Diversified Energy Company plc (LON:DEC) is the topic of conversation when David Round, E&P Analyst at Stifel, caught up with DirectorsTalk following Diversified Energy’s interim results for the six months ended 30 June 2023.
Q1: What was your view on Diversified Energy’s first half results?
A1: Interim results were in line with expectations. H1/23 production averaged 141.9 kboepd (Stifel 141.8 kboepd) with an exit rate of 144 kboepd. Adjusted EBITDA was also in line at $283 million (Stifel $285 million) with strong margins at 52% (Stifel 53%), which was despite slightly higher costs from Central assets and inflationary pressures, offset to an extent by lower production taxes and transportation expenses. Capex of $32 million was also lower than our $40 million forecast. Liquidity at the end of the period was $103 million, which followed a substantial reduction in payables.
Q2: Any other key points to note?
A2: I would highlight:
- The company generated $62m (net) in liquidity through the monetisation of non-core assets. On our estimates, the value of non-core acreage across the portfolio could be worth ~$250 million on a risked basis.
- Diversified has declared a Q2/23 interim dividend of 4.375 cents p/s, consistent with Q1/23 and our forecasts. The overall dividend yield is over 15% at current levels which makes the stock particularly attractive to investors seeking investment income.
- There was a gain of over $50m on commodity derivative settlements. Diversified remains ~85% hedged in H2/23 at an average price of $3.53/mcf vs a peer group average of 50% at $3.08/mcf. This advantaged position is even more pronounced in future years.
- Diversified continued to deliver strongly on its ESG commitments. Amongst a variety of initiatives, during the first half of 2023, overall 100 Diversified wells were plugged (Appalachia and Central Region), at an average cost of $20-25k per well. Elsewhere >120,000 upstream surveys were conducted, with a post-inspection no-leak rate on ~97% of assets. Diversified also converted pneumatic devices on 50+ well pads in Central Region, exceeding FY23 goal of 50 well pads.
Q3: Should Diversified Energy’s shares be at a discount to US peers?
A3: No. US peers have outperformed over the last few months as the general poor sentiment going into Q2 has improved slightly. Frustratingly, Diversified Energy’s shares have remained largely range bound despite arguably demonstrating one of the strongest business models to counteract the impacts of both an inflationary market as well as softer natural gas prices. Given the absolute and relative strength of DEC’s protected cash profile, we believe the current disconnect is unwarranted and the shares should re-rate towards peers.
Q4: Have you forecasts / valuation changed in any way?
A4: Results were in line so we do not expect significant changes. Our NAV is 165p/sh.
