts scheduled for 15 August (a long wait in my opinion). 12 September still no audited accounts - why? Auditors doing the job they are paid to do by and for shareholders? Geoff not happy? Silence reigns.
AceOfClubs
"I would like to invite you to the £20+ party in Miami" - very generous BlueWiley, please advise the date and I shall try to keep it open!
You are probably not in a position to do so because of so many unknowns, only to be resolved against an unknown time scale. Burford is a long-term punt but the share price is half of what it was 5 years ago, the yield is negligble and inflation is no longer
Javier Milei reads like Liz Truss on steroids - if he ever gets his hands on the levers of power I can see it ending quickly but not well.
AcoOfClubs
Porsche1946 doesn't make his case with any finesse; but that doesn't invalidate his case. I have been in the US market since 2012; originally attracted by $1.70/£1 exchange rate which I considered way undervalued. I still hold most of the original purchases and they have made me very happy. Whilst many were promoting dross like NRR I was buying Amazon, Apollo Global Management, Blackstone and Skyworks.
My "quality" UK picks like AVIVA, VODAFONE, BARCLAYS have done nothing; they were cheap then and even cheaper now. Only ENTAIN, SRE, SHELL and ICP have made me significant money in the UK. No companies on my watchlist are UK listed. No delight for me in this state of affairs - but UK public company management is generally poor. It's not only in the public sector there is a deep culture of rewarding failure.
The profitability of AV continues to be very poor in relation to the value of assets it manages; policy holders do even worse.
AceOfClubs
Mistaken Trek, still holding on for better days.
AceOfClubs
Greygorge - Very kind of you to inform me it is not the same time at every point on the planet and how ignorant and self-centered of me to asssume otherwise; your post was clearly not a late evening event - which planet are you on by the way?
AceOfClubs
The original post was at 11.08pm - so shall we just put it down to a late evening event?
Of course the saving grace to avoid Chapter 11 is the ability to cut or halt the very expensive dividend. That's not going to raise many cheers either. DEC show no immediate pressure to do that having just announced an unchanged dividend, payable 29 December and still committed to the full September payout. If cash flow has indeed turned positive, it would have been very helpful to have publicised the company's RCF position at 31 August, if only to confirm that.
AceOfClubs
Jim 800 - Many thanks for the endorsement of the numbers, apologies for the lack of qualification that they were in $000's, I wrongly asumed you might be up to speed on these things by now.
As for the "Explanatory Notes"; I am aware that changes in working capital will affect the operating cash flow, but they are just one of a myriad of factors: the net result is what counts and paints a picture of the whole business.
AceOfClubs
Thanks for the kindly advice Trek. Why do I want out of DEC? - the numbers tell me I do.
SP wise, since Jan 1, DEC is down 24%; my other O&G holdings, SHELL +5%, Crescent Point Energy + 18%, Gulfport Energy +67%. Am I seller at 88p - no, too cheap. As always, the market will decide the SP, but at the moment it's not too optimistic either - is it?
You can check my figures: they are in the published reports, but I have been known to make a mistake. You may want to check "they have plenty of cash" $4,208 at 30 June 2023? Equally, my experience of Corporate Bankers is they start to get far more communicative when a business approaches its overdraft borrowing limits.
Still hoping for the best and the SP is a temporary blip.
AceOfClubs
JDCBC - I don't hold any other security that makes me wait 6 months for a dividend - do you? My second largest holding makes wait 6 weeks, also paid quarterly.
AceOfClubs
At the forefront of most holders’ minds will be is the current dividend sustainable? The dividend is the only element saving the share price from imploding below its already deflated level.
The determining factor will be cash flow; recent history gives no grounds for optimism.
Net cash provided by operating activities:
6 Months ended 30/06/2022 $204,987
6 Months ended 31/12/2022 $182,777
6 Months ended 30/06/2023 $172,566
These figures have been generated against a backdrop of a whole series of allegedly “accretive” acquisitions. The results of these acquisitions have been an inflated equity base and a growing gross and net debt pile. An equity raise at 13.5% cost is a huge burden. A $350M Revolving Credit Facility at 8.65% is not what the creditworthy are paying.
Net borrowings have grown in 12 months from $1,143,984 to $1,500,400, +31%.
It’s at times like this that a company needs a Finance Director, with a steel backbone, to tell the dominant CEO the facts of financial life. It must be a nightmare juggling the cash flow against the monthly demands for capital and interest payments on all those ABS Notes and keeping the RCF lenders on board ($265,000 drawn at 30 June 2023).
The final red flag is the payment of the dividend for the quarter ended 30 June on the 29 December; why wait 6 months other than cash flow preservation? I am hoping for an exit at £1.06.
AceOfClubs