Diversified Energy shares to rise on Russell 2000 entry & gas price recovery, predicts Tennyson

Tennyson Securities has released a detailed analysis of Diversified Energy Company’s performance in the first quarter of 2024. 

In its Q1 trading statement, Diversified Energy Company (LON:DEC) showcased consistent figures aligning with the year’s projections, including a steady production rate of 121 thousand barrels of oil equivalent per day (kboepd) and free cash flow (FCF) totalling $74 million, marking a substantial 31% year-over-year yield. This was achieved through a strategic reduction in unit costs by 7% and maintaining cash margins at 48%.

Analyst Tim Hurst-Brown points out that one of the focal points of the quarter was the optimisation of the Black Bear gas processing facility in Louisiana, which DEC acquired in April 2022 for $10 million. Following a low-capital expenditure upgrade and gas reroute, the facility’s efficiency improved significantly. The company now projects a fourfold increase in the processing of equity gas to 66 million cubic feet per day (mmcf/d), reducing reliance on third-party processing and compression fees. These changes are expected to enhance the annualised cash margin by approximately $9 million, which constitutes about 3% of the group’s Q1 FCF.

Also, Diversified Energy is looking forward to the completion of the Oaktree acquisition in Q2 2024, anticipated to boost group production by 17% and significantly enhance H2 cash flow, especially as US gas prices show signs of recovery. NYMEX strip prices have seen a rise of 5-20% since February, with forecasts remaining optimistic.

The imminent inclusion of DEC in the Russell 2000 index by June 28 is expected to attract substantial interest from passive funds, potentially boosting share performance.

Tennyson Securities underscores that while the financial results reflect a robust strategic approach to operations and cost management, the forward-looking initiatives, particularly the integration of Oaktree’s assets and the operational leverage from Black Bear, position Diversified Energy Company for potential upward trajectories in the upcoming periods.