Member Info for Redtom

Edwina,
I like your thoughts here and that sounds quite feasible. I hope that is correct. I suspect more and more funds will avoid or will have to avoid DEC in the future. But income funds do like this stock and unless the divi is cut, there is a floor to this.

Apendragon, Your bet is clearly stated already - 50p by August. That is how we will judge your prediction. I've also stated mine as 115p. Daily movements are too meaningless.

MrG,
I agree with you. Hedging has nothing to do with the current SP struggle.
I'm at a loss to explain the sudden drop (and it was quite sudden). Extreme nervousness about the last deal (which has yet to complete) or is there something else that is currently hidden from the market? I personally think that DEC is planning a much bigger acquisition (with Oaktree) and this was the real reason for the late share placing. Whether this is true or not and has anything to do with the current SP, who knows. As you say, a trading update would be useful. I can't see the SP getting out of a 95p - 120p range anytime soon. But as long as the dividends keep flowing, I'm happy.

How about we discuss this more at end of August. You reckon 50p by August, I'm going to say 115p. Let's see who is closer by then, OK?

Is that your analysis. OK, whatever. Brilliant.
90% of 2021 hedged and 65% of 2022. Of course they benefit from rising NGP as they want/need to hedge further into the future whilst pricing is good. This is part of their conservative approach. Debt, anything more specific? Why did they 'overpay' for assets as you say? Seriously, if you want to discuss the company's finances, at least do a bit of research first.

How about a bit of analysis to support such a crass statement?

adv11/Ezio,
I've just checked and the 15% WHT appears on the annual Tax Certificate that HL sends you after the tax year has closed. In fact it was not in an ISA, just an ordinary share account.
The Tax Certificate has a schedule of 'Overseas Income' and clearly shows the 15% WHT as 'overseas tax'. This implies that this WHT was properly accounted for with the IRS. Obviously this is only as HL do it. I can't speak for other brokers.

My wife has DEC in both her SIPP and ISA and I can see that she only received 85% of the dividend in the ISA but the full 100% in SIPP. I need to take my own advice and move it from the ISA to the SIPP before the next dividend!

In fact the dividend arrived in my share account about 10 seconds ago. Nice to have some cash back from DEC and I can confirm no WHT. HL may not be everyone's favourite broker but they got this right.

Ezio,
Could you not put it into a SIPP and therefore have 0% WHT. I accept there is a cost but 3% of each divi would soon add up.

adv11, I'm sorry that you're having a wht problem.
All I know is that I correctly have 0% tax deducted as my holding is in a SIPP. I use Hargreaves Lansdown as they are pretty good in my opinion. Good luck resolving it but it might be more cost effective to move to a better broker.

adv11, I have not read the tax thread but the rules are reasonably straight forward.
Normal WHT rate between US:UK is 30%. Under the double tax treaty this is reduced to 15% on divis under normal circumstances (ie share account, ISA etc) and reduced to 0% for pension related holding accounts such as a SIPP.
Hold them in a SIPP if you want full payment, otherwise accept only 85%.

adv11, what tax problem? Are you talking about withholding tax on the divis? If so, it is not a real problem.

Temple, I do think this is a bargain and I have been buying heavily the last week or 2. I am way over-weight in this but accept the risk/reward balance. £10.3k dividend tomorrow will soften the blow a bit. But I'm still down as my average is around 108p.

I'm a bit puzzled by this one as I have done a lot of research. Let's do some basic maths regarding the acquisitions and funding before adding in some of the other variables.
Prior to fund raising SP was 122p giving MV of £863.4m (708m shares). So this was the value of all of the existing businesses etc as determined by the market. DEC decides to raise £159m by issuing 20% (142m shares) equity at 112p. Firstly let's assume that they retained the cash (ie no acquisitions). They still have the existing business (£863m) but also have £159m in cash. These 2 assets are 'worth' £1022m spread over 850m shares. This equates to 120p. And this makes sense as the existing shares were diluted by the discount offered to new shareholders. So from a pure mathematical perspective, we should have been at 120p.
But the cash was not kept as cash, it was spent on 2 acquisitions. There is a very detailed analysis of the impact of the 2 acquisitions (there is a link in another thread) and these acquisitions are accretive in earnings & cash. So again applying logic, the company is exchanging cash for more lucrative assets (as compared to its existing gas assets) which implies that the add on value should be proportionally more. Therefore the post-acquisition SP should be north of 122p with everything else remaining unchanged. Of course there are multiple other factors to consider.
On the plus side, gas (and oil) prices continue to rise which should increase value of DEC as hedged income can be obtained further into the future at higher levels. Equally similar assets re available in new fields at very cheap prices (various reasons for this, inefficient for the big boys, bigger companies becoming greener so selling 'dirty' assets etc) and DEC now has capacity to make bigger acquisitions (but only if they fit accretive criteria).
On the downside, fund raising spooked shareholders perhaps forcing some sales? Perhaps the markets do not believe the accretive nature of the acquisitions (they obviously carry risks). Are the markets worried that DEC will overstretch itself both operationally and financially? are 'dirty' companies like DEC simply falling out of favour with big institutions?

So what have driven the SP to 103p from where it should be (mathematically) of approx 125p?
I'm struggling to find logical answers to this question. Any thoughts people?

We have updated our dividend discount valuation of DEC which is based on the formula:
p0 = d1/(r-g) where:
p0 is our assessment of the fair value of the DEC share today
d1 is the value of dividends over the next year
r is the required rate of return
g is the expected long term organic growth rate
Buy recommendation maintained at unchanged price target of GBp140 We derive g
from ROCE adjusted for the production decline rate and payout ratio. Following the
acquisitions of the assets from Indigo and Blackbeard, we estimate 2021 and 2022 ROCE
at 12.6% and 12.0% respectively (previously: 11.6% and 10.1% respectively). We have
adjusted our estimate for the rate of production decline up from 5.9% to 6.5% to reflect the
higher rate of production decline at the new acquisitions. Our estimate for r is unchanged at
11%. Adjusting the average return on capital employed figure for 2021 and 2022 of 12.3%
by 6.5% to reflect declining production produces a return of 5.0%. If we then reduce this
number by 40% to reflect the dividend payout, we arrive at a sustainable growth rate in free
cashflow (adjusted) of 3.0%. Plugging our estimates for d1 (USD0.16), r (11.0%) and g
(3.0%) into the formula above produces a valuation (see figures 5 and 6 below) for the DEC
share of GBp141 (previously: GBp137). We maintain our Buy recommendation at an
unchanged price target of GBp140.

I'm exhausted. That was hard work as MMs were being difficult. I'm going back to bed. Stress done for the day.

Day,
Thank you.
Just did 71 transactions to sell the lot from yesterday. Quite a stressful 30 minutes!

Given the positive futures and Mr Copper doing well over night, I'm thinking (and hoping) that this opens around 118p? Is that unreasonable? 120p would be sweeter but let's see what happens in 45 minutes.

Billy,
I can't tell you how mad I am too on not buying Shell yesterday. I hovered over the button a few times at sub 1000p but didn't buy. After that it strengthened and closed way higher. I think it will open way higher today too. I think we need to put this down to stupidity!
Tom