Agreement Underlines Importance
At first glance, the agreement with Kentucky to P&A wells wouldn't ordinarily be an issue, but given that the number involved is 7,500, the issue is significant.
This takes on new impetus once you consider that these wells are liable on today's balance sheet, so even if you assume that it's just the wells that are P&A-ed, assuming $30m per well gives you a liability of over $225mm.
While the monies still have to be spent, it is not now all a current liability and provided DGO's treatment of the wells in consideration remain within the agreement; there is little retrospective application of the law that can now be imposed.
We believe that the Company's owners should be pleased with the agreement, and one of the more significant headwinds preventing the price from strengthening has eased. Nevertheless, we also believe that the scale of the issue has now been quantified, which may also prove to be its a headwind, in the near term at least.
Whichever competing investor group dominates in the short term, this news underlines how important decommissioning is to free cash flow and how the Company is approaching its liabilities.