The latest Investing Matters Podcast episode featuring Jeremy Skillington, CEO of Poolbeg Pharma has just been released. Listen here.
Oops, fat thumbs. And too many furking ADS. Should have said..
LNG is a transition fuel.
Wind and solar generate when the wind blows and sun shines, but on calm nights you need to either have lots of storage, which we don't and is very hard, or something operating as a peak lopper.
LNG fuelled gas turbines are quick start/ stop units only using fuel when demand means they are on. They can go from fully off to fully on in minutes. Coal runs at Base load, a thermal power plant takes days to go from off to on. Nuclear is similar, you have huge ongoing overheads whether you're generating or not, and the reactors are also slow to go from stand by to full generation.
LNG is the interim fuel to get rid of coal until we have sufficient energy storage, either in the firm of gravity stores or batteries.
Green policies should favour LNG for the short to medium term as a result. Any shift back to black fuel is bad.
LNG is a transition fuel.
Wind and solar generate when the wind blo
So... DEC is one of a portfolio of shares I own that have fallen for no great obvious reason. Yields are high, bordering on ridiculously so, and cash generation is positive across the board. So why the falls?
Shorters are having a field day on London listed companies at the moment, but they are not the underlying cause of the falls, they are just taking advantage and exacerbating the issue.
The fundamental problem is cash outflow from the London market. The Evening Standard has a story describing it:
https://www.standard.co.uk/business/small-investors-uk-stock-market-record-pace-shares-london-stock-exchange-lseg-funds-investment-us-city-b1136580.html
In an environment where investor money is continually leaving a market, either to find a new home or to cover rising cost of living, then shares with any uncertainty, complexity, or temporary problem fail to compete in attracting enough of the reduced number of buyers in the market to sustain their share price.
Previously blue chip companies are seeing this phenomenon impact their share price, with yields amongst some big UK players now often in double figures due to depressed share valuations. VOD, AAL, DGE, RKT and many others sit on very depressed valuations despite strong cash generation.
DEC's price fall is not something that has happened in isolation. It's perhaps the worst victim of a market wide phenomenon, it's revenue and debt models beyond trivial understanding act as barriers to buyers with a wide choice of high yield options.
None of which means there is anything fundamentally wrong with the company. It doesn't have to maintain the current 30% yield for ever. Even if the yield is just maintained for this year, and there is no sign that won't be the case, there would have to be a further 30% fall in the share price for investors to lose money. With somewhere in the region of 276p dividend per share, the price would have to fall below 624 to lose. If they only manage to hold the dividend for the next two years, the share price would have to be below 350p for investors to lose, at which point the yield would be near 80%!!!
At some point investors have to notice the yield on offer. Right now it probably looks too good to be true and that alone is putting buyers off.
Saying it's unsustainable just because it's a big number without any other rationale for why the company can't continue to generate that much FCF ignores all the company fundamentals and is the wrong way to look at the value here. The recent trading statement tells us implicitly the next divi, and the one after that, and likely the one after that too are secure financially.
Long term the company will inevitably move its primary listing away from london to NY. That's when we may see a dividend cut, but I think that's 2025 at the earliest.
To be fair, US investors prefer buy backs over dividends because of the different tax treatment. Reducing the dividend and directly allocating the same amount of cash to buy backs would probably increase the share price sharply, not only because of the direct share purchases. Obviously they would have to accelerate the buyback program significantly against the current fairly anaemic rate.
Contrarian - the underlying driver for the inflation surge was energy costs which in turn spiked just after the start of the Ukraine war. If you look for a normalised lagging correlation between energy price, with say LNG price as a proxy, you will see a tight fit. Energy has reverted to its long term normal range, inflation will inevitably follow suit, the only question is the time lag. Consensus seems to be about a six month lag on the way up and a 12 month lag on the way down.
Given the removal of the core driver for inflation, and the internationally falling rates, interest cuts are a political when rather than a financial one. That political decision is all about timing for elections both in the US and here, with Hunt promising tax cuts and Biden admin thinking rate cuts and cheap energy going into the election. I'd expect modest rate cuts in the US in H1 with sharper cuts early in H2 to boost the economy. Here the BoE may act sooner.
A more scientific explanation is here https://www.sciencedirect.com/science/article/abs/pii/S2110701722000993
Meanwhile 10m shares is £10k. Going up a penny would be a ten bagger. Strangely if significant gold mineralisation is found that's not entirely impossible even relatively short term, but a 5x would be more likely.
Combined with GROC it's possible longer term to see the share price above a penny, or maybe even more.
Blacksteel,
Buybacks have a couple of interim benefits though, not least in terms of reducing dividend outflows. Not many other choices with free cash are going to have an in year 30% return.
The company has also likely made commitments to major investors to maintain the dividend. To do so the company may well choose to liquidate more assets particularly as it continues to trade at a large discount to NAV.
All this mean that whilst status quo structure would lead to revenue and profit decline, there is no sign that the company will suddenly decide to be a company content with status quo. History suggests constant change here acquisitions, disposals, buy backs, equity raise, and even organic growth via NXTlvl. It's hard to point at one event the management have executed which has been negative but the amount of churn has made it difficult to forecast what next.
One thing that could happen, indeed if the share price continues to tank, is a private equity take out. PE would be more than happy with the return levels on offer here, and at this price the company may be a sitting duck for a PE offer. An instant 50% premium to the current share price may not get board recommendation, partly due to Rusty's personal holdings, but I think a lot of holders may well take it if offered. Full return in 4 years is a massive carrot for PE, with an ongoing IRR of 30%+. On top no single big defensive holding, debt/equity under control, huge discount to NAV, stable hedged profit.
So watch for the signs of a bid, now that really would fry the shorters. At this price a bid will come.
Both thoughts are absurd.
Yes I have worked in oil and gas in the US. Yes there really are that many wells. In the oil and gas fields they are literally everywhere. You see them in fields as you drive by alongside the cattle.
I used to work just up the road from this location (off McHard Road, Pearland, Texas.). If you look in the fields you can see the shadows of the pumps (nodding donkeys). The pin is right on top of one, make sure you're in satellite view to see the shadows.
https://www.bing.com/maps?osid=0d2f3da0-ddf6-42d5-9963-6704f80c4616&cp=29.582495~-95.486185&lvl=20.08&style=h&pi=0&imgid=2c0ce19f-d670-4e38-930d-4bce29143d96&v=2&sV=2&form=S00027
See how many wells are in that field alone? They are stripper wells, producing oil but only just.
You also realise that DEC bought all these wells off someone else. They didn't drill any of them. Do you think they bought a load of fictitious assets with borrowed money?
That's the level of thinking you're at? Do the Wells exist?
Imagine for a moment a blue chip company like Conoco Philips would sell non existent wells to DEC. Or that the EPA wouldn't notice soemthing fishy in the emissions statements. Or that the 14 different banks lending against the estate wouldn't notice it was missing.
If it sounds absurd, looks absurd, on even the most trivial level of thinking seems absurd then guess what... It is actually absurd.
There is a really good question about when you HAVE to retire a well. That seems to underpin all of this.
If you're a big company with large operating expenses, loads of contractors, and high production targets then maybe you retire wells that are still flowing but only at a small percentage of their original production.
If you're a small company with low overheads, what is compelling you to shut down that same well? If it is still flowing, producing measurable output, its not leaking, and your well maintenance costs are lower than the value of the production why would you shut it down?
This is where you have to get the calculator out. Asset amortisation, maintenance costs, workover costs (if any), and ARO amortisation all intersect on a graph somewhere where the well becomes uneconomic.
All the arguments are about where that intersection is and when you incur the ARO costs. DEC are arguing that their maintenance costs and ARO liability are lower than industry norms, so their intersection point is further in the future with costs offset by lower levels of production. Some people obviously don't like that as it seems like sharp accounting practice or a fraud, but is really pretty simple. Oak blokes second hand car analogy is pretty close to the mark, although he would have been better using a Nissan Micra than a BMW, no chance of future classic status there!
The big wildcard and the other focus of attention is the evolving ESG requirements for older wells. That's why DEC have focused heavily and in advance of changing regulation on not only accurate measurement of emissions but also proactive elimination of them. Their answer to congress was strong on that front I thought, if not on all others.
One last mad thought. The big drop in the share price is actually good for shareholders who intend to hold rather than sell. The low share price effectively prevents equity dilution being used to raise capital for acquisitions, and the company will instead have to focus on debt reduction and profitability of the existing estate. That could well result in a much stronger company coming out of this drama than one which is tempted to over extend with more acquisitions.
How long for lab test results do we think? This isn't a ten ton low grade bulk sample so should be pretty quick I would have thought.
'Test what's in that bucket will you?'
'Can I do it after my tea break?'
'So long as you don't eat all the chocolate digestives.. '
'I'll have it done by lunch time!'
It would be a good promotion, but in order to make a statement on grades they need to send the samples to a lab for formal testing. One nugget doesn't make a mine, have you ever seen the film 'Gold'?
:)
Last message on the matter as I am starting to sound like the antigeorge.
There is a huge difference in per well cost for teams and equipment between a business retiring one well a year, one retiring 20 a year, and one retiring 250 a year.
The first two you have to hire not only equipment at retail, but also hire in Contractors as you won't have your own teams either, and probably not even your own SOPs and risk management plans. Everything will be done with the huge E&P upstream margins applied, no contractors think 'Oh, it's an oil and gas company, best knock the price down as they will be skint.'
By the time you get the economies of scale to be running a reasonable sized business with teams, execution templates, and equipment in house massive economies of scale kick in.
If that's not blatantly obvious I don't know what is.
Guess what, as demand grows they might even have to hire more staff tk drive the extra diggers. Imagine that.
Cross charge ex margin, or at fixed non commercial internal margin, also isn't unheard of.
And on top of that, why would anyone assume steady state for NXTlvl?
Surely as well retirement as a business accelerates they will be planning growth?
It's like 'thou shalt only have four JOHN deere diggers, and four will be the number of diggers you shall have for all time. Yeay, indeed shouldst thou consider expanding to five diggers you will be strucketh down by the God of capital amortisation, and your worldly estate will immediately revert to the sacred number of four diggers.'
Jeez. Hardly rocket science expanding a relatively low cost capital asset base to align with demand growth.
Nope, they don't have ARO obligations for 3rd party wells, why would they imply anything about them other than it's a profitable business line?
Why wouldn't they use their own equipment running their own business, the comparison is against their E&P peers that don't have their own equipment because they don't have asset retirement commercial businesses.
That's a bloody silly assumption of the worst case if you ask me.
By the way, having been in commercial engineering for E&P an 80% gross margin as bid is far from unhead of, my business unit would target 60% across all projects including the ones that went TU.
This nonsense about project margins and own equipment vs hire equipment is just FUD hype.
The earth moving equipment thing is a hilarious discussion.
Big companies need to work with big companies to rent equipment. That carries a massive premium, and is often not agile. You may end up hiring a digger, a loader, a dump truck, a drill etc for two weeks for a job that in reality take a day, but you have to book in advance as you won't know the exact schedule day and need the kit on site and available to work with your very expensive people when needed. Think $500 per day per item, x 4 x 10 - 14. $20,000 + of kit hire.
Compared to having your own equipment, your own delivery trucks, and combining a people team with kit as an integrated whole it's massively expensive to hire on a day basis, but cheaper if you are only using the equipment sporadically.
Buying, amortising over 5 or 6 years, and using intensively is much much cheaper, but you could only do that if you have a company or regular business to use the equipment intensively.
The difference could easily be in the $10,000+ bracket per job.
Oh dear oh dear rover. That's a real p1ss take.
:)
For once, and probably only once, I agree with George that the LSE is tighter than the circus that is the NY stock market. Some rules, like quarterly reporting, are good. Some are definitely derived from 'The Old West'.
Have none of you realised that 'Wolf of Wall Street' and 'Gold' are perilously close to documentaries?
Either way, the short attack is based on a right load of old bow locks dressed up as fact. Even George hasn't gone as far as the snowshoe guys.
Just a curious question... Do they need to RNS buy back every day or can they aggregate over a period, for example weekly? Seems the latter would save money on RNS posts, and really make no actual difference to the SP.