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Hi Cumbrian,
I would second Easy_Livin's comment - IWeb are my main ISA provider but (at least as at 2021) would not honour the 15% ISA rate. You will find a number of other holders complaining about this lower down the board!
It's a substantial difference for me - almost £300 per quarter. As a result I opened a second ISA account with XO Jervis - I can confirm that they do honour the 15% if the W8-BEN is completed. Like iWeb, they don't take a % of your ISA each year, just £5.95 dealing costs.
At present I believe the law is that you can only contribute to one ISA account per year - this may be changing soon (as per the autumn statement) but perhaps not fast enough for you.
If you still want to get invested before the new tax year then you could use a spreadbet position as an interim measure until you can fund your 2024/5 ISA. I did this a couple of years ago, so can confirm that IG Index will honour the 15% if you complete the W8-BEN. I can't confirm for other spreadbet providers.
Joedjoed - you're not wrong about margins of course, but I guess my point would be that this is a short term drop driven by a warmer than usual winter in the USA so far...it won't significantly affect the price at which DEC hedge going forward for 2026 and beyond.
That will much more be driven by demand increases due to the new LNG export facilities, which others have already alluded to.
Cost of production won't have changed much since earlier this year - if anything, DEC have a decent track record of reducing production costs (once you strip out the effect of acquisitions/geographical expansion and compare like-for-like assets).
What makes the yield really bonkers is if you are investing with a bit of leverage.
IG Index have a margin requirement of 20% - so technically you can be exposed to £5k worth of shares for £1k of capital.
If you put up double that i.e. £2k then you have £1k to cover share price movements, and are exposed to £5k of shares.
That takes the dividend yield to 47%, even after 15% withholding tax.
Unless you believe that DEC is going to collapse in a heap, that return is quite enticing.
As far as I'm concerned I hope the US natural gas price drops like a stone this winter - DEC are hedged at a hugely profitable price for the foreseeable future. When I was first investing here, Rusty was saying that the company made a tonne of cash if they were able to sell gas at $3 - they are hedged for $3.80 for this quarter, and 80% hedged at $3.30 for 2024. So DEC is pretty much immune to short term gas price fluctuations.
The actual effect on the business is that if DEC's (largely unhedged) competitors are hurting a little bit then they are more likely to sell gas assets to DEC on advantageous terms to bring in some cash.
And, of course, it's helpful to have all the future hedging 'in the money' at year end so that the IFRS accounting doesn't mislead potential investors into imagining that the company isn't profitable!
Fingers crossed that some US institutional and private investors have been waiting for a US listing before investing.
I've picked up another 300-odd shares to reduce my average and hopefully get a few more at/near the bottom.
Agree - good to get confirmation that the model still works and everything is going fine in terms of production.
Also good to see that 80% of 2024 production hedged at $3.31
And the dividend confirmed.
I'll plug the numbers into my spreadsheet later, but at first glance it looks like a positive update.
* what we have here
I agree with MrG123 and Andy144 - it's curious to suggest that the share price does not lie.
If an investor took that idea to its logical conclusion, it would be an unmitigated disaster. You'd invest at the top of the market ("the share price doesn't lie - this is expensive so it must be good!") and you'd sell at the low point ("this is cheap so it's not worth holding!").
MrG is right - as investors we need to try and look beyond the share price to the underlying business, its revenues, margins and cash flows. As he says, the business is substantially unchanged from 2022 when the share price was much higher.
I don't see how investors could possibly come to much harm if they are investing in the 70-80p range. Whatever you think of the market conditions, interest rates, macro outlook for natural gas etc, what we have hear is an investment with an asymmetric payoff: very considerable upside in potential capital gains and dividends, but minimal downside risk because the post-hedging revenues are so predictable.
Gavster - I suppose the reason it matters is this:
Your view implies that the coming changes to the EPA rules will be significantly damaging for DEC.
In which case, it might well be a long road back up.
My view is that the coming EPA changes will be no worse than a minor irritant for DEC.
This viewpoint implies that the current low price is an enormous buying opportunity.
My view is that DEC's business is strong enough to continue to pay dividends at the current rate, even in a higher for longer interest rate environment. When DEC demonstrates its ability to do this, the price should go back up - so perhaps not such a long road back up after all?
Accordingly I topped up in my ISA with £10k early on Wednesday morning.
But the very strong probability of those rules being changed has been known since 1 August. The document from the green activists won't have moved the needle - if the EPA consults on changes to rules then you know that they fully expect to change the rules!
There is a big difference against the Bloomberg report. That was a pretty cynical hatchet job - but it was news - and the market reacted straight away.
To give weight to your interpretation, we have to believe that:
(i) the new EPA rules are Very Bad for DEC; and
(ii) the market was told about these Very Bad new EPA rules 2 months ago, but did absolutely nothing; and
(iii) the market follows the publications of obscure green activists and when they realised that these activists agreed with the EPA's proposals, which had been public for 2 months, the market absolutely soiled its pants.
Not sure that adds up...
Hi Gavster,
I can see why you might think that given the timing. However, the reality is that the EPA's consultation document (i.e. the formal notification of the new reporting rules they are considering) was published at the start of August 2023.
Andy144 has posted the link before:
https://www.federalregister.gov/documents/2023/08/01/2023-14338/greenhouse-gas-reporting-rule-revisions-and-confidentiality-determinations-for-petroleum-and-natural
The document you linked to on Monday is not an EPA document, it is a response by a group of green activists to an EPA consultation. Naturally, the activists are in favour of more stringent reporting on methane emissions. And the Pope is Catholic!
What is not clear to me is why anyone would give any weight at all to a consultation response.
The "news" of the EPA's proposal to revise these reporting rules was public from 1 August - two months ago!
But it was never mentioned on this Board (where there are a good number of well-informed investors), never mentioned by the Company, never mentioned by the many analysts who cover DEC. And the share price in August was in the 90s, with a nice peak to 96p at the end of the month.
In other words, Mr Market took a look at the actual EPA proposals which are being consulted on and basically shrugged his shoulders. The effect on the share price was absolutely negligible.
So the idea that a response document from green activists to that same consultation paper has moved DEC's share price by 15% in two days doesn't really seem credible.
I think it's far more likely that the very quick slide down through the 70s was caused by stop losses being hit, and investors not wanting to "catch a falling knife" until the company confirmed no known reason for the reduced SP.
The real reason for the SP drop seems to be set out in the First Berlin equity note published today.
https://www.investegate.co.uk/announcement/eqs/diversified-energy-company--dec/original-research-diversified-energy-plc-vo-/7801685
"Yesterday morning management commented that they are unaware of any operational or company-specific reason for the share price decline. In particular, we gather that UK-based income-focused funds are experiencing increased redemptions in this higher interest rate environment, which is causing them to sell shares, including those of DEC."
This makes much more sense to me, and it explains why so many income producing shares have been hit, not just DEC. My other income holdings in Aviva (before the takeover rumours), L&G, BAT (even before Rishi's announcement), RIO, BHP also had a real weak patch - obviously this effect is magnified in a smaller company due to lower trading volumes.
The OakBloke's analysis is not new, but it is a nice simple explanation: thanks for posting.
I previously looked at this matter in Feb 2022 and people found it helpful to understand how the hedging worked, and in particular why DEC was reporting huge "losses" at a time of enormously high gas prices...and why it was not a disaster.
**Reposting below in case useful to other investors. Note this was written in Feb 22**
My understanding is based on p13 of the October 2021 Investor Presentation, and it is as follows:
1) Let us assume that DEC has a projected production volume of 50,000 MMcf for Q3 2023 and, at FY2021 year end, have hedged 50% of it at an average price of $3.00/Mcf. (That level of hedging for a period 21 months away would be broadly in line with the hedging strategy set out on p98 of the Capital Markets Day deck.)
2) Let’s further imagine that the Henry Hub gas price at 2021 year end was $4.00. The Company’s hedges at $3.00 for that Q3 2023 would be underwater – they would owe $1/Mcf on the hedged volume. In other words, the Company would (hypothetically) owe the counterparty $25m if those Q3 2023 hedges were (for some reason) suddenly unwound.
3) Of course, $25m in the red is pretty small beer, but $25m in the red for 10-12 future quarters can stack up pretty quickly. It is this ‘paper loss’ of multiple future quarters that is reflected in the accounts – see the 2021 HY accounts for a good example of this.
4) However, when we actually get around to Q3 2023, the Company will have that 50,000 MMcf of gas, and if it is able to sell it at $4.00 then it will have $200m of revenue from gas sales in the quarter. At that stage, DEC would have an actual cash loss of $25m on the hedging, but have made $50m more on gas sales (than if the price was $3.00).
Plainly, higher gas prices are a Good Thing for DEC because DEC produces and sells gas and never hedges 100% of its production. However, the 'mark to market' accounting rules produce some strange results due to the obligation to recognise paper losses from underwater hedge contracts, while not reflecting the cash gains that DEC would make if the gas price stays at the high level.
So, the answers to your questions are:
1) If gas prices never go down, then DEC simply sell the gas they have produced at very high prices, which is a Good Thing. The non-cash hedging loss (for each relevant quarter) will at that point become a cash loss - but that cash loss will be offset by very high revenue from sales of gas.
2) The hedging loss can be greater than operational profit because the hedging stretches a few years into the future (albeit not in respect of 100% of production), while the operational profit is a figure that refers to only six months' worth of DEC's activity (or 12 months for annual numbers). If you look back in the accounts to when the gas price fell significantly, then you will no doubt see hedging gains which exceeded the operational profit fo
Levantic - in short, no.
If you look back at the 2019 annual report, or the 2020 interims, you'll see that during times of low gas prices, the hedges contribute millions to the bottom line. This is what has made it possible for DEC to increase the dividend regularly since IPO, even in times of low gas prices.
I would anticipate that the interims (to be published in August) this year will show a significant cash gain in relation to the hedging, as our hedged price for 2023 is considerably higher than the current spot price.
Ascoyne,
I was also with iWeb in 2021, and had the same issue that they would not honour the 15% rate.
Others on the board had the same issue, and while iWeb are wrong, my view was that they likely would not change!
My solution to the issue was:
In the short term - to sell my shares held in iWeb and stay invested by opening the equivalent spreadbet position with IG Index - which does honour the 15% rate with a W8-BEN.
N.B. I did this by selling immediately before the next dividend, and buying in IGI at the ex-div price. While not without risk, the outcome was that I *essentially* got the untaxed value of one quarterly dividend, which helped offset the pain of having been taxed at 30% on the previous one.
The benefit of all this was that I did not have to withdraw a large sum from the ISA tax protection to stay invested in DEC, as I only had to fund 25% of the position to open the spreadbet. And, of course, I was able to redeploy the capital from selling DEC in the ISA.
In the long term - I opened my 2022 ISA with XO Jervis and used this year's allowance entirely for DEC shares, selling down the spreadbet each time I invested in the ISA. XOJ also honour the 15% rate and (like iWeb) do not take an annual percentage of your ISA pot.
Note that you can have multiple stocks and shares ISAs - you just can't fund them both in the same tax year, which is why I did not go straight to opening a different ISA account.
Of course, now we are so close to the end of the tax year that (depending on your amount invested and funds available) it may make sense for you to go straight to XO Jervis for the May ex div date, without the intermediate stage.
No doubt other brokers honour the 15% too - my objection to most of them is that they take a percentage of my ISA as the service charge!
Hope this is helpful.
MJ
Happily, Bismarck, you don't have to wait to see those hedge prices for 2024.
Ceri Evans kindly posted them a few days ago.
Copying and pasting C.E.'s link:
https://www.cmegroup.com/markets/energy/natural-gas/natural-gas.quotes.html
Looks good to me - in general, the price offered in 2024 looks to be well north of $3.50...
Thanks Trek,
Interestingly, £1.66 would be a market cap of over $2bn - which has often been thought of as being the threshold for a US listing to be viable. I have a fairly jaundiced view of Simply Wall St so I will make no comment about the exact £1.66 figure, except to note that it is in the same type of range of target prices estimated by various brokers covering the company.
As posted before, on the basis of all the publicly available information about the hedging levels, expected production, and costs of production, I certainly agree that DEC is massively and bafflingly undervalued.
Personally, I've been picking up shares in the last couple of weeks and, since the placing, have added around 14,000 shares at an average price of just under £1.03. Time to back up the truck, I think.
MJ
Thanks Ceri,
Good to know I was not barking up the wrong tree in relation to the options stuff. Looking at that CME link, I was particularly struck by the strong prices for 2024 and 2025 - obviously it is subject to seasonal variation, but looks to average about $3.50.
Good luck to all holders here.
MJ
Hi Trek,
With great respect, I think your concern about the level of hedging for future production is misconceived.
Ultimately, the level of hedging for future production derives from the futures market, not the day to day spot price.
This is outside my expertise, but from a bit of desktop research there still look to be plenty of products to hedge future production beyond 2023 at levels well above $3.00 - i.e. massively above the current spot price of Henry Hub gas.
https://www.cmegroup.com/markets/energy/natural-gas/natural-gas.quotes.html
https://www.teletrader.com/quickbar/nymex-futures/henry-hub?ts=1677084805423
Furthermore, the previous time that natural gas prices were low - around $1.75 in H1 2020 during COVID - DEC's hedging was absolutely fine. If you look back at the 2020 Final Results Presentation, on page 5, DEC had managed to hedge for 2021 at $2.94 and for the first half of 2022 at $2.84 - i.e. very significantly above the spot price available for most of 2020.
This is of course completely logical - if you are a user of a commodity that normally sells for $3 and it is currently $2, the obvious thing to do would be to stockpile at $2. If that is logistically difficult (as it is for natural gas) you might well be very happy to enter into a derivative position which (economically) ensures you will pay only $2.60 for your gas usage for the next 2-3 years...so there should be no mystery about why, when spot prices are low, you can hedge at a price higher than current spot.
Finally, take the numbers that I've calculated for cash profit in FY22 and FY23 - $462m plus $714m = $1,176m.
At present FX rates, this equals £971m.
Given that (post-placing) we will have 970m shares in issue, and that the share price today is circa £1, the market cap of the entire company is at present approximately equal to the combined cash profit of FY22 and FY23.
With great respect to Mr Market, that can't be right. I won't pretend to be able to explain the drop in share price to you.
Is it an artifact of the placing whereby large institutions and HNWIs who have appetite to buy DEC had that appetite satiated via the placing, causing a short term lack of buy-side demand? If so, it implies that this will be a temporary blip.
Does it reflect the drop in the gas price? If so, it implies that the people trading the stock are poorly informed about DEC's hedging arrangements - which will ensure they are selling at a highly advantageous post-hedging price for the whole of FY23 and FY24, by the end of which, new export facilities will be starting to come on-line.
Or is it a reflection of wider market malaise? If so, I'd suggest the fall in SP is inappropriate not at all clear to me that a recession/higher interest rates would significantly affect the market for natural gas in the US.
I suspect we are seeing a combination of all three - which leads me to think that this is an enormous buying opportunity in respect of DEC, the likes of which we may well not see again.
Next, consider the acquisition itself.
The announcement and presentation state that we are acquiring assets which produce 17 Mboepd in a 76/5/19 split between gas, oil, and NGLs. Adding this acquisition in to the projected figures for 2023 - noting the decline rate (for all assets) of 10% and that the effective transfer date will be 1 Feb 2023) - suggests that DEC will have production of 146.3 Mboepd in FY23. Of course, this assumes no disruption to production, but it also assumes no further acquisitions.
In FY2023, this would translate to post-hedging revenue of $1.3bn. (Assumptions are $3.46 gas, $70 oil, $36 NGLs.)
Assuming costs at $10.97 per Boe, this implies total cash expenses of $585m - and therefore cash profit from the core business of $714m - a cash margin of 54%. Or, in other words, cash profit of $0.73 per (post placing) share in issue - which would be a 50%+ improvement from the $0.47 profit per share that I've calculated above for FY22!