Diversified Energy Company (LON:DEC) continues to stand out in the oil and gas sector, demonstrating resilience and significant potential despite broader market challenges. Tennyson Securities remains bullish on the stock, reiterating a BUY recommendation with a target price of £20 per share. The company’s impressive free cash flow (FCF) generation and smart acquisitions set it apart from its peers, making it an attractive investment opportunity.
Strong Financials and Cash Flow Potential
Despite a dip in global energy stocks, Diversified Energy has maintained robust performance. The company’s estimated US$1.5 billion in free cash flow over the next five years will allow it to reduce debt by US$1 billion, all while paying dividends to shareholders. Tim Hurst-Brown, the lead analyst at Tennyson Securities, highlights that the company’s cash flow benefits from a steady base of production, which has outperformed expectations for three consecutive quarters. This consistency, combined with strategic acquisitions, has provided a significant boost to EBITDA.
Diversified Energy’s ability to unlock value from its existing assets is a crucial part of its success. The company owns 8.6 million net acres of leases, with 65% remaining undeveloped. Recent land sales support a valuation of over US$800 million for its Oklahoma acreage alone, highlighting the enormous latent value in its portfolio. Hurst-Brown points out that the company’s smart deal-making, including strategic land sales, positions DEC to extract further value.
H1 2024 Financials: On Track with Expectations
The company’s H1 2024 results were broadly in line with expectations, reflecting strong operational performance. Diversified Energy produced an average of 124 kboepd in H1 2024, a slight decline from H2 2023, but exited the period at 143 kboepd, supported by a recent acquisition. With US$439 million in revenue and steady cash margins of ~49%, DEC continues to generate solid cash flow, even in challenging market conditions.
Hurst-Brown notes that the company is well-positioned for growth. He commented, “We see continued momentum in free cash flow generation, enabling aggressive debt reduction while maintaining a strong dividend.” The company’s ability to manage costs effectively, coupled with its steady production, underlines its long-term sustainability.
Attractive Valuation and US Investor Growth
One of the most compelling aspects of Diversified Energy’s story is its valuation. The stock is currently trading at a significant discount to its peers in the US gas sector. According to Tennyson Securities, DEC is valued at 4.7x EV/EBITDA compared to the sector average of 6.2x. Additionally, the company’s free cash flow yield stands at a remarkable 60%, far exceeding the peer group average of 9%.
Furthermore, DEC’s dual listing on the NYSE has expanded its shareholder base, with US ownership rising to 35%+. This shift is expected to help close the valuation gap between DEC and its US peers as more American investors become aware of the company’s potential. With a 141% upside to the target price of £20 per share, the stock offers substantial growth opportunities for investors.
Final Thoughts
Diversified Energy Company plc continues to build a solid case for long-term investors. Its strategic acquisitions, robust cash flow, and attractive valuation make it a standout in the energy sector. As Tim Hurst-Brown from Tennyson Securities highlights, “With the potential to unlock significant value through smart deal-making and a growing US investor base, DEC is well-positioned to outperform.” Investors looking for a strong, dividend-paying stock in the energy space should certainly keep Diversified Energy on their radar.
