Diversified Energy Company plc (LON/NYSE:DEC) Chief Executive Officer Rusty Hutson caught up with DirectorsTalk for an exclusive interview to discuss the Maverick Natural Resources acquisition, enhanced margins & organic growth opportunities, the combined company’s financial position, and sustainability goals.
Q1: Rusty, the acquisition of Maverick Natural Resources significantly increases Diversified Energy’s scale and diversifies its portfolio. Could you elaborate on how this acquisition aligns with your long-term strategic vision and what sets this deal apart from previous acquisitions?
A1: The size of it is very, very relevant. It’s the largest acquisition we’ve ever done, $1.275 billion, but it has some really, really important attributes that make it a great deal for us and where we are as a company.
First and foremost, the decline rates. It’s 10% or less, similar to our existing portfolio, which again, for a deal this size is very difficult to find.
Secondly, the ability to find pretty substantial synergies across both the operating structure of the business and also on the G&A side.
The third thing that made it very attractive to us was it has a non-operated joint venture with a very reputable and large drilling company in the Cherokee Basin of Oklahoma that gives us that first organic growth lever to pull within our portfolio to help offset declines and to grow the business going forward without just having to do straight acquisitions all the time.
So, those are the three things that we saw as big positives as we looked at the deal.
Q2: As you mentioned, the acquisition highlights opportunities for expense synergies and enhanced margins. How does the group plan to integrate Maverick’s assets to achieve these synergies and optimise organic growth opportunities, particularly in the Permian Basin and Cherokee play?
A2: The assets that we acquired from Maverick in Oklahoma, if you look in our presentation, they sit almost right on top of our existing assets. So, similar to what we were able to accomplish in the Appalachian Basin when we acquired all those assets in the 2017 to 2020 timeline.
When you get that many assets within the same geographical footprint, there’s a lot of scale and a lot of synergies that can be executed on, whether it be pipeline consolidations, compression, water hauling, contract renegotiations, headcount reductions. There’s a large amount of opportunity that we see there.
When you do a merger or a size of an acquisition like this, you have some of those backroom G&A functions that you’re able to reduce because we built this platform that we believe has the ability to really scale and size without a lot of growth in the G&A costs.
So, we think it’s got all of those attributes, which gives us the ability to have a pretty sizable synergy number at the end of the day.
Q3: With a 95% protected revenue increase and a 55% rise in free cash flow, what immediate and long-term benefits can shareholders expect from the acquisition? Additionally, how do you see the combined company’s financial position evolving over the next few years in terms of debt reduction and dividend sustainability?
A3: When you put the two companies together, it’s kind of the old saying that the two together are better than one. The financial position is great. We see a leverage ratio improvement, it’s accretive to our leverage and the free cash flow profile of the business grows and becomes more relevant.
The debt reduction over the next several years is going to be pretty substantial in that $300 million range annually because they have the same type of debt we did in terms of the ABS structure; a majority, 80% of their debt was in ABS.
So, those things will continue to pay big dividends for us as we move forward.
We obviously have our fixed dividend strategy with our shareholders, and we’ve made it very clear that that $1.16 dividend is sacred, it’s sustainable, it won’t be touched. So, we’ve allotted cash flow for that with the added shares that come along with this deal.
All in all, there’s really nothing that we didn’t see as a big positive for these two companies coming together and it just made us all better at the end of the day.
Q4: Now, environmental stewardship is a key focus in this acquisition. How will Diversified Energy leverage technology and its modern field management approach to further sustainability goals while driving consistent free cash flows?
A4: We’re going to apply our smarter asset management philosophy across these assets. We’ll use the technology that we’ve invested in over the last several years as it relates to methane identification equipment, flyover lidar processes, pneumatic device change-outs, all the things that we were doing in our existing portfolio, we will now apply to Maverick’s portfolio also.
So, we’ll continue to see big, big wins from that standpoint.
As we say all the time, we don’t want to emit methane, we want to sell it and so we’re going to spend our capital and our time doing what’s necessary to hit our sustainability goals.
Our smarter asset management programme, it just makes these things easy to implement because we have a ground game that every day they’re incentivised to go out, find production, lower cost, lower emissions. All the things that we talk about in our presentations for our existing business, we’re just now going to apply it to this new acquisition, and it will pay tremendous benefits in the long run.
