The latest Investing Matters Podcast with Jean Roche, Co-Manager of Schroder UK Mid Cap Investment Trust has just been released. Listen here.
It's profitable and cash generative but due to historical issues with its Vislink Communication Systems divison (which it sold back in February 2017 following a strategic review) it became lumbered with ~£12.1m of bank borrowings and net liabilties of ~£6m as at the end of FY17.
Its been progressively repaying its bank borrowings ever since and its borrowing should now be down to ~£5.5m as at the end of FY23. At the end of FY22 it had net laibilities of ~£750k but should now have net assets at the end of FY23. It took a bit of a knock during Covid and the subsequent chip shortage (like a lot of businesses) but now seems to have fully recovered its mojo.
It's currently prioritising repaying its borrowings and I wouldn't expect a dividend to be paid in FY24 but, subject to working capital requirements and/or business investment opportunities that might arise in the meantime, I would expect a dividend to, at least, be up for consideration in FY25 or FY26 (the payment of a dividend would require court sanctionioned approval to convert its merger reserve and share premium account to distributable reserves).
That said, it did explore a potential equity raise in FY22 to provide it with additional capital to accelerate the development of next generation solutions but, despite good levels of support from existing and new investors, it ended up shelving the plans because of the worsening global economic situation and falling investor sentiment for the equity markets generally. If the markets and the global economic situation continue to improve throughout FY24, it may consider revisiting these plans if expansion opportunities exist (at the moment it's funding this investment from its own cash flows).
Positive update this morning. It's not every day that you find Pebble at the top of the share risers list ;-)
'Trotsky ? I mean, you wouldn't try to mislead the morons of this board by failing to warn what happened to the majority of 'investors' who were suckered by a carefully orchestrated con ?'
GG, as usual you are reading posts out of context. One would have thought that even you would have learnt to add by now! I wasn't advocating that the bulls should (or should not) buy. I was just pointing out that the short sellers could be countered by the bulls buying if the bulls were of a mind to do so and advocating that DEC should borrow to buy back shares was not a sensible course of action (none of us know the future and borrowing should be limited to operational matters, not propping up the share price).
You think that DEC is a con despite there being no real tangible evidence. I, on the other hand, am more concerned that DEC may be out on a limb i.e. having been brought to account, it can't now justify its depletion rate and ARO provisions being so materially out of kilter with other operators. The bulls on the other hand simply believe economies of scale alone can justify the disparity.
Bottom line, I think if the share price is to recover then DEC needs to do more to justify its depletion rate and ARO provisions than it has done to date to restore investor confidence and that borrowing to fund buybacks is not the way to go.
Obviously DEC needs to balance disclosure with business confidentiality but if you look at DEC's reports and presentations you'll find that despite there being a lot of information they are actually fairly detail light e.g. I could find a lot of words but very little detail about its underlying ARO assumptions. That's not necessarily unusual (companies generally try to disclose the bare minimum to try and maintain any competitive advantage) but once a company finds itself under the spotlight then it has to be more forthcoming (or suffer the share price consequences)
Just signed second SPL within a week. It would appear that the financial constraints that have afflicted the market over the last 12-18 months may, at last, be loosening. This could be good news for MXCT at long last.
Alternatively, the bulls could buy more shares themselves (it worked for GameStop). In fairness, quite a lot of the bulls are probably already tapped out (having been buying steadily as the share price has dropped and maxed out their exposure). Borrowing to fund share buy backs is a slippery slope especially if you consider the current economic and geopolitical backdrops. There is no absolute guarantee that base rates will drop; it might only take a further escalation of the conflicts in Ukraine and the Middle East to once more adversely tip the balance in favour of base rate rises. Topps Tiles tried a capital reduction back in the mid-2000s (because debt was relatively cheaper than the cost of dividends; not disimilar to DEC's current position) only to get unexpectedly caught out by the subsequent financial crisis. It took Topps Tiles the best part of a decade to repay its borrowings and the share price is still c75% below its peak back in the mid-2000s. Obviously a capital reduction is not the same as a share buy back and if DEC bought the shares back into treasury (and didn't cancel them) it could potentially sell the shares back into the market at a later date, if the share price recovers. However, borrowing to buy back shares is not risk-free and best avoided if at all possible; DEC's business is operating oil/gas wells not trying to manage its share price.
Bismarck, The results were, more or less in line with market expectations. There was something for everybody. From a bull's perspective, there was reassurance that it was business as usual and no nasty surprises. From a bear's perspective , there appears to have been a period on period decline in the production rate and potentially a (modest) rise in the depletion rate (none of which is necessarily conclusive). However, at the end of the day, it's the future potential ARO costs rather than the here and now that will finally decide whether this share price will rise or fall and, thus far today, the jury seems to be out.
NAV up 0.67p week on week. The trend continues.
Have you actually given any consideration to the number of people who would need to be treated? In all likelihood you'd be long dead before your turn in the queue came around! Current CAR-T treatments are not only expensive but also use a lot of hospital resources; patients currently have a risk/recovery period of 2-3 months and it's not uncommon for them to have to be admitted to hospital throughout because the treatment can impair their immune systems (it may cure their cancer but in the "change over" period they can be susceptible to other diseases).
I'm not saying that the research is without merit but, unless they can come up with a pill or an injection, the pure logistics, let alone the economics, of the existing procedures make a mass roll-out unfeasible. Furthermore, OXB is about the delivery system rather than the treatment itself (if you like, OXB provides the inhaler not the drug) and unless the drug makers can come up with a means to swap out the T-cells without the need for a "transfusion" (the reason that they have to remove the old T-cells before replacing them with the new T-cells is because they can't "co-habit") and the consequential hospital stay then the type of delivery system becomes a fairly mute point.
The existing treatment just can't handle millions of patients each year, let alone tens of millions, hundreds of millions or even billions; it's not (necessarily) the cost of the treatment that is the ultimate stumbling block but the time (2-3 months per patient) and resources needed (individually tailoring the treatment for each patient, hospitals, beds etc.).
Finally, and it shouldn't be ignored, no drug company is going to pursue this because if it achieved all of its aims it might ultimately put them out of business! You only have to look at the treatment for stomach ulcers to see that this is true; for decades drug companies refused to accept evidence that stomach ulcers were caused by bacteria in the gut and that some, if not all, of them could (potentially) be cured by a simple, one-off dose of antibiotics because they were making £billions from ulcer drugs (such as Zantac) that tackled the symptoms rather than the cause.
It should be noted that GSF is down c40% over the last 12 months whilst GRID is down c60%. It's not so long ago that people were bemoaning the poor performance of GSF relative to GRID and selling GSF to buy GRID; so things could be worse ;-)
At this juncture, I would only expect a dividend cut to be driven a fall in NAV and, for the time being, the current dividend of 7.5ppa looks just about safe IMHO.
Monty, the shorters are more concerned with the potential long term issues (ARO, depletion rate, ESG etc.) rather than the short term results. I would be very surprised if the results aren't materially in line with current market expectations, given the level of hedged production. The only thing in the results that might swing it one way or the other is the H2 production rate and/or greater transparency on their ARO and depletion rate calculations. The production rate is a two-edged sword; given the relatively low spot price during the period, one might expect that DEC would, from an operational perspective, have wanted to limit production over and above any agreed hedged production but shorters would no doubt see this as further evidence of a "false" depletion rate. If the production rate is lower than might have been expected then DEC will need to come out swinging (both justifying the production reduction and its depletion rate calculations). I don't think DEC can simply rely on "trust what we say" and leaving it at that (they need to anticipate and be proactive rather than reactive).
MrG123, I don't think as much consideration has been given to DEC's concentration of its production to certain geographic locales as it should. By piggy backing off the infrastructure needed for its more productive wells, DEC is able to leverage its economies of scale and keep less productive wells producing for longer. But the real benefit of this approach may not be so much its bottom line as deferring the date when its less productive wells might normally be abandoned and, by extension, the timeframe for plugging said wells.
It's debatable whether continuing to operate (potentially) thousands of wells at a (very) marginal operating profit is a good use of capital employed and/or just simply a mechanism to defer its ARO expenditure. DEC are currently selling it as part of their smarter asset management (SAM) i.e. maximising income/profits on its "dud" wells which they had to acquire in any event (they weren't permitted to simply cherry pick the "good" wells from the previous owners; they came as a package). This argument is not without merit. But if DEC's overriding business rationale is to simply defer its ARO expenditure then it does become a bit more questionable in the bigger picture; although there's a clear monetary benefit to deferring the ARO expenditure as long as possible it does, nevertheless, open up DEC to additional scrutiny over affordability and whether its ARO estimates are indeed all they are cracked up to be.
I'm not so sure. CAR-T treatments are individually tailored and, as I understand, involve removing an individual's existing T-cells and replacing them with altered T-cells (essentially using a process similar to a blood transfusion). It's never going to be feasible to do this on a large scale.
The Americans are historical isolationists (despite what some people might think). Couple that with the fact that despite what else is going on in the World they are wedded to cheap energy and if a president doesn't deliver (regardless of the reasons) they rarely, if ever, get given a second term. Against a backdrop of rising worldwide conflict and the prospect of higher energy prices, they are prone to go into their shell.
Even if Biden does get a second term, I'm not sure that he'll be in a rush to roll back the decision to pause the approval of licences for new LNG hubs. The Democrats are between a rock and a hard place and if they want to try and stop US politics lurching even further to the far right then they've got to keep those floating voters (the ones who are only really interested in their own "check" books) sweet.
PS. These are looking like politically desperate times in the US. Neither Biden or Trump will make for a good next president. On the one hand you have a Democrat who really should have retired four years ago but continues because there is no other Democratic candidate who stands a chance of beating Trump. Whilst on the other you have a complete egomaniac who is capable of anything (even bringing the US to the brink of civil war). The bar is so low that it makes both Sunak and Starmer look like political titans in comparison ;-)
Https://www.thetimes.co.uk/article/biden-lng-natural-gas-export-ban-uk-rqhwh5wvs
For those who can't read the attached link, the article talks about the Biden administration's decision to (indefinitely) pause the approval of licences for (new) LNG hubs.
The apparent rationale for the decision is that "... the present economic and environmental analyses used by the Dept of Energy to underpin its LNG export authorisations were roughly five years old and “no longer adequately account for considerations like potential energy cost increases for US consumers and manufacturers”, or greenhouse gas emissions ...".
The potential impact of this decision is (at least) threefold. Firstly, it has the potential to increase Europe's energy costs and either force us back into the arms of Russia and/or invest yet more into (relatively more expensive) renewables sooner (and perhaps forcing the UK, at long last, to invest more in its "not fit for purpose" energy transmission network; it's a national disgrace that we are currently paying some offshore wind farms not to produce because we are unable to transmit/store the electricity). Secondly, it will put a cap on US gas prices (whilst US supply continues to outstrip US demand), which may be good for US consumers and manufacturers but less so for US-based producers like DEC. Thirdly, it will (at least in the short/medium term) hand a competitive advantage to the US.
Personally, I'm not sure whether environmental groups aren't shooting themselves in the foot here. Americans are wedded to cheap energy and whilst oil/gas prices remain relatively low there is no incentive for the US to invest more in renewables unless the White House intervenes and, as evidenced by the Trump campaign, lower energy prices are still a potential vote winner in the US (and any president promoting more costly alternatives is unlikely to be invited back for a second term).
From a DEC perspective it could make it more likely that there will be lower prices for longer i.e. make it more likely that gas production will extend beyond 2050 (as DEC already expects) but that the prices realised will remain at the lower end of the potential price spectrum. Bottom line, not sure whether it's good news for DEC and its ilk.
Pickedpeck, You've completely missed the point. If you read the rebuttal letter again you will see that DEC says it was able to save money by using its own equipment on its own wells (the implication being that it didn't use its own equipment on third party wells). Given that it only capped six of it own wells in the period under review, it seems hardly likely that it has gone out to buy equipment soley for use on its own wells. QED it's more likely that it's currently using existing equipment from elsewhere in its operations.
Nothing wrong with that so far as it goes. However, as its production declines and plugging activities increase over time, it's unlikley that it will be able to continue to borrow equipment from eslewhere in its operations and will have to either buy or hire equipment for use in its own plugging operations.
The question therefore is, did DEC make an internal recharge for the use of it own equipment? I rather got the impression from the letter that they might not and, as such, their quoted plugging costs would be misleading and understated. Who's laughing now?
If you are interested in investing in bonds you may want to take a look at TFIF. It holds a portfolio of primarily investment grade bonds. It currently has a dividend yield of 9.01% based on the dividends paid for the year ened 31 March 2023 but is likely to pay 11p (a prospective yield of c10.5%), perhaps a bit more, for the years ended 31 March 2024 and 31 March 2025 (if there's no material change in the current base rates).
Caveat emptor as always.
I think a lot will depend on the bond's rating. Bonds with a rating below BBB- (on the Standard & Poor's and Fitch scale) or Baa3 (on Moody's scale) are generally considered speculative and often referred to as "high yield" or "junk" bonds.
Given the size of the bond relative to the size of RGL, it's likely that its bond would always been afforded junk bond status (the bond may even be non-rated; I don't think the bond was rated before issue). Furthermore, the bond is unsecured and, as such, a high yield would not be unusual.
I've never bought or sold bonds, so I'm not sure when the discount might normally be expected to unwind.
Bismark, Noted. Revenues may not be as impacted as I'd originally thought.
Gavister, It's not quite that simple. Not all of DEC's wells are producing. At 31/12/2022 (latest figures I can find at present), DEC said that they had estimated PDP reserves of 829 Mboe with a PV10 of ~$6.1bn or ~$65.8 per new share (in layman's terms, the PV10 equates to NAV). DEC doesn't disclose in its accounts how many unplugged wells it has but I believe the figure may be in the region of 65,000. If the present value of plugging costs are $100k per well, rather than $21k, then DEC's PV10 might be expected to decline by ~$5.1bn or ~$55 per new share, all other factors being equal (which would broadly mean the NAV would be ~$10.8 per new share). If the plugging costs were $125k per well then DEC would have a negative PV10, all other factors being equal i.e. it might be insolvent. It should be noted that the PV10 calculations are susceptible to oil/gas price movements.
Please note that DEC doesn't set out its PV10 calculations in any detail (I can't even confirm from the accounting disclosures that the present value of DEC's average plugging cost estimate is $21k per well or that this is the figure that's being used in its PV10 calculations; DEC hasn't fully provided its expected future plugging costs accounts and I haven't been able to find any disclosure in its current accounts to confirm that the calculations are based on $21k per well but that does appear to be the generally accepted figure). So, if I have erred in my calculations I apologise.
PS. I don't personally believe that DEC's average plugging costs will be in the region of $100-$125k per well but it's certainly feasible that they could be in $40-$50k range. DEC's current figure appears to be at the very lower end of the potential price range (if not a bit below) and, on that basis, I think it's perfectly reasonable that people should be questioning DEC's figure (if nothing else to satisfy themselves that it is actually achievable).
Be honest Trek, do you really think that DEC's rebuttal letter has put the ARO question to bed? I didn't see anything new in the rebuttal letter that DEC hasn't said before.
The letter conveniently ignored the fact that the average cost of retiring their own wells during the period referred to in the letter were 19% higher than their projected ARO costs ($25k vs $21k). The letter also seemed to imply that the costs might not have included any earth moing/excavator costs because they'd been able to borrow the plant from other parts of their operations. Utilising plant in this manner is perfectly acceptable but there should be an internal, "market-rate" recharge, particularly if it's not going to be a long-term option. My expectation would be that as its oil production winds down over time and its plugging activities increase it's going to have to either buy or hire plant to undertake the plugging operations (so a cost saving now doesn't really give an accurate picture of what its costs might be in the future). I think DEC does need to do more to justify its expected future ARO costs and, if appropriate, explain what economies of scale may come into play furthe down the road (puchasing power is unlikely to be a major factor in the future because they should be able to realise most, if not all, of that benefit now from taking on third party work).
There's also the pertinent question of whether or not all of this adverse publicity will enable DEC to continue deferring its existing plugging obligations and/or whether previous agreements will be revisited. My current take is that DEC already has a lot more dormant wells than its currently plugging and that, by agreement with various state bodies, it's been permitted to defer plugging those wells to build up its cash resources. If those agreements are now revisited then that could create a major problem (the only way DEC could afford to materially increase it's current plugging rate would be to cut its dividend and/or borrow more money).
PS. Given the hedges that DEC was able to renegotiate in 2022, 2023 results should invariably be good (certainly compared to 2022) but the benefit of those higher hedge prices is going to start dimimishing from 2024 onwards and, given that the HH spot price has, for most of 2023, been below $3, the opportunities for DEC to have achieved equally favourable hedge prices for 2024 and beyond would appear unlikely. Obviously their hedging positions are built up over a number of years and results should not necessarily "fall of a cliff" in 2024, albeit that it appears likely that their average hedged price will now be lower than 2023, but the longer the HH spot price remains below $3 the worse future years will become.
I don't know whether there's any merit to Snowcap's comments on the gas price DEC "needs" but at this moment in time the HH spot price is definitely on the wrong side of $3.
DEC's closing price on the NYSE was actually lower (about 17.5p give or take) than its closing price on the LSE today (based on the current exchange rate of $1.27 to the the £1).
Really? You two must live in a closet if you think that LSE is alone in seeing wild price fluctuations.
Remember GameStop? People seem to forget that the value of the so called "Magnificent 7" actuallyt fell 39% in 2022 (that's $trillions); since then they have collectively recovered and at the end of 2023 were worth about a $trillion more than they were at the start of 2022. Have you never read headlines about Musk losing $billions in a day or the daily travails of bitcoin investors? At the end of December 2022 bitcoin hit ~$16.5k and looked to be heading further south. It now trades at ~$40k.
The markets can be very unforgiving places and the LSE is most definitely not alone.
PS. JD Sports crashed and burned becasue it made a major boo-boo; it stocked up big-time on Nike's new retro Tech Fleece thinking it would fly off the shelves at £120 each. It didn't and JD Sports was left with large stocks and forced to discout it (in competition with Nike's own direct-to-consumer channels). Big picture, Nike is increasingly looking to try and cut out the middleman and this fiasco has raised fresh concerns about JD Sports future relationship with Nike; JD Sports heyday might have come and gone. Bottom line; if JD Sports needs its high-end suppliers more than they need them then JD Sports may have a big problem (I'm sure the likes of Nike, Adidas et al would much prefer that £900m of profits sitting in their accounts rather than JD Sports). You just have to look what's happened to Currys & PC World to see what could happen to JD Sports (Currys only still exists because the likes of Sony, LG etc. need a shop window for their goods but make no mistake it's Sony, LG etc. who call the shots and decide whether Currys makes a profit of not). Some investors are concerned that the "fat times" may be over for JD Sports.