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Having access to capital when (you believe) assets are cheap is not a bad place to be. If we really are at the bottom of the cycle for gas price then buying now is the right thing to do. In two years time, assuming gas prices recover as expected, would Crescent Pass cost a lot more, the same , or less to buy?

The reason to buy now would be because DEC has the capital to operate them, or even just shut them in for that matter, until gas prices recover at which point they could create new hedge contracts at preferable prices.

George,

I agree your scenario could work, and some aspects are correct. However I think there is an equally credible alternative explanation.

One thing stands out in the Crescent pass acquisition, that is the fact their production doesn't seem to come with any hedges. In the current gas spot price market that makes them a distressed seller, and as such had to take whatever terms they were offered. Their cash generation would be in the gutter, and if they had their own finance to serve they may have been a lot closer to foreclosure than they would like to admit.

I agree the E&P brotherhood are incestuous, but they are not averse to cannibalising one of their own should the opportunity arise.

So maybe a slightly different scenario is that Crescent Pass, a tiny company with limited production and high debt ratio, were running out of cash and looking for a sale in a widely distressed down market. Along come DEC with enough money to bail them out and hand them a happy retirement, but forced them to accept DEC shares in lieu of cash for part of the deal. A nominally short lock in period was promised were DEC committed to buy the shares back at 'market rate' if Crescent Pass wanted to sell.

The net effect was to keep cash in DEC's balance sheet for the quarterly results, to give Crescent Pass an exit, and for DEC to hoover up some more production at an even lower multiple than originally offered.

Well you're the on joining dots between weird events. You revealing you have a brain after all and tackling some fake news is just as weird as it gets.

Still, could all just be random coincidence.

On the lock in period, how about we ask? I am sure investor relations should be able to come up with a response, I'll message them.

Still, explain the mechanism you think is working here. Its not at all obvious to me what would be in it for either DEC or Crescent Pass to even have the share element in the deal given the price shifts.

No, I was on about your contango conversation. I'm not much on conspiracy theories, who mentioned that? Good work keeping both sides honest for once.

Oh, one other odd thing, you revealing a degree of cynicism about our new visitor. All very coincidental.

George,

There is a lot of oddness going on. Its hard to imagine how the deal to issue new shares top Crescent Pass at a nominal value of $10.39 is related to buying back large volumes of shares in the $9s. Why?

Firstly why bother? Why not just pay the cash in the first place if the company had it?

Secondly, you would have to assume the Crescent Pass shares are subject to a lock in period longer than a week.

Third, where the heck has all the cash for the buybacks suddenly come from? Guessing it is related to acquisitions, but how? Maybe they raised more against assets than it turned out they needed?

In this one, I am in an honestly dunno state. It is a bit weird, and also as you rightly point out the buys are hardly supporting the price which given the 'normal' volume is a surprise too.

My own assumption is that this is a double down on the short attack, the company raised more for the acquisition than needed and as such has decided to spend the however many million dollars on extra buy backs to resist the shorts. Propping up equity value is a must if you want to be credible using equity to support acquisitions ever again.

RRB - Yep agreed. The point I was making was that the price they will be able to forward hedge at in two years time will be reflective of the spot gas price at that time. Spot price affects forward hedges, so yes they may not get the maximum effect from price spikes, which in any case are generally short lived, but for example will get an improved hedge rate for 2027 and 2028 and maybe beyond if the spot price is high in 2026. As I understand their strategy they tend not to hedge further out than two years, and are opportunistic about rate optimisation.

Yes I appreciate that is all jam tomorrow, but that's the whole point isn't it?

They have high leverage, but there is no suggestion they can't service their debts. Stating the dividend will be held for 3 years based on their cash model isn't without merit either given a four year natural gas price cycle.

Rrb1981,

No, the point is nothing to do with their income levels strangely. You rightly pointed out that hedges lag spot price by two years or so. The hedges their income is coming from right now were set a couple of years ago, I know they took some out just above $3 earlier this year so for the next two years they are trading with an income around $2.8 - $3.20 a unit.

The real point of the cyclical market is that they will be able to do future hedges at the spot price, not produce a spot income. Its a weird feature that futures prices are heavily influenced by the spot price.

The other weird thing that happens is that the whole market sector gets rerated based on the higher income potential. Again its counter intuitive. When prices are high, asset values are high, futures are high, share prices are high. None of which has any basis in revenue

George, that's lame even by your standards. Do try harder, clowns are supposed to be amusing rather than just, well, clownish.

Speaking of a cyclical market...

Have you ever looked at the continuous contract historic price chart? It literally spikes like clockwork.

Spike in Jan 2010 , Feb 2014, Nov 2018, Aug 2022

Troughs in Apr 2012, Mar 2016, Jun 2020, Mar 2024

Anyone notice a pattern there? Anyone care to make a prediction about 2026?

https://www.marketwatch.com/investing/future/ng00

Notrex, yep, and I have.

Time will tell whether that's the right call or not.

Nope, but the trick is to buy low and sell high. That means always going against what seems to be consensus.

Notrex,

Its more that when the price of your product is down everyone panics and thinks it will never go up again, the company is doomed, we are all going to lose our money, and vice versa, when the price is high and income is great no one is prepared for it to fall again, income to go down, dividends to get cut, so to fall etc.

Natural gas is obviously a cyclical product, just no investors seem to believe that, preferring to blame Rusty, the board, politicians, shorters, and everyone else

Looking at the trading volumes over the last week they have gone pretty crazy. Given the price movement, and the company decision to support the price, plus a lack of TR1s, the likely conclusion is the shorts are doubling down and it's a push - pull for the price over the next week.

Historic natural gas price chart here:

https://www.macrotrends.net/2478/natural-gas-prices-historical-chart

Notice how spiky the chart is. There are always peaks and troughs. The last ten or 15 years or so shows a decline driven by shale gas production volumes, but there is a minimum cost with fracking that makes the chart even more prone to spikes.

It all comes down to where gas prices go then, which given that DEC is a gas producer isn't exactly a surprise.

If gas prices continue to be low forever then they will inevitably struggle.

But as drilling has already been reduced, production will tail out faster than consumption will fall, so prices will inevitably rise again.

Maybe that's Rusty's bet, that he can buy up enough production at low prices to really profit when gas prices return to their previous range.

Plus another half million plus spent on buy back.

I agree with most of your points with a few exceptions.

The number of crews is not the problem in scaling. You can hire staff and scale easily once you have a repeatable model. Gaining the required corporate knowledge is the hard bit, going from no idea how to plug wells to having in house expertise is the expensive piece. Scaling it up is relatively low cost in manpower and equipment.

The low production volume wells are indeed a big question mark. When do you decide to plug them? Decay as I understand it is exponential not linear, and relatively low cost workovers can boost production again too. What are the fixed costs vs variable elements is the key question, when do wells become uneconomic to operate even minimally. I do agree they need to show some intent with a step change in the level of plugging.

The last point is the ongoing low gas price. Low gas prices inevitably reduces drilling as the cost vs return equation goes horribly wrong. So low price periods result in subsequent lower production levels and higher prices return. Right now the futures markets don't reflect this, with the forward range being in the top half of the $3s rather than passing $4. This winter La Nina could reshape the futures, but the jury is out on that right now.

The other factor is the depression of the wider sector now a democrat win looks more likely, Weirdly that may be good for DEC as the obvious pro-environment move would be to limit new drilling inevitably again pushing up the value of diminishing existing production. Of course they could return to DEC's ESG credentials, but I think the company has done enough to refute the worst allegations they previously faced regarding leaks in particular.

The big question about your assertion is over what period of time will they have to cap all 70,000 wells? 10, 20, 50, or 100 years?

Also the average cost of plugging is questionable. Simple shallow vertical played out wells cost a lot less to plug than complex, horizontally drilled, still pressurised wells might. DEC own a lot more of the former than the latter.

Also missing from your post is the fact DEC now make an income from plugging third party wells on behalf of both States and 3rd parties. That income looks like it will rise substantially as many of the companies currently responsible for ARO neither have the cash nor capability to plug their wells. Many are in fact untraceable with responsibility defaulting to the state.

How much revenue could DEC as well capping experts expect to make from capping 1,000 wells a year? Would it be enough to cover the cost if capping say 1,000 of their own?

Considering one isolated aspect of the company in isolation doesn't work. I would argue Dec's biggest issue is not ARO but clarity on their overall business plan. Their corporate updates present a lot of useful information, but are seldom referred to or even trusted by investors.