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According to the Financial Conduct Authority, 9.26% of the stock Diversified Energy Company (LSE:DEC), i FTSE 250 gas producer, abbreviated. Ten investors lent around £40m of shares in the hope they would fall in value.
Share price movements over the past five years may explain this pessimism. Compared to September 2019, it is down 63%. And it has decreased by 25% since the beginning of 2024.
Personally, I like DEC's business model.
It buys existing gas fields in the US and seeks to improve their performance and economic viability. It is argued that exploiting existing sites instead of digging new ones is better for the environment.
Analyzing the details
However, it is a very complicated business to understand.
It regularly buys and sells fields, enters into long-term hedging arrangements, has a complex debt structure and has a system on its balance sheet for the cost of underground wells. This can make its financial performance difficult to analyze.
For example, one of the preferred measures is net-to-pro-forma trailing 12-month adjusted EBITDA (earnings before interest, tax, depreciation and amortization). Bow your head to that!
But money doesn't lie.
By 2023, the company will make $410m in its operations. And during the six months ending 30 June 2024, it made $161m.
However, the company's eagerness to buy more resources and its need to pay off a large amount of its debt means that much of this is outsourced to third parties.
Politically unpopular
Concerns have been raised that the DEC is underestimating the cost of closing its wells.
In December 2023, four members of the US House of Representatives Committee on Energy and Commerce published a letter saying that agreements with certain states allow the company to waive up to $2bn in environmental liabilities. Although legal, the authors say this makes the DEC provide “profit visibility on paper“.
The company disputes that. In its defense, it says that these allegations stem from an old story that turned out to be untrue. It also points to awards it has won for its transparent reporting. And why the group's auditors never raised the topic.
Promoting measurement metrics
Despite these problems – which may explain why the stock is so popular with short sellers – I think it remains one of the best income stocks.
It currently pays an 'adjusted' dividend of $1.16 (88.2p) a year, which at the current price (4 October) of 898p, means a nice yield of 10.2%. But as a reminder that dividends are not guaranteed, its payout was cut by two-thirds in 2023.
Interestingly, the company's £440m market share is now not far off its book value as of 30 June 2024 of $548m (£416m). On the face of it, the shares appear to offer good value.
For these reasons, I remain a fan of the company – it has been on my watch list for some time.
But I don't want to invest.
That's because of the long-term decline in stock prices. Regardless of what I think, if others have concerns about the company, its stock will continue to fall. And in these cases – even if there is such a large share on offer – I don't want to part with my hard earned money.
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