Diversified Energy Company (LON:DEC), a company in the natural gas production industry across the United States, continues to demonstrate its strength and resilience. Despite challenges in the broader energy market, the company’s proactive strategy of acquiring long-life, low-decline assets has put it in an enviable position to maintain steady growth. Their focus on operational efficiency and scale is paying off, with the company navigating a volatile market environment impressively.
Solid Interim Results
As reported in their interim results, Diversified Energy Company has shown a commendable ability to adapt and thrive. While the overall daily production was down by 12%, the core of this decrease was due to the sale of non-core assets, a strategic move aimed at optimising production. The company’s ability to stabilise underlying production levels over the past three quarters shows its operational acumen. The June exit rate, which includes contributions from recent acquisitions, was robust, reaching 855 MMcfepd, and sets a solid foundation for future performance.
In terms of acquisitions, Diversified Energy’s recent purchases have been crucial to its ongoing success. The acquisition of the Oaktree assets in June 2024 for $410 million has already added significant production capacity, contributing 122 MMcfepd of gas. The East Texas acquisition, announced in August, is another major step forward, adding 21 MMcfepd of gas to the company’s portfolio. These assets, along with the Crescent Pass acquisition, are expected to help the company offset production declines and provide stability over the next 18 months.
Strong Financial Management
Diversified Energy’s financial management continues to impress. Despite facing one of the lowest gas price environments in the past decade, the company has maintained a solid EBITDA margin of 49%, highlighting its resilience in difficult market conditions. The company’s hedging strategy has been key to this success, with 60-80% of the portfolio hedged over the next five years, providing further stability to revenues.
Although gas prices fell by 16% to $2.48 Mcfe, Diversified Energy managed to realise a higher hedged sales price of $3.05 Mcfe, demonstrating the value of its protective measures against market fluctuations. Hedged revenues were down 18%, but the company still generated $446 million, with EBITDA holding steady at $218 million.
Additionally, the company’s balance sheet remains healthy, with liquidity of $107 million at the end of June 2024, supported by a rolling share buyback programme. Net debt stands at $1.645 billion, and the management’s strategy of carefully timed acquisitions and effective optimisation of existing assets shows their commitment to long-term financial stability.
Strategic Acquisitions Driving Future Growth
The recent acquisitions of Oaktree, Crescent Pass, and East Texas assets have bolstered Diversified Energy’s production capacity significantly. These purchases align with the company’s strategy of acquiring low-decline, high-value assets. The East Texas deal, in particular, is seen as a game-changer, with its favourable purchase multiple of 3.5 times next twelve months (NTM) EBITDA.
Paul Richards, Equity Analyst at Dowgate Capital, highlighted that these acquisitions provide crucial scale in the Central Region, enabling the company to maintain production levels well into 2025. He also noted that Diversified Energy’s strategic moves will help offset declines in existing wells, ensuring a steady production profile over the coming years.
A Bright Future Ahead
Looking forward, Diversified Energy Company remains well-positioned to benefit from any potential rebound in natural gas prices, particularly with new LNG capacity expected to come on stream in 2025. Despite the current low commodity prices, the company’s robust hedging strategy and recent acquisitions ensure it has a solid foundation for future growth. With a dividend yield of 11%, supported by consistent cash flow generation, investors have every reason to remain confident in Diversified Energy’s outlook.
In Summary
Diversified Energy’s operational strength, disciplined financial management, and successful acquisition strategy have cemented its place as a reliable player in the natural gas sector. Paul Richards of Dowgate Capital sees a promising future ahead for the company, as it continues to navigate market challenges with agility and foresight. The strategic moves made by the company are not only stabilising its current position but also setting it up for sustained growth in the years to come. Investors can look forward to a stable dividend yield and the potential for long-term gains.
