Release Date: August 15, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Diversified Energy Co PLC (DEC, Financial) generated $121 million in free cash flow with a 38% free cash flow yield.
- The company made $108 million in debt principal payments, aligning with their long-term strategy.
- DEC paid $65 million in dividends and share repurchases in the first half of the year.
- The company has maintained a 0% decline in production over the last three fiscal quarters, adjusted for acquisitions.
- DEC has returned over $850 million to shareholders since its IPO, showcasing strong shareholder returns.
Negative Points
- DEC continues to trade at a 37% discount to its peers, indicating potential undervaluation in the market.
- The company faces challenges in maintaining production levels without significant acquisitions.
- There is a reliance on federal contracts for well retirements, which have been delayed to the back end of 2024.
- The volatility in natural gas prices poses a risk to future cash flow and profitability.
- DEC's undeveloped acreage, while valuable, requires significant time and effort to monetize effectively.
Q & A Highlights
Highlights of Diversified Energy Co PLC (DEC) Earnings Call
Q: The Crescent Pass acquisition screened pretty well on our estimates. Could you talk about the depth of opportunities with similar attributes? Has the volatility in the gas space helped, or are more companies looking to unload assets to improve their balance sheets?
A: (Robert Russell Hutson, CEO) The current market is in a slight contango, with the lowest prices in the first 12 months. This makes multiples on natural gas deals appear higher. However, we see significant asset movement in the coming months and quarters, with opportunities in the Gulf Coast due to LNG export capacity. Valuations remain favorable for us to secure decent deals.
Q: On well retirements, it looked like you had a higher percentage of non-op activity last quarter. Is this indicative of more demand for next-level services, or just a one-time data point? Any thoughts on the cost of retirements or profit margins for third-party work?
A: (Bradley Gray, CFO) We are ahead of schedule on plugging diversified wells. The pace of federal contracts has shifted to the back end of 2024, so we focused more on internal plugging. We are well-positioned for third-party work in the second half of the year, with no significant cost adjustments year-over-year.
Q: Since Q4 last year, excluding acquisitions, production has been broadly flat versus the 8%-10% depletion rate in 2023. Are there any one-off factors, and what do you expect for the second half of this year?
A: (Bradley Gray, CFO) We had good production results in both Appalachian and Central Region, with some Marcellus production coming back online. Optimization projects have also contributed. We expect to trend back towards high single-digit declines in the second half of the year.
Q: The hedging strategy continues to work well. How do you maintain the right level of hedging when acquiring businesses that may not come with a hedge book?
A: (Robert Russell Hutson, CEO) We have provisions in our RBL to hedge acquisitions prior to closing, locking in the value we strive for. This minimizes price risk and ensures stability, which has been crucial given the volatile prices over the past few years.
Q: On undeveloped acreage, you've raised $15 million in Oklahoma in the first half. Is there any prospect of accelerating the disposal rate, and what is the average tax burden on your remaining portfolio?
A: (Robert Russell Hutson, CEO) We aim to accelerate sales when there is interest, especially in Oklahoma. The process depends on buyer pace due to land investigations and title searches. We have a good team working on these deals. Regarding tax, we don't anticipate significant cash tax burden due to our advantaged tax position.
Q: For the full year volume outcome, if we assume a return to previous decline rates in the second half, will average volume in '24 be slightly below '23, assuming no further acquisitions?
A: (Bradley Gray, CFO) With the Oaktree transaction adding a 15% uplift in production and Crescent Pass adding further, we expect to offset overall declines for about 18 months. We should be higher at the end of '24 compared to '23.
Q: What is the value of undeveloped acreage in your portfolio compared to current acquisitions?
A: (Robert Russell Hutson, CEO) The value of our undeveloped acreage will continue to materialize over time. New formations and opportunities will emerge, adding value. We have accumulated a lot of acreage without paying for the upside, making it a valuable proposition for us and our shareholders.
Q: How do you manage the integration of new assets and processes with speed and efficiency?
A: (Bradley Gray, CFO) We use a data-driven approach with modern technology tools, standardizing data and providing business intelligence tools to our teams. We are a 100% cloud-based company, allowing us to integrate new assets efficiently and cost-effectively.
Q: Can you elaborate on your capital allocation strategy and its impact on shareholder value?
A: (Bradley Gray, CFO) Our strong free cash flow allows us to create shareholder value through growing our production base, systematic debt reduction, and returning capital via fixed quarterly dividends and share repurchases. This balanced approach provides flexibility to allocate cash flows to the highest and best uses.
Q: What are your thoughts on the current trading discount of your equity value?
A: (Robert Russell Hutson, CEO) We see the current trading discount as a great opportunity for investors. We believe that as we continue to develop maturity and increase U.S. shareholder involvement, the trading discount will shrink, leading to multiple expansion over the next several months.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
