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Always useful to read alternative and additional views Trotsky. I don't pretend to know all of the answers or sometimes any of them. DEC is an enigma. I have sometimes bet gainst the market view but usually have lost. Clearly backing the wrong horses.
I have removed the values of asset and liabilities connected to derivatives from my Current Asset and Current Liability calculations. It is not just the absolute numbers that concern me but the magnitude and direction of travel between 2021 and 2022. All this against a background of blowout product prices in 2022.
I do still think with DEC it is all about cash flow and that depends upon two things: product production, which we know will decline every year and product pricing.
When looking at DEC presentations their assumptions are always unjustifiably optimistic and contradicted a few months later in a new "Investor Presentation".
The February '23 presentation was based on an 8.5% annual production decline rate (Pg.15).
The May '23 presentation "assumes" a 4.5% annual production decline rate. (Pg.26)
The difference this would make to cash flow is immense over a 5 year projection, let alone the 50 years it is used for!
The May '23 presentation also assumes a 10 year Nymex NG price strip at $4.66 MMBtu. When has DEC ever achieved $4 in a single year? With their disclosed hedge prices and the current spot and forward prices it certainly won't be in 2023 or 2024. The difference between achieving $4.66 and the $3.79, 2023, $3.30, 2024, currently disclosed in P.17 will again make a huge difference to cash flow as it is all pre-tax cash profit.
Some have viewed the participation of 14 banks in the $375M RCF as a positive sign. Keybanc was the bookrunner for this, but on average each bank only wanted a $26.8M slice of this pie - chump change to a bank - and Keybanc probably had to take a bigger than average slice to generate interest.
The repeated use of the "Smarter Asset Management" catchphrase also discomforts me. It infers that all previous managers of assets acquired by DEC were practicising "Dumb", or "Not Very Smart", Asset Management. Maybe they were, maybe not.
With a £1.06 average cost I am holding on to see how this develops. I think the dividend is safe for 2023 and probably 2024. I can't see beyond that so await developments!
DEC cannot be categorised as boring, even if it does give me a few headaches.
AceOfClubs
It's difficult to understand the DEC share price. I can't pretend to understand the share price of many companies - I have to revert to "market expectations".
So what are the market expectations for DEC? The share price indicates the market has no faith that the current level of returns to shareholders is sustainable. Why so?
The Balance Sheet and Income Statement are heavily distorted with a mish mash of derivative contracts that could turn out to be very costly or valuable depending upon future prices of NG & oil and movements in interest rates.
I find the most undistorted information in the Cash Flow Statement.
Using the combined cashflows from 2021 & 2022 I find positive Operational Cash Flow totalled $707,946, Cash Used in Investing $1,014,169. Cash outflow for debt interest, debt repayment, shareholder dividends et.al. is all additional.
Extracting the values on derivative liabilities and assets in the Balance Sheet gives a figure of $326,483 for Current Assets and $837,790 for Current Liabilities at 31/12/22.
Between 2022 and 2021 comparatives, Current Assets declined 3%, Current Liabilities increased by 60%.
DEC is buying assets every year so the goal posts are constantly moving. They appear well insulated through 2023 from the current NG spot price, in 2024 have still sold forward, but at a lower price.
Cash will be the constraint on DEC and the market has no expectation the dividend is sustainable.
AceOfClubs
All Figures $000's.
I think the depressed share price is industry wide because the depression in equities has caused the amateur traders to quit. TCAP didn't help itself by grossly overpaying for the no growth business that is Liquidnet. TCAP has historically done well when interest rates have been on the move and they certainly have lately in EU, UK & US. Perhaps sacking all those well paid bond dealers wasn't such a good move after all?
IGG overpaid for another American lemon in tastytrade. PLUS made much cheaper and more successful entries into the US & Japanese markets but that hasn't saved its share price either.
TCAP needs rising equity markets to tempt the punters back in. If it has lost its position in fixed interest that could be permanent damage.
Another in the "too cheap to sell category" and I have a basket load of those!
AceofClubs
Irony, gulfharbour, irony.
AceofClubs
I think Cevian were just being gentlemen, but actions speak louder than words.
May 24 (Reuters) - Activist investor Cevian Capital has sold down its entire stake in British insurer Aviva, ending its campaign to drive up investor payouts at the FSTE 100 company.
Cevian said in a statement that Amanda Blanc and her management team had done an "excellent job" in improving the company's fortunes, despite mixed quarterly trading figures
on Wednesday that sent its shares down 5%.
Aviva has paid out more than 5 billion pounds to investors since 2021, when Cevian first revealed its stake in the company.
"Over the last few years, Aviva has transformed from a poorly-performing conglomerate to a focused and well-performing insurance company," said Niko Pakalén, partner at Cevian Capital.
"Aviva has produced strong shareholder returns, including substantial distributions of excess capital... Aviva is now well positioned for continued success, which is not reflected in today's share price."
A Cevian spokesperson said the firm had entirely exited its position in Aviva, which had stood at more than 150 million shares at its peak last October.
Yes, they sold because: "Aviva is now well positioned for continued success, which is not reflected in today's share price."
AceOfClubs
Do you remember the Cevian £8 share forecast?
"A spokesperson for Aviva (AV.L) on Wednesday said Cevian Capital holds roughly 60,000 shares of the insurer, compared with the peak 150 million shares it had in late 2022, according to a same-day report by Reuters.
The Sweden-based activist hedge fund had acquired a 5% stake in the UK-based insurance provider in 2021 and called for higher investor payouts."
Plodding along.
AceOfClubs
JiffyBag,
Trading commodity contracts is no different to trading shares, you can be long or short and you never have to supply or take delivery of any product; you can sell your position back into the market at any time short of maturity. If the spot price is higher than the hedged price at maturity then DEC will be the loser, and vice versa.
Trading is a completely different "industry" to exploration and production in my opinion. Fortunes are made and lost and some of the biggest and most successful traders have no producing assets at all. DEC have a less than stellar record with their hedges which are basically mandated by their bondholders, in the interests of their bondholders, not those of shareholders. P.184 of the DEC 2022 accounts explains that their commodity hedges reduced revenue by $895.802,000 in 2022 and $320,656,000 in 2021.
Shell has a very large and usually highly profitable trading arm. Here is another large trader I have some knowledge of: https://www.mercuria.com/our-activities/trading - It is an activity best left to the very well funded and informed - DEC appears to have no discretion other than to sell forward, at any price, to cover debt repayment and interest liabilities.
AceOfClubs
"U.S. natural gas futures (NG1:COM) ended sharply higher for the week, +14.1% to $2.585/MMBtu, with analysts attributing the spike to a smaller than forecast increase in U.S. inventory and signs of a slowdown in domestic production."
AceOfClubs
Leapgrog,
I don't know where you get your data from but it could explain your "fair value" DCF valuation of £24.59!
"has never reduced its divi instead growing it at 6.44% average annual over 5-yrs" The dividend was 43.2p for 4 years (2018-2021) and raised a derisory 1p in 2022 to 44.2p, a CAGR of less than 1%. I can't be bothered to check your 10 year divi CAGR, but it won't be 7%.
"Debt to equity if 15%." IGG has no debt to equity ratio because it has a net cash position.
Highest analyst price is £12.50, lowest £6.67 - who is more accurate?
Analyst forecast net income to fall to £382M in 2023 from £504M in 2022.
The share price reflects the business, drifting ruderless.
AceOfClubs
One for the bulls:
https://seekingalpha.com/article/4595972-natural-gas-demand-to-soar-result-of-green-revolution
Be aware this guy throws an enormous number of darts on an almost daily basis - only sometimes does he hit the board.
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