It's been 6 months since our previous discussion on DGOC. DGOC has shown a decline < 6 % p.a., announced an acquisition in Cotton Valley (new region) and aims to acquire more this year (50/50 with capital from Oaktree Capital.
Do you still hold the same view of DGOC or are you reconsidering based on their published numbers?
There are two major risks to the equity here, both driven by higher-than-expected decline rates: (1) the returns on the wells dropped into the PDP-collateralized SPVs are earning less than the all-in cost of borrowing; (2) the actual present value of the P&A is much higher than reported if regulators force P&As on their "farting" faster than their GAAP ARO liability assumes.
Operators are deft at stonewalling regulators on P&A's (see Fieldwood shallow GOM). Diversified also bought a P&A service company recently. I think they see that risk coming down the pike. But we will see how hard regulators push.
Curious what the equity value of the SPV wells will be after (if?) the SPV term loan gets paid off...
This, albeit late chat, is a great outline on the existing and continued problem... and a few nuggets that had me wondering thinking. I appreciate the article, really wish there was a few more wonderful reads.
Interesting read, thank you! Looking at their presentations, how would you explain that this production decline hasn't happened in the past 3 years on their legacy assets? They have explained that, even though the production isn't seemingly declining, it is in fact declining but they are putting previously built wells back into production to mitigate the effect. Have you looked at that?
As a final note, they explain quite literally in their presentation what they do to improve production/mitigate production loss through their smarter well management programs that have been excluded from this report. Have you taken this into account in your FLOW model?
Hi Tom,
It's been 6 months since our previous discussion on DGOC. DGOC has shown a decline < 6 % p.a., announced an acquisition in Cotton Valley (new region) and aims to acquire more this year (50/50 with capital from Oaktree Capital.
Do you still hold the same view of DGOC or are you reconsidering based on their published numbers?
Well written and well-researched. Would love to see the NPV sensitivity on the abandonment liability under various assumed declines.
There are two major risks to the equity here, both driven by higher-than-expected decline rates: (1) the returns on the wells dropped into the PDP-collateralized SPVs are earning less than the all-in cost of borrowing; (2) the actual present value of the P&A is much higher than reported if regulators force P&As on their "farting" faster than their GAAP ARO liability assumes.
Operators are deft at stonewalling regulators on P&A's (see Fieldwood shallow GOM). Diversified also bought a P&A service company recently. I think they see that risk coming down the pike. But we will see how hard regulators push.
Curious what the equity value of the SPV wells will be after (if?) the SPV term loan gets paid off...
This, albeit late chat, is a great outline on the existing and continued problem... and a few nuggets that had me wondering thinking. I appreciate the article, really wish there was a few more wonderful reads.
Interesting read, thank you! Looking at their presentations, how would you explain that this production decline hasn't happened in the past 3 years on their legacy assets? They have explained that, even though the production isn't seemingly declining, it is in fact declining but they are putting previously built wells back into production to mitigate the effect. Have you looked at that?
As a final note, they explain quite literally in their presentation what they do to improve production/mitigate production loss through their smarter well management programs that have been excluded from this report. Have you taken this into account in your FLOW model?
Excellent article...seems likely SWM will increase declines as the well uptime will be higher.