Diversified Energy Company plc (LON:DEC) is the topic of conversation when Peel Hunt’s Oil and Gas Equity Research Analyst Matt Cooper caught up with DirectorsTalk for an exclusive interview.
Q1: First off, Matt, Diversified Energy Company published 2023 results a few weeks ago. What was your view on the results?
A1: I think the results highlighted a very strong year for the company. A number of the key metrics, production, EBITDA, operating costs, were pre-released in January.
They did announce revenue at $1,046 million, which was substantially above consensus of $937 million. Another key number that was announced a couple of weeks back was the free cash flow of $219 million and again, that was above consensus and above our estimates.
I thought another impressive part of the results statement was around the continued progress on the ESG. So specifically, they announced that in 2023, the group had met its target of reducing scope one methane intensity reduction by 50%. That’s actually seven years ahead of the target of 2030, that was set a few years back.
So, I think it really just highlights the progress the group’s made against its ESG targets.
Q2: Could you give us a high level synopsis of the research note that you’ve released yesterday?
A2: It was primarily on the back of us publishing an updated model and updated numbers that are now reflective of the results that were announced, but also importantly, the rebasing of the dividend, which we know is a fixed level of 29 cents a quarter, for the next three years. Also the $0.4 billion acquisition of around 20,000 BOE a day net production from Oaktree.
So, it’s publishing updated group numbers on the back of those announcements all made together, earlier in March.
Q3: How much of an impact does the model update have on the group’s free cashflow?
A3: It’s a very material impact. So we’ve seen nearly a doubling of our group free cashflow estimate as a result of these updates for 2024, and a similar degree of increase actually into 2025.
So, there’s a few pieces that contribute that. The most material is the increased EBITDA that the company gets from that Oaktree acquisition and the production associated with it. There’s also a pretty significant contribution from the very strong hedge book that it acquired as part of that acquisition and also improved incremental hedging that they’ve added over the six months since last update, and then the other moving parts into free cashflow.
We also see, number one, we now include a contribution for their next level subsidiary,
plugging of third-party wells so they announced with full-year results that that subsidiary had contributed $28 million in revenue last year. So, we now include a contribution for that going forward.
The other important piece is we see as a result of these announcements that they made,
there’s actually quite a substantial decrease in the interest costs that the group has to make. So obviously the ABS amortization is fixed, so there’s no change there but we do find that with this update, they now don’t need to draw down on their revolver and they can actually pay it off in full on our numbers this year and don’t need to draw on it from 2025 onwards.
So, the revolver has an interest rate of so far plus 2.75% to 3.75% so not to draw on that’s a pretty significant saving.
Just to give you a flavour on our numbers, it reduces the group average interest per annum during the period 2024 to 2030 by around 30/35% so quite a material saving over the next few years there on interest.
Q4: How has your view on the balance sheet items changed?
A4: That’s another big piece. So, Diversified Energy Company, the gearing level there, we find drops pretty materially so for example, our year end 2026 gearing level drops by about 1.0 times and another interesting finding is given that making this pretty substantive acquisition, you’re looking at $386 million guided on completion, we actually find that our year end 2024 net debt number actually goes down slightly despite making that payment.
So reasons for that are the EBITDA that you can get straight away from that acquisition this year, the reduction in dividend payments, and also, a slight reduction in interest.
In subsequent years, our net debt estimate for the group falls fairly materially so in year-end ‘25, year-end ‘26, we see quite a material reduction in net debt for the company as a result of these announcements made on the 19th of March.
