Diversified Energy Company plc (LON:DEC) is the topic of conversation when Tim Hurst-Brown, Partner and Oil & Gas Equity Research Analyst, at Tennyson caught up with DirectorsTalk.
Q1. What stood out in Diversified Energy’s H1 results?
A1. Diversified Energy reported a solid set of H1s last week, despite headwinds in US NG markets, underscoring the resilience of its business model through the cycle. The numbers were in-line with market expectations at the revenue & EBITDA level and add confidence in the FY outlook.
DEC reported H1 revenue of US$542m (hedged) and EBITDA of US$283m (hedged), implying robust cash margins of 52%. Average realised prices (US$3.56/mcfe) were some 25% above Henry Hub – reflecting the benefits of the hedging programme – whilst total cash costs came in at US$1.66/mcfe, down 10% on H2 2022 – in part reflecting receding inflationary pressures across the group. On the balance sheet front, H1 gearing stood at 2.4x EBITDA (in line with 2.0-2.5x policy), with US$103m of group liquidity – approximately flat on end Q1 (US$110m). A further US$16m cash inflow from non-core divestments post period end puts effective liquidity closer to US$120m.
In addition, 2023 has seen a notable increase in asset sales. Asset divestments have raised US$62m (4p/shr) – more than doubling the tally since 2019.
Q2. Is a US listing for Diversified Energy still on the cards?
A2. In its H1 investor presentation, management noted that it continues to engage with prospective US investors around an ADR listing and believes there is strong appetite for its stewardship model. In anticipation of a dual listing, DEC emphasized it is keeping its SEC filings fully up to date, awaiting the right asset transaction and equity market conditions.
Q3. How is Diversified Energy’s share price performing relative to its US peers?
A3. US gas E&Ps have enjoyed a strong run lately, in spite of the current weakness in spot prices. According to Bloomberg consensus estimates, EQT Corp, Range Resources & Antero are up 15-30% over the last 3 months, outpacing DEC (-6%) by some margin and opening up a substantial relative valuation gap.
Q4. What’s your view on US NG markets?
A4. In our view, US NG markets are at an inflection point: macro indicators point to a marked tightening in NG markets moving into the winter. The gas rig count is down nearly 30% (47 rigs) since April 2023 and total US supply is now falling month/month. Gas storage levels also indicate a market in deficit. It is clear that current low prices are insufficient to keep the drill bit spinning to satisfy domestic and export led demand. Thus, once inventory levels normalise prices need to move higher.
Looking ahead, we continue to view a recovery in US NG markets as a key near-term share price catalyst.
