Member Info for asp1

Hi AoC

I think it is important to understand why DEC hedge. Their business model is buying legacy gas assets at low EBITDA multiples & operating them highly efficiently. Now in order to generate the funds to acquire assets, they can either issue equity (which they try to limit) or take out debt (their ABS notes which is currently their standard approach).

For an investor to invest in these notes they need to be sure they will get their money back plus interest. So in order to provide investors with the required assurance DEC have to take out hedges to ensure sufficient revenue is guaranteed to repay the loan and interest. Without these hedges the business model does not work as no ABS investor whould take the risk to invest.

Now as an example if in 2022 the average market price was $6 per unit of gas, the hedge price was $3 and the unit cost to produce gas was $1. Then DEC would generate a positive cashflow of $2 (3-1)per unit of gas but book a loss in the P&L of $3 (6-3) per unit of gas.

If the gas price goes up at at a faster rate than the average hedge price then losses widen and if hedge price goes up faster than unit costs then cashflow increases and vice versa of course. You see this reflected in the financials from 2021 & 2022. By design, DEC target the cashflow generation that is used to repay the debt and pay dividends. They are not targetting to optimize p&L at this stage (I think this may well change as debt levels are reduced and the opportunity to hedge less presents itself).

This business model requires a high degree of financial capability as well as operational capability, as its the operational teams that eek out extra production from bought assets and find cost synergies. Its then the financial guys who are able to take that delta and leverage it to purchase more assets and continue in this manner.

So yes you are correct re the volumes from the annual report etc. but that is intentional and also why they look to repay capital in the first 9 -10 years of an asset that is expected to have a 40-50 year life on average.

For me they operate in a conservative way and have a unique model in the industry. It really is up to individual investors to decide if they are comfortable with this or not. As you can probably tell, I am. DEC is my largest holding. Good luck all.

Ace

I agree re your price assumptions of $4.66MMBtu - $4.91 is high historically, but given the reducing investment in fossil fuel production globally over the last decade I am also not sure historical numbers (which reflects a higher level of investment in gas production) are valid to be used for a foward projection of 50Y.

On the ARO, I would say that they have started a well retirement business that will offset their own decomission costs, take your pick on assumptions re impacts etc. to their own net retirement costs, but again I think it could at a minimum hedge cost upticks over time that you refer

On the decline rate, from the previous ARO presentation (Aug 21) 75% of their wells had a decline rate of under 6% (which they are aiming to continue to reduce) while 43% had a decline rate of 3-4%. This was based on a sample size of 20K wells and was independently audited. The wells above a 6% decline rate had not had the smarter asset mgmt treatment fully applied - so again making a 4,5% assumption may not be so wild. I think acquisitions skew the number here. I would also expect any ESG remediations to stop gas leaks at the wells will also help reduce the decline rate.

I certainly think DEC have provided a rozy picture (thats their job) but I do not think the assumptions are too crazy

looks like I am not permitted to post a link - just google "gas demand 2050" - and you will find plenty of info

Reality is that Gas consumption will still be material in 2050 (see link) so a 50 year well life seems a reasonable assumption at this moment in time (china is still building coal plants at a massive scale !!). DEC have contracts in place for next 15 years (for 70% of wells) and 10 years (for 20% of wells) that agree the minimum number of wells that need to be plugged each year . Hence the ARO risk in this period is low (~2M USD max per year). After approx 10 years - debt has been paid off due to the amortizing structure in place - so revenue should be freed up to address the ARO.

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/global-gas-demand-to-rise-50-by-2050-gas-export-group-says-62844254