Over the past month, the Diversified Energy Company (LSE:DEC) has really struggled. It has fallen by 20% over this period, hitting fresh 52-week lows last week. Now down over 50% in the past year, the FTSE 250 firm clearly isn’t inspiring investors. Here’s why I don’t think things will get any better in the near future.
Recent problems
Over the past year, the natural gas benchmark price is down 23%. Given that the firm is in the business of acquiring, optimizing, and managing existing natural gas and oil assets, this doesn’t help. If we’re looking at just the past few weeks, the fall in the share price also matches up very well with the 13% fall in the price of crude oil.
As with any energy stock, there will always be a strong influence driving it via the price of the underlying commodity. The reason for this is that the price of the end product impacts the revenue (and ultimately the profit) of the business. The Diversified Energy Company could deliver exactly the same amount of natural gas and oil as a year ago, but if the price of the commodity is down, revenue is going to fall.
Another problem was noted in the half-year results. At first glance, shareholders would probably be quite spooked to see that operating profit dropped 99% versus the same period last year. This meant the company posted net income of $15.7m in comparison to $630.9m in the year prior.
On closer inspection, this was actually due to “fair value adjustments of unsettled derivative financial instruments”. So this isn’t a cash loss, but it’s true that the large swings in accounting details would likely have put off some potential investors.
The direction of travel from here
I recently wrote about the fall in BP shares, noting the impact that the lower oil price was having. One reason why I’m holding off buying (even though I like the stock) is because I think oil and gas prices have further to fall in coming months.
Demand out of China for these commodities is still low and I don’t see this changing soon. Further, I’m hopeful of a ceasefire in the Middle East. If seen, this would likely cause the oil price to fall further. When I tag on other reasons, I just can’t make a compelling argument to make oil and gas prices finish the year higher than currently.
As a result, it doesn’t make sense for me to buy Diversified Energy Company shares now. Further, even when I decide the time is right to buy an oil and gas stock, I’d much prefer to buy a larger, more established company, such as BP.
Sitting this one out
I don’t believe that the firm is in any material difficulty right now. It’s still profitable and is pushing ahead with some interesting projects, such as the one in East Texas. The potential to grow is definitely there, and it has a good track record.
However, I think the move over the past month shows how sensitive the stock can be to changes in commodity prices. For that reason, I’m staying clear right now.
This post was originally published on Motley Fool
