Member Info for asp1

I do not agree with the sentiment that DEC have been “found out” and that ARO’s or debt is a problem. Let me try to explain why.

The average life of DEC’s wells is 50 years (as per latest ARO presentation). From mid year results we know daily production at end of June was 855 MMcfepd. Assuming ~70K wells it means the average well produces ~12 Mcf per day (855/70). At the current $3+ hedge price this translates to an average ~$13K revenue per well (12x3x360 days a year).

The DEC business model is a density based business model. This means that a DEC well tender looks after several wells in a close geographic area to minimize travel time and maximize time spent attending to wells.

From the annual results DEC has ~1600 employee with two thirds (~1100) out in the field. Meaning each well tender takes care of ~64 wells (70k/1100). This means a single DEC tender on average manages ~$830K revenue (13Kx64 wells).

Lets look at the big cost elements. The vast majority of debt is amortizing over the next 10 years, meaning $150M pa of capital needs to be repaid (~$1,5B/10 years) plus $120M in interest (~$1,5B @8% average interest), for a total of $270M per annum. Which equates to $3850 per well (270M/70k) or ~250K per well tender ($3850x64)

Lets assume an average salary for a well tender of $75K pa , then for the next 10 years net revenue after debt & salary per tender is ~500K ($830-$75-$250).

Assuming $20K ARO cost per well, then for 64 wells, total costs ~$1,2M which equates to ~2,5 years of revenue per well tender ($1,2M/$500k) out of the 50 year life of a well, which is absolutely no issue.

Now clearly there are others costs (transport, dividends etc.) and other revenues (mid-stream, Next LVL etc.) but it is clear there is no problem for DEC to address ARO & debt. That is why banks are happy to lend to them & they do not have issues securing financing.

The DEC business model is to extract every last molecule of gas from a well as efficiently as possible until it is no longer economic to do so, even if that is only 3Mcf per day. This is very different to most other E&P companies.

I have yet to see any hard numbers & calculations that demonstrate DEC is anything other than a really good value play.

GG, no I am not saying what a CPR is, I am evidencing what regulators define as a CPR. The link below helps summarise things for the UK Market. Unfortunately you only state your opinion on what CPR and provide no evidence to backup your claims. Unfortunately the global financial markets do not run on the opinion of GG.

https://higherlogicdownload.s3.amazonaws.com/SPE/a77592d6-ec9a-43b1-b57b-c7275fb91cb0/UploadedImages/SPE%20Past%20Event%20Presentation%20Downloads/28_JAN_2014%20John%20Barker%20-%20The%20Competent%20Persons%20Report%20SPE%20London.pdf

GG, let me try to wrap this topic up. The Competent Person's Reports (CPR) are specialized appraisal reports for oil and gas properties with components dictated by regulators in various venues around the world. I stress the word dictated.

There can be potential regulatory issues that might arise if a report that does not contain all CPR elements is submitted for public review.

By definition it is the regulators that define the CPR, i.e. the SEC in the US etc. When you say what I have referenced is not a CPR you are completely wrong. If you can find any part of the CPR that is incorrect, please can you reference it.

Below is a link to DeGolyer and MacNaughton, one of the oldest (formed in 1936) and most respected names in the petroleum industry. They explain what a CPR is:

https://www.demac.com/services/competent-persons-reports/

I have demonstrated with data and appropriate references that the statements you have made are just plain wrong and consistently so. I do this not to make you look foolish, but to ensure my investment thesis in DEC continues to hold.

I would gladly revisit my stance on DEC if data / information comes to light that questions the logic on which I invest. That is why I do not discount posters with an alternative or negative view until I can research things and form my own opinion. Unfortunately none of the points you have raised falls into this category.

DYOR & best of luck to all

GG, firstly this is not my evidence. These are the official documents that DEC and other oil & gas firms need to produce.

The CPR report confirms that these numbers are produced in compliance to the SEC rules & FASB accounting standards for use in the annual accounts.

Having made an incorrect statement on the non-issuance of these independent reports since 2020, you now imply that these are not valid reports performed by an independent petroleum engineering firm.

I suggest you take legal proceedings against DEC & the engineering firm itself, as clearly you believe these are not “proper” competent person reports. Which would mean DEC are in breach of their obligations. However I suspect you won’t as you do not have a leg to stand on.

Apparently I am also a fraud for referencing official figures & documents. The same I assume as the risk officers, compliance teams, finance specialists etc in each of the 14 banks who use such reports & other official data from DEC to lend $1,6B. In addition the auditors are frauds for agreeing to sign of such accounts and finally those damn frauds at the SEC coming up with stupid rules that hoodwink investors.

This is a bulletin board to help share information and make better investment decisions. It is not meant to be a forum to trade insults. You are entitled to your view, but the language you use and the manner of your discourse is not pleasant.

GG “you’re doomed” rants & conspiracy theories aside, I believe DEC represents value, based on my research. Good luck & DYOR, however as mentioned previously I will take a break from posting.

GG,

I have shown respect to you in my communications, it is a shame you do not reciprocate the same courtesy back. I post to support fellow investors and to discuss the logic of my investment thesis (right or wrong). I will not waste my time posting to trade insults. Let me respond to your query, however I am not inclined to post further .....

You are incorrect in your statement re the independent CPR not being issued by DEC since 2020. Below is the 2024 CPR from DEC . It may be worth pausing to think if you could be wrong on this, where else could you be wrong?

See exhibit 15.3

https://www.sec.gov/ix?doc=/Archives/edgar/data/0001922446/000162828024011847/dec-20231231.htm

Good luck all & DYOR

GG - sure, the below provides all the audited data, with links to the rns's:

1) The 2017 PV-10 FY reserves can be found in the audited accounts. See RNS from 30 April 2018.

2017 FY: hTTps://polaris.brighterir.com/public/diversified_gas_and_oil/news/rns/story/xepnzyw

2) The PV-10 reserves for end 2023 can be found on p3/slide 5 of the 2023 Annual report.

Link: hTTps://d1io3yog0oux5.cloudfront.net/_0c3799e6a3728ad147795f86587dca10/dgoc/db/604/5962/report/DEC+Annual+Report+and+Accounts+2023.pdf

3) The PV-10 reserves related to the DP Lion sale ($230M) & acquisitions (net $706M) can be found in the relevant RNS's provided below.

DP Lion: https://polaris.brighterir.com/public/diversified_gas_and_oil/news/rns/story/wv4kmzw

Oaktree: https://polaris.brighterir.com/public/diversified_gas_and_oil/news/rns/story/xe1kejw

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

East Texas:https://polaris.brighterir.com/public/diversified_gas_and_oil/news/rns/story/xldoz9r

Net Debt End Q2 24: https://polaris.brighterir.com/public/diversified_gas_and_oil/news/rns/story/xqdnl2w

DEC is actually a relatively lower risk play in the oil & gas sector.

It eliminates drilling risks by only purchasing PDP assets.

It reduces financing risk with fixed rate amortizing ABS structures.

It eliminates commodity price risk by hedging at price levels to ensure it can repay the debt, pay dividends and complete ARO obligations.

Finally it minimizes environmental risks with best in class sustainability actions (vs peers)

Taking a bigger picture view in 2017 (IPO year) DEC had PV-10 assets of $259M today PV-10 assets are now ~$3,6B with debt of ~$1,6B which will decrease to zero as the debt amortizes. Thats decent net growth and does not take into account the value from all the undeveloped land.

So you have good growth at relatively lower risk for O&G sector. The falling share price is to do with non-value related issues. Its tough, but thats the way markets work ......

@trek - no, not oak, just a humble value investor.

I posted previously that the ARO for me was not a concern from an asset or an operational free cash flow perspective i.e. DEC has the means over short & long term to cover its obligations comfortably without the need for a sinking fund.

I also highlighted how the asset number in the balance sheet are conservative with plenty of upside for revaluation and that liabilities (including ARO) are being reflected on the balance sheet appropriately. I have not seen any quantitative analysis since then that makes me alter my view.

However I have seen a number of posts highlighting how the increasing debt and equity issuance (dilution) are a huge negative and that the board are not performing. Based on the numbers, I take a totally different view.

At the end of 2023 DEC had PV-10 reserves of $3,2B then sold $230M of PV-10 assets in Jan 24 (at a x5,7 multiple vs ~x3,5 multiple for purchases - good business) leaving ~$2970M of assets. Similarly EBITDA at end of 2023 was $543M, with the sale reducing EBITDA by ~$35M to ~$508M.

With the 3 acquisitions this year DEC added ~$706M of PV-10 assets at a time of historically low gas prices (so potential for this to increase). These acquisitions represent ~$171M of EBITDA.

So PV-10 assets have gone from ~$2970M to ~$3676M a ~24% increase in assets.

EBITDA has gone from ~$508M to ~$679M then adjust for 10% decline rate leaves ~$611M a ~20% increase.

Let us look at the liability side. Net debt stood at $1285M at end 2023, while current debt net debt post acquisitions is 1645, an increase of $360M.

So yes, debt has gone up by ~$360M and I see a lot of posts bemoaning this, however assets have gone up ~$706M, meaning shareholders are better of by ~$346M or $6.65 per share (assuming ~52M shares in issuance post acquisitions)

Now lets look at the equity position. At the start of 2024, DEC had ~48M issued shares, currently it has ~49M issued shares (post buybacks & 2 acquisitions). The last acquisitions will increase shares issued to ~52M, so an increase of ~8%. So an 8% equity increase is delivering a ~24% increase in assets and a ~20% increase in EBITDA.

I do not see the problem with increasing debt & raising equity if it is accretive. More importantly none of the financials institutions lending to DEC do either.

As a value investor, I see significant value in DEC shares that is not currently reflected by the DEC share price. Value & price are different things and often disconnect for periods of time. The famous quote “In the short run, the market is a voting machine but in the long run, it is a weighing machine” could not be more apt for DEC.

BlackSteel, Good point. Further weakens the argument for a sinking fund.

Part 2 continued:

Finally the $3,7B reserve value is priced of strip , which is at one of the lowest levels in the last 2 decades. Given the next two years will witness the fastest growth of LNG export capacity in U.S. history. Unless the laws of supply/demand no longer work, price will react accordingly.

To help matters along natural gas production is plummeting. Between December 2023 and May 2024, U.S. dry gas supply has contracted by a notable ~5 billion cubic feet per day. The drawdown is the sharpest since the shale revolution began, excluding the 2020 COVID year.

The U.S. natural gas market is now in the grip of a sharp and sustained deficit, as evidenced by inventory trends, which stands in contrast to the bearishness of investors. Following a mild winter, mid-March inventories stood nearly 700 bcf above the five-year seasonal average—a near record. Yet, in just five months, the surplus has been halved, now standing at 325 bcf. I expect the surplus to be completely eroded by year’s end—just as the new LNG capacity begins to come online.

As an indication, gas for delivery in Europe remains at ~$12 per mcf, while Asian LNG fetches ~$13.50 per mcf, compared with ~$2.00 in the U.S.

To me it makes perfect sense for DEC to prioritize acquisitions and to issue equity (on an accretive basis) at this moment in time. Buy low, sell high is the right way to do things. I do not see anything nefarious in this.

This has been a far longer post than intended and I had wanted to address some of the other points you raised. That will have to wait for another time.

As usual DYOR.

Rrb1981,

I would like to respond to your posts on DEC as I take a different perspective.

From your posts, I see you believe that the field operations of DEC are top quartile and that their use of technology is top notch. Thats good to hear. However your primary concern is with the ARO of ~$1,5B or ~$30 per share which makes DEC a “zombie company”.

Your focus on liabilities is commendable but not balanced as you never mention the asset side of the equation. At year end 2023 the PV-10 of DEC reserves stood at $3,2B using the strip price at the time. Since then we have had the DP Lion sale and 3 acquisitions which will increase reserves by ~$0,5B to ~$3,7B. This equates to ~$75 per share.

A sinking fund is not needed, however there is a need to recognise the liability on the balance sheet. Can I refer you to note 19 p184 in the annual report. Currently ~$0,5B is on the balance sheet as a liability for the ARO which nets of against assets in the usual way. This liability number increased by ~$50M from the previous year, so DEC are clearly acting responsibly on this. I would also note that they add an annual inflation charge to cover inflation costs.

From an operational perspective lets assume DEC plug 1400 wells per annum at a cost ~$21K. That would translate to ~$30M per annum. Given pro forma EBITDA will be ~$600M and FCF around the $320M mark, again no need for a sinking fund.

Now lets dig into the $3,7B reserves (adjusted for acquisitions & sales). Perhaps DEC are being scoundrels and pumping up this number.

Firstly as you are in the business you will be aware that reserves are modelled using a 10% discount rate. However DEC finance costs are well below 10% meaning there is upside in terms of the value of the reserves that will actually be realized.

Secondly DEC currently has an operating net footprint of ~8,6M acres of which 65% is undeveloped (~5,6M acres). DEC’s recent land sales achieved $1,100 per acre. If we run rate that it would equate to assets worth ~$6B. We could clearly discuss the appropriate number to use, but in their latest earnings presentation DEC value just the acreage alone in Oklahoma at >$800M. Importantly DEC do not assign any value to this in the books. Seems a highly conservative approach and should afford investors comfort.

will continue in part 2

GG, you hold a valid investment position.

However just to be clear, DEC owns 11K miles of midstream pipelines. Currently they are configured to flow gas in one direction, out to LNG ports, large clients etc. Would it be possible to reverse the flow in these pipleine to put CO2 back into the ground etc. DEC has the infrastructure to do this- however is it technically & commerically feasable? The probability of this happening is certainly not zero. DEC also has contracts in place that give it the time to validate what is achievable. However it will need time to validate.

At present everyone is focused on wind, solar tech etc. to address the CO2 issue but what if someone came up with a new gas power station tech that emitted zero CO2 at a cost equal or les then current gas power stations that could pipe CO2 for storage. Now wouldn't that be a game changer ....... this should not take 20 or 15 or 10 years. It is expected to be live on the grid in the next 3 to 4 years in the US.

GG, I know I shouldn't but could not resist one last bite ....

So carbon sequestration or capture is not BS , but it is BS if pursued by DEC?

Thats a perfectly valid investment thesis for you to have ......

GG, correction, I am summarising the supposed BS from the DEC board.

While your at it, it seems the US DOE are investing $444M into even more BS:

https://netl.doe.gov/node/13090

There was a reason I tend not to post so often ciao

I tend not to post so often, but I thought I would try to provide an alternative perspective on a theme raised in earlier posts.

It tends to be treated as fact that "there are a large number of wells that DEC will need to retire at some point". This is incorrect. It is a potential scenario, the majority of investors may believe it is the most likely, however others may put a lower probability on this being the case.

I would refer investors to p32 of the May 24 Corporate Presentation deck titled "Working to make assets out of liabilities". Basically DEC are exploring how to use existing wells for carbon sequestration and how to time well retirements to maximize value to shareholders of carbon credits.

There are multiple paths and technologies to achieving net zero. Recent US laws provide significant credits for those who can successfully sequestor carbon. If (and it is a big if) this could be made it work, then DEC as one of the largest well owners in the US would stand to gain significantly.

I think DEC have created the time & space with their 10 & 15 year contracts with the various states to validate the feasability of doing this, especially in light of the innovation/ evolving tech in this space .

Notrex, the market cap of the Russel 2000 ETF's is not the relevent figure rather the assets under management of these tracker funds which is around ~$168bn (according to Tennyson Equity Research). In addition to this you have assets under management from the active mgmt funds that are benchmarked against the Russel 2000. These active mgmt funds are even bigger than the trackers.

By the end of 2025 ~6 billion cubic feet of additional LNG export capacity will be added, a demand rise of 40%-50% compared to today. In addition by 2030 export capacity is scheduled to double from present levels to ~30 billion cubic feet of export capacity. However today there is an oversupply of gas vs LNG export capacity hence the low prices.

This is not an issue for DEC as they are hedged 85% @ $3,83 for 2023, hedged 80% @ $3,32 for 2024 and hedged 70% @ $3,23 for 2025. However this does create a fantastic opportunity to acquire assets when other companies may struggle over this period.

In addition I expect game changing technology to enable net zero natural gas based power stations to be live in 2026, with accelerated roll out planned thereafter. DEC have in my view a 3 year window to acquire as many natural gas assets at great prices as they can. I expect long term DEC holders will be positively rewarded.

I think Benjamin Graham's quote that “In the short term the stock market behaves like a voting machine, but in the long term it acts as a weighing machine" is very apt here.

As an investor I make most money not by following the "voting herd" but by weighing up the available data and coming to my own conclusions about value. When there is a big disconnect between the voting & weighing outcomes, I have the biggest opportunity to profit. Specifically when it comes to DEC, I would just add the following:

- DEC's revenue over the next 3 years is highly secure. On p38 of the results presentation they confirm, 85% of the portfolio is hedged at $3,83 for 2023, 80% of the portfolio is hedged at $3,32 for 2024 and 70% of the portfolio is hedged at $3,23 for 2025
- At the end of 2025 LNG export capacity will increase to ~20B cubic feet (p11 of results presentation). That is a ~40% increase in demand from today. This will impact pricing positively in my view especially given how supply is not growing anything like that. Dec have protected themselves from price fluctuations in the interim time frame which could be quite volatile. This positions them to agressively execute their business model over next 3 years (as Rusty aluded to in his call).
- DEC has a current market cap of ~$990M. In the last 2 years DEC has made ~$1B in asset purchases all at great prices (i.e. they have not overpaid) as per their announcements. The market is effectively valuing the rest of the business built over the last 20 years for nothing.
- While the 2022 years end adjusted EBITDA is $503M, DEC have shown how this will develop by providing on p186 of the annual report, DEC's Pro forma Adjusted EBITDA, inclusive of Tanos II of $681M .

Individual investors need to come to their own conclusions on balance of risk, however it is important that all relevent available data points are used to come to an appropriate conclusion.

Hi Vista - the hedge accounting topic is a complicated area and I do not confess to be an expert in the details.

Hedges can be used to mitigate risk and act like an insurance policy. DEC are effectively insuring that they have sufficient cashflow to meet their business model needs. By end of 2026, 55% of outstanding debt will be repaid with this approach (p30 of final results presentation). Depending on where nat gas prices move over this time, DEC could easily lose another net $1B+ from a P&L perspective over that period and it would be no problem at all for the business.

DEC buy assets extremely carefully (always accretive & long life), this locks in a healthy positive cashflow delta at time of purchase. They then insure their cashflow risk to make sure all the debt associated with the purchase can be repaid in a reasonable time frame. So as you say they are super conservative and give up upside in order to ensure they can always repay debt & dividends etc.

Depending

Hi AoC

I disagree with a number of statements & the underlying logic in your reply. Let me try to briefly explain referencing a couple of statements in detail:

1) "Your example on the commodity hedging is incorrect. There is no loss booked in the P&L"
The derivatives that are used to hedge are made up of 2 components. Those that were settled in 2022 & those that will be settled in 2023 & beyond see table bottom p52 of the annual report. This total loss of 1758M is reflected in the audited P&L p130. The settled derivatives component is analagous to the example I provided. The unsettled derivatives component is an accounting adjustment based on the current price vs the hedge price when DEC took out their hedge. It is this component that does not cause an impact in the cash position. This distinction is often conflated.

2) "does the business model demand the extent of commodity hedging that DEC indulges in?"
At an absolute minimum DEC needs to have the cashflow available for the following:
a) Repay capital borrowed ~270M (for 2023 p30 of final results presentation)
b) Pay interest on loans ~82M (5,7% of 1435M of loans p30 of final results presentation)
c) Pay the dividend ~170M (0,175 for 2023 on ~970M shares)
d) Pay operating & G&A expenses ~616M (p51 of the annual report)
In total ~1138M of cash which is already 60% of 2022 revenue. I mixed numbers from 22 & 23 as I do not have all reports to hand, but just wanted to provide context. In my view the level of hedging is justified for this model.

Since 2020 based on a P&L view DEC has made a net lost ~$1B yet professional investors are more than happy to invest equity & debt into DEC. If anyone is not able to understand why I would strongly recommend not to be invested.

For those willing & able to invest for the medium/long term, I see DEC as highly undervalued with significant upside potential based on real & predictable cashflows. Good luck all. DYOR.