Diversified Energy Company plc (LON:DEC) is the topic of conversation when DirectorsTalk Interviews spoke to James McCormack, Research Director at Cavendish. James delves into the operations and financial health of the company, covering a range of topics including DEC’s current business performance, the robustness of its dividend policy, its strategic use of asset-backed debt, and the company’s overall outlook in the context of not pursuing a U.S. listing. McCormack’s analysis provides a detailed view of DEC’s production metrics, financial strategies, and long-term positioning in the energy sector, offering valuable insights.
How is the business performing?
Diversified’s business continues to perform well, with Q3/23 production expected to be between 134-138Mboepd, in-line with expectations and reflects the monetisation of the Company’s non-operated assets in Q2/23. Furthermore, the Company’s interim results and the upscaling of the Company’s borrowing base in September provides affirmation of Diversified’s long-life, low-decline business model. Diversified’s interim results highlighted the resilience of the business in the wake of lower natural gas prices. Through the Company’s proactive hedging programme, Diversified was able to realise a price 25% higher than Henry Hub in H1/23, which together with a 10% reduction in unit costs resulted in a 52% adjusted EBITDA margin. The interim results also demonstrated Diversified’s continued commitment to sustainability, which saw the Company awarded the OGMP Gold Standard and a ‘AA’ rating by the MSCI.
DEC’s discounted share price makes the dividend even more attractive. Can you explain how its protected?
Diversified’s dividend is protected by a robust hedging portfolio, where c85% of 2023 natural gas production is hedged at US$3.79/Mcf – a c50% premium to the 2023YTD Henry Hub average, and c80% of natural gas production is hedged at US$3.31/Mcf. Diversified’s long-term hedging policy provides long-term cashflow visibility for the consistent repayment of the Company’s amortising debt structures.
How do you view DEC’s borrowing base and its fixed rate asset-backed debt?
Diversified’s asset backed debt is an attractive financing tool, that insulates Diversified from higher interest rates, avoids bullet maturities, and systematically reduces Diversified’s borrowings in-line with the cash profile of its business. These structures account for c83% of Diversified’s gross debt at the end of H1/23 with a low average interest rate of 5.7%. The recent upscaling of the Company’s borrowing base to US$425m (from US$375m) from a consortium of 14 banks at a time of low gas prices should provide investors with confidence in the resilience of the Company’s long-life producing portfolio, which is complemented by robust hedges and value-enhancing midstream assets.
How you do you see the outlook for DEC and the fact it’s no longer pursuing a US listing?
We believe that the recent sell-off in the stock is overdone, and the outlook for Diversified Energy remains positive given its combination of low-decline, predictable, hedged production base and insulation from rising interest rates and capex inflation. The decision not to pursue a US listing given current market conditions should provide assurance to investors, the Company has ample liquidity and issuing new shares to facilitate the listing given market dynamics at the time was not the path to execute. It demonstrates that the Company is focused on shareholder value creation. The long-term strategic benefits for a US Listing remain in place, as it provides a pathway to expanding the investor base, increasing our valuation, adding research coverage and raising the profile of the Company. So focusing on solutions to expand into the US market with the deep pools of capital it provides should be supportive to the current UK based investors.
Diversified Energy Company plc (LON: DEC) is a notable player in the energy sector, primarily engaged in the acquisition and development of mature oil and natural gas assets. The company focuses on maintaining a portfolio of long-life, low-decline assets, leveraging a strategic approach to maximize production efficiency and ensure sustainability.
