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GG, the really interesting point that you fail to understand is that now DEC own all the oaktree assets, if a similar block of 22729 acres was sold at $72,8M, DEC would get 100% of the gain and this would equate to $3202 per acre. Now that is something !!

Just to underline the huge potential upside on the land that DEC owns.

GG, there is nothing murky about the fact they have 8,6M net acres and the RNS is very clear the total value of the sale was for $72,8M, given the assets in the partnership with oaktree were owned ~50/50 then the amount DEC recieved was $37,3M.

Nothing dodgy , murky, unclear or untoward. Just good old clear facts & data on which an investor can make investment decisions.

If you feel the 8,6M acres is a fraudulent claim, feel free to sue DEC given these are official numbers and DEC resides in one of the most litigious jurisdictions in the world. They would not just throw numbers out randonly and expose themselves to such huge legal risks and to date I am not aware of any actions regarding this topic.

So DEC have announced 2 land sales historically (both linked). In one of the RNS's it references that this was leasehold land. In total 44729 acres for a total price of $49,7M , this equates to ~$1,111 per acre.

https://polaris.brighterir.com/public/diversified_gas_and_oil/news/rns/story/rno18jw

https://polaris.brighterir.com/public/diversified_gas_and_oil/news/rns/story/xp96n9w

So not sure if any land DEC owns is freehold, but would assume the valuation would be even higher than for the leasehold examples above.

Hi Clued, I cannot find any reference to value associated with the 8,6M acres. DEC only appears to recognise PDP assets on their balance sheet. If anyone can point me to the line in their accounts where this is covered I would be highly appreciative and would stand corrected of course. However I cannot see it. I believe Oak bloke also references in one of his articles the fact that land value is not recognised in DEC's accounts.

I also think this is the angle that they negotiate deals from i.e. we only willing to pay for the PDP so I can understand the approach. From slide 9 of the interim presentation, just the land value for Oklahoma alone is >$800M. Current DEC market cap is $570M.

This is why I believe there is a disconnect between the current share price and the underlying value of DEC. At some stage this will correct.

Hi pickedpeck all good. I am actually keen to identify any hole in my investment logic, so happy to dig in if someone raises a point. I think thats the whole point of the board - even rrb where we essentially have a difference of opinion re purchase of assets - but thats fine. I do think GG is a lost cause.

I just want to reiterate, I am not interested in hurling abuse or invective, I just want to make sure I am making good investments. This requires reasoned debate and critical analysis. I have no problem discussing points logically.

I am also not interested in convincing anyone to buy DEC. However so far I have not come across an argument that changes my investment decision on DEC. I still see it as representing considerable value.

Pickedpeck, the 170K acres in the link you refer is just related to that East Texas acquisition. It is 8,6M acres and that is not a typo ....... however it is not recorded as as an asset it is held currently at zero value.

Pickedpeck, just to clarify slide 9 in the presentation of interim results from August states 8,6M Acres.

Also re your point of perception, DEC is not just replacing production, but is increasing production. Based on my models debt % will drop, FCF will increase and this will become visibile in results over the course of rest of 2024 & through 2025. The oaktree deal was only completed in June so there has been no time for the cashflow that deal creates to be fully recognised, however the debt is recognised day 1 of closing the deal.

The good thing is if the fundamentals are right, perception can change in very short order.

Hi Damofarl, you are quite correct that I did not model interest & dividends on the new debt/equity. I did this to avoid over complicating things and regarded this increase netting out against the decrease in costs from the reducing debt. But completely valid point from my perspective.

However to get an idea of costs lets assume a 9% dividend/interest rate. This works out at an incremental $11,5M pa cost uptick ($170M x75% x9%) which should net of against the reduced cost of interest from the ($150M @ 8% = $12M incremental) debt reduction per annum. Meaning the $130M buffer is approx. the right level in my view.

The other assets/opportunities that I mention are not recorded in the accounts that is the key point. If anyone can show me the line in the accounts where this is I would happily stand corrected , but it is not the case. DEC take a conservative approach and only recognise their PDP assets.

To get an idea of the opportunity, historic land sales DEC has achieved are ~$1,100 per acre. DEC has from memory 8,6M acres of which 65% is undeveloped. That is alot of buffer not currently in the accounts notwithstanding all the other revenue opportunites that are also not recorded.

Damofari, I should also add this does not cover additional revenue from mid stream assets, next Lvl revenue, land sales, in-fill drilling revenue and the potential of CCUS in the future. So buffer margins are large from my perspective for DEC.

Damofari, I have to correct you, unfotunately that is not the point I make. Lets take the numbers again from Rrb:

$500M (revenue net of costs) - $120M (interest) - $150M (debt reduction) - $55M (dividend) = $175M

What is missing from above is the $170M to purchase new assets to cover the decline rate, meaning daily production stays flat (no reduction that you mention). Since IPO DEC has only issued equity or taken on additional debt for the purpose of acqisitions which for me is perfectly fine especially as they are all accretive (I used a 25%, 25%, 50% ration in my example of cash, equity, debt). Rrb believes this must be paid fully in cash, that is the fundamental difference.

So if we continue the maths $175 - 25% (cash part of purchase) = $130M buffer (26% of the $500M net revenue - very healthy).

Now in 10 years time once debt is repaid then $270M ($150M + $120M) would drop off completely. This creates the headroom to start meaningful ARO and surprise , surprise, DEC have current contracts with states for the next 10-15 years that commits them to very low volumes.

So they are protected for the next 10-15 years. Not to avoid ARO, but to perform the ARO in an economically efficient way without recourse to the taxpayer. I believe many states fully understand this. However in my view the green lobby want all fossil fuels to be shut off immediately which makes no economic sense and they skew reporting in this way. I believe DEC invited bloomberg back to re do their piece after they put in place their detection sysetms etc but I have never seen a follow-up article.

Finally I would just like to note that crescent point was happy to take DEC equity as part of the recent acuisition. Given they are experienced players in this industry why would they accept equity if there are doubts re DEC short term? It makes no sense.

DEC can cover its dividend, debt, ARO obligations etc. and has a sustainable model in my view. I have not seen any logic to change my view as of now.

GG to butcher a famous quote, you really are a riddle wrapped in a mystery inside an enigma ...... good luck with your investing endevours

Rrb, I forgot to mention the logic flaw in your post re ARO. The meaningful ARO volumes will occur after the ammortization of the existing debt (due to the various state agreements DEC has in place that last 10-15 years), so the interest payments & loan repayments drop out of your calculation. This enables ARO costs to be easily covered.

Essentially you have not factored the timing of ARO costs into your calculations correctly.

Rrb1981, from your post, I think we have hit the crux of the matter which is your belief that 100% of new assets purchased must be made in cash (170M in your example) verses the assumption of a mix of cash, equity & debt in my previous post.

I do not believe that is a correct assumption, however you are entitled to your view. Perhaps I will try my property example again to illustrate.

If I am a property company that purchases leasehold properties with a weighted average portfolio lease of 50 years, then I will recieve a certain rental income from these properties. If that is sufficient to:

- repay the loans taken out,

- cover the interest on those loans,

- cover maintenace & upgrade of the properties to meet new green environmental standards (like ARO cost for DEC)

- cover dividends to shareholders

- allow increasing free cash flow to be created

- generate enough cash to purchase new leashold properties

Then I have a sustainable entity (the way I view DEC). I will then use some combination of cash, loans & equity to purchase new leashold properties and repeat the cycle. Why would I have to purchase the new leasehold property in cash? Could you please explain the rational behind this?

Also as a last remark the consotium of 14 banks that finance DEC have no issues with providing additional financing to DEC on the basis I describe in my post. Banks are always happy to lend when they are confident on getting their money back and earning a good return (a good sign). I do not see them demanding that DEC must purchase new assets 100% in cash?

Rrb1981, I have provided a high level how the logic works and why I see value in DEC. I am not here to convince you or others to buy DEC, I am only interested to keep an open mind and change my investment decisions if I identify issues with my investment thesis or new facts come to light. Based on my analysis I do not agree with your view re ponzi scheme.

The 4 risks with DEC that I do see are:

1) Not being able to make accretive acquisitions - since IPO DEC have consistently executed accretive deals. through various price cycles. Given the business model to extract max value from exisitng wells is completely different to the business model for the typical drill baby drill E&P, I see limited risk this will be an issue for DEC to continue to purchase assets from traditional E&P's who frankly are not setup to operate more mature wells and put them on their divestment list and are keen to use them to generate funds to invest in new wells.

2) Gas prices tumble below cost & stays there for over 3 years - Given DEC are heavily hedged out short term (3 years) and they layer in hedges 2 or 3 years out, they are able to survive low prices for a sustained period. Given this is an industry risk, supply would be curtailed quickly in such a scenario and prices would recover within 18-24 months (like we see now). Also given the increasing LNG export demand, I do not see soft pricing for any extended length of time.

3) Fraud - It is always possible but given DEC consistently pays down debt over a sustained period, provide a dividend and DEC uses a consortium of 14 banks for all asset purchases you would expect something to be picked up by now if this was the case. Most fraud happens when fiddling financial reporting, however DEC are actually shipping cash out of the door to pay loans and shareholders.

4) Regulatory risk - Cal has reached an all time high of production driven by Asia. Gas consumption in the US is increasing which in turn helps the US have one of the lowest energy costs in the world and is driving a re-shoring of manufacturing jand hence jobs back to the US, I do not see any politician doing anything meaningfull to stop this. The countries that have made the most progress to going green have the highest energy costs and across europe left wing governments have fallen as companies relocate and jobs lost. Check out New Zealand which instituted a ban on gas a few years back and are now being forced to rescind the ban due to the dire state of their energy market. German manufacturing is in a mess due to high energy costs.

As usual DYOR

Rrb1981, A Ponzi scheme is a fraud that pays profits to earlier investors with funds from more recent investors. Thisis certainly not what DEC does.

I would classify them as a private equity centered gas company. Basically acquire assets at accretive prices squeeze out the maximum revenue from them that current owners cannot possibly do before retiring them. This requires a very specific setup which they have refined over time. It is most definitely not a ponzi scheme. Please show the maths how this can possibly be the case with such a cashflow positive entity.

DEC have done many deals with a mix of cash, debt and equity, the latest of course is crescent point. Think of a property company, it uses equity, debt & cash to purchase property assets via loans from banks, equity from investors and cash generated from its existing property assets. It then purchaes assets and over time repays the loan before puchasing next asset etc. DEC are essentially applying the same logic just to gas wells (not the perfect analogy I know but good enough I hope to make the point)

They are highly sophisticated linking state contract tenors for plugging to financing tenors for assets to accretive deals to amortizing ABS structures to hedges & futures etc. without taking on any exploration risk this is not the normal skill set of a traditional E&P.

However I digress, I still await someone to show me the maths behind why DEC cannot pay its debt, fullfill its ARO obligations pay dividends etc etc. as opposed to the usual emotion, noise & invective.

As usual DYOR

Rrb1981, so referencing my earlier post, let me take the points you raise and use the latest mid year results and run through the logic again.

From the interim results presentation (slide 11). The average hedge price was $3,34 per Mcf while costs were $1,68 per Mcf meaning a $1.66 per Mcf revenue net of costs (LOE, SG&A, transportation etc.) resulting in an average revenue per well of ~$7,1K pa (12x1,66x360 days)

Taking the 64 wells per tender, this equates to ~460K net revenue. Since salaries are covered in SG&A and the debt interest & repayment stays the same at ~250K per tender, leaving ~$210K per tender net of debt and costs.

If I take the $55M dividend pa this equates to ~$785 per well ($55M/70K wells) or ~50K per well tender ($785x64 wells).

Now lets address replacement costs re the 9% decline rate. DEC purchases average at ~x3 EBITDA and are all accretive. Using the 2023 EBITDA of $543, approx. $49M pa needs replacement ($543x9%) at a cost of $147M pa ($49x3). This cost will be met by a mix of debt, cash & equity. Lets assume 50%, 25%, 25% (however you can play with this). Meaning a cash cost of ~37M ($147Mx25%). This translates to a per well cost of $528 ($37m/70k) or a per tender cost of ~$34K pa ($528x64).

So DEC over the next 10 years can cover all its costs, pay off its debt, keep paying dividends and replace declines and is still left with $126k per tender pa of headroom ($460k-$250k-$50K-$34K).

In addition DEC has state level agreements in place for the next 10-15 years with a low level plugging rate (immaterial costs). On renewal of contracts, assume a higher linear plugging rate of 1750 (70k wells / 40 year remaining well life). This translates to ~$39M pa costs or ~$580 per well ($39M/~67K wells) or ~$37k per tender ($580x64)

In addition at the end of this 10 year period, DEC would still have ~$735M of new debt ($147Mx50%x10 years). Assume this is repaid over 5 years or $147M per year or ~$2190 per well ($147M/67K wells) or ~$140K per tender.

This means net revenue headroom per tender would then revert to ~200K per tender pa ($460k-$50K-$34K-$37K-$140K).

I believe this addresses the points you raised and covers your concern re “hand waving and saying, everything is ok” and this is without factoring all the potential upside revenue opportunities from next Lvl revenue , mid stream revenue, land sales, in fill drilling, carbon capture etc. I see DEC as a strong value play.

Rrb1981 , I appreciate the more constructive tone (vs GG) . Do I take it that the revenue analysis is reasonable from your perpsetive (although it excludes land sale opportunities, in-fill drilling revenue, next lvl & midstream revenue)? I can look into refining the cost angle to cover some of the points you raise - but the logic will hold (that DEC can cover all its costs & more).

Buy now, but will update my post.

Sorry type , should read "the 8,6M Acres of land of which 65% is undeveloped ......."

GG

Since the quote you reference, you will no doubt be aware that DEC sold a number of wells (~$35M worth of EBITDA) as part of the redlion deal and took over the working interest from oak tree. If you factor these events I used an estimate of ~70K wells. But happy to revise this number if you can show workings reflecting the above events that provide a more accurate view.

Irrespective of this , a revised number does not alter the underlying logic that DEC has more then sufficient funds to take care of debt and ARO obligations. Bear in mind I have not mentioned the potential value of the 8,6M Acres oeveloped .......

It would be better if you could avoid using inappropriate references to misdirect & misinform.