John Bran;311475 wrote:Update from DEC bought more assets!
I will wait to see what oakbloke says.
Let him trawl through the maths.
Here you go Bran Flake! Apologies for likely annoying formatting …
Dear reader
The opposite of accretive is dilutive. Which was it for DEC-hands?
DEC announced the acquisition of high-working interest, operated natural gas properties and related facilities in eastern Texas from Crescent Pass Energy. The deal should close in Q3.
Thanks for reading The Oak Bloke’s Substack! Subscribe for free to receive new posts and support my work.
The Acquisition will be funded through a combination of the issuance of approximately 2.4 million DEC shares ($34,512,000 at today’s share price - which is 5.07% dilution for DEC hands) as well as a senior secured bank facility partly secured on the acquired assets, along with existing and expanded liquidity from the Company's recently increased borrowing capacity ($66,500,000 expected). The net purchase price should be circa $100m total.
The purchase is a PV-20 valuation. This means this has an IRR of about 20%. People are concerned that debt is being used. But what cost is the debt meanwhile? 7.28% fixed rate in ABS VIII. What’s 20% - 7.28% reader? The answer is
accretive.
How much debt headroom does DEC have? ~$130m. So in other words this is about 50% of remaining headroom and well below DEC’s limits, and was part funded by the issue of shares.
Txn Details:
Crescent Pass has current net production of 38 MMcfepd (6.3 Mboepd) and historically low annual declines of ~9%.
Production is ~92% gas with the remainder NGL/Oil
Attractively priced at $2,651 per flowing Mcfe (which is $16m per flowing MBOEPD). Interesting, too, to notice that EQT recently did a deal in April 2024 with Equinor and paid $20m per MBOEPD. So EQT paid 25% more than DEC. What’s $20m - $16m reader? The answer is
accretive.
Estimated NTM EBITDA based on NY Strip Price of ~$26 million is a 3.8x purchase multiple. PDP Reserves of ~170 Bcfe (28 MMboe) with PV-10 of $155 million. What’s $155m - $100m reader? The answer is
accretive.
Given its location right next to existing DEC assets there are opportunities for additional operating cost efficiencies. What has DEC proven time and again to achieve with its Smarter asset management? and what happens when you produce things more cheaply reader but still get the same revenue? Yes,
accretive.
Then there is further upside in that the purchase includes ~170,000 acres of commercially attractive leasehold in both East Texas and the Freestone Trend. How many times has DEC divested land reader? The answer is three times in as many years. $180m of divestments. What is the word when you earn an extra return on something at no extra cost?
Accretive.
What happens when you produce more gas in the parts of the US from which it is easier to export the gas as LNG and take advantage of Gulf Pricing?
Accretive.
What happens when you realise that the 4 year strip price of $3.95 (for 2028) is a super conservative price based on recent low prices and the $155m PV10 moves back out to circa a $300m valuation at the former 10 year strip prices being used just a year or so back? After all, the EIA today spoke of 2H24 prices being $2.90 average up from $2.10/mmbtu.
Accretive.
Comparing Crescent Pass to other DEC acquisitions
How does Crescent Pass compare to other acquisitions? Very favourably actually. $3.57m per MMBOE is the cheapest acquisition to date and $15.87m per MBOEPD is a little bit more than Tanos II….. but 25% cheaper than EQT’s deal with Equinor.
Analysis$155m of PDP assets.
5% dilution on a £525m market cap (or $672m) is $33.6m “cost of dilution”.
-
$66.5m of debt at 7.28% costs $4.8m.
Depletion, depreciation & amortisation at 9% is $14m
$1.6m is estimated tax
Totals $20.4m “ITDA” taken from $26m EBITDA
1. So the deal delivers a $55m gain of assets with potential upside.
2, The deal delivers an annual estimated additional net profit per annum of around $6m
3.If shorts are 7.5% of stock 5% dilution also means 0.4% of shorts pro rata disappear
ConclusionSome appear to have forgotten or misunderstood DEC’s strategy. Let’s recap it:
“We continuously refine the capital allocation framework in order to balance debt reduction, sustainable fixed dividends, strategic share repurchases and
accretive acquisitions.”
Yes, paying down debt is important, paying dividends and supporting the buybacks too. But acquisitions too. Accretive acquisitions. The assets have been acquired at an exceptionally good price and are well-located for LNG expansion.
Look at the PDP resources DEC now has accumulated in 2024 (compared to 2020, say). Nearly 900MMBOE - and that’s after an assumed 50 MMBOE gain so far in 2024 (taking into account an estimated 50 MMBOE production.
Put another way, operations generated $410m in 2023. $100m represents less than 3 months cash flow…. where the $26m EBITDA itself boosts cash.
These simple and accretive facts seem to have not been well understood by the markets today.Regards
The Oak Bloke