# Diversified Energy reports strong interim results with strategic acquisitions and steady production

- Link: https://www.directorstalkinterviews.com/diversified-energy-reports-strong-interim-results-with-strategic-acquisitions-and-steady-production/4121168613
- Published: 2024-08-15T07:18:47+01:00
- Author: Amilia Stone

**[Diversified Energy Company PLC](https://www.directorstalkinterviews.com/company/diversified-energy-company-plc/dec.l)**(
[LON:DEC](https://www.directorstalkinterviews.com/company/diversified-energy-company-plc/dec.l))
has announced it is trading in line with expectations and has provided its Interim
Results for the six months ended June 30, 2024 and other recent highlights.

**Delivering Reliable Results**

•     Average net daily production: 746 MMcfepd (124 Mboepd);

◦     Reflects effectively flat production volumes since 4Q2023, on a normalized
basis^((a))

◦     June 2024 exit rate of 855 MMcfepd (143 Mboepd), including the impact of the
Oaktree Acquisition

•     Net Income of $16 million, inclusive of approximately $98 million in tax benefits

•     1H24 Adjusted EBITDA^((b)) of $218 million

◦     1H24 Adjusted EBITDA Margin^((c)) of 50%

◦     1H24 Adjusted Cost per Unit^((d)) of $1.68/Mcfe ($10.08/Boe)

•     Free Cash Flow of $121 million, excluding the impact of working capital^((
e))

◦     Annualized Free Cash Flow Yield (excl. working capital) of 38%^((e))

•     Leverage ratio of ~2.8x^((f)), excluding Oaktree transaction, leverage ratio
of 2.6x^((g))

•     Undrawn credit facility capacity and unrestricted cash of ~$120 million

**Executing Strategic Objectives and Achieving Milestones**

•     **Accretive Acquisitions**:

◦     Announced $516 million (gross) of high-margin, low-decline asset and working
interest acquisitions

◦     Includes the $410 million acquisition of Oaktree working interests and $106
million for assets to be acquired from Crescent Pass

•     **Sustainable Capital Return**:

◦     Declared 2Q24 interim dividend of $0.29 per share

◦     Paid $55 million of dividends 1H24 and returned a total of $65 million, including
share repurchases of ~2% of shares outstanding^((i))

•     **Systematic Debt Reduction**:

◦     Reduced amortizing debt principal by $108 million

•     **Recent Milestones:**

◦     Included in the US Russell 2000 Index, adding to daily trading liquidity and
US shareholder base

◦     Permanently retired 169 wells in Appalachia, including 135 Diversified wells(
70% of 2024 goal)

◦     Realized ~$15 million of upside value through the divestiture of non-core 
assets and leasehold sales^((h))

> **Commenting on the results, CEO Rusty Hutson, Jr. said:**
> _“Building a portfolio of high-performing assets with dedicated teams of experienced
> professionals has been part of our strategic vision since the Company went public,
> and we have continued our track record of delivering on that vision with two recent
> announcements: the closing of our Oaktree acquisition and the pending Crescent
> Pass acquisition.  The outstanding results presented, both operationally and financially,
> reinforce the success of this strategy. Our ability to drive the 3% cost structure
> improvement during the first half of 2024 is enhanced by further scale and vertical
> integration, allowing us to once again deliver approximately 50% Adjusted EBITDA
> margins and consistent free cash flow generation. This strategic vision has proven
> highly successful, but it’s our employees’ commitment to operational excellence
> in the field and the corporate office that has helped Diversified achieve these
> results. We remain committed to our balanced capital allocation framework, with
> the diversity and strength of our asset base providing a solid foundation for 
> accretive growth and value creation for our shareholders, while maintaining our
> position as the **Right Company at the Right Time** to responsibly manage long-
> life, mature producing assets.”_

[Diversified-Energy-Interim-Report-UK-2024](https://www.directorstalkinterviews.com/wp-content/uploads/2024/08/Diversified-Energy-Interim-Report-UK-2024.pdf)
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**Conference Call**

Diversified Energy will host a conference call today to discuss the Company’s Interim
Results at 2:00pm BST (9:00am EDT) along with these results. The conference call
details are as follows:

| US (toll-free) | + | 1 877 836 0271 | 
| UK (toll-free) | + | 44 (0)800 756 3429 | 
| Web Audio | https://www.div.energy/news-events/ir-calendarevents | 
| Replay Information | https://ir.div.energy/financial-info |

Footnotes:

| a) | Reflects adjusted production of 734 MMcfepd (4Q23), 723 MMcfepd (1Q24) and 727 MMcfepd (2Q24), adjusting for the effect of the previously announced divestiture of 50 MMcfepd (gross) associated with the ABSVII transaction and the previously announced acquisition of 122 MMcfepd (net) associated with the Oaktree Working Interest acquired by the Company in certain assets operated by the Company in the Central Region | 
| b) | As used herein, Adjusted EBITDA represents earnings before interest, taxes, depletion, depreciation and amortization, and includes adjusting items that are comparable period-over-period, non-cash items such as gains on the sale of assets, acquisition related expenses and integration costs, mark-to-market adjustments related to Diversified’s hedge portfolio, non-cash equity compensation charges and items of a similar nature | 
| c) | As used herein, Adjusted EBITDA Margin is measured by reducing Adjusted Total Revenue for operating expenses and Adjusted G&A, expressed as a percentage of Adjusted Total Revenue; Adjusted Total Revenue is calculated as Total Revenue and the applicable gain (loss) on settled derivative instruments during the period | 
| d) | As used herein, includes operating expense; employees, administrative costs and professional services and recurring allowance for credit losses, which include fixed and variable cost components; for the purpose of comparability, amounts from Operating Expense relating to Diversified’s wholly-owned plugging subsidiary, Next Level Energy, have been excluded ( 1H24: $0.06/Mcfe; $0.36/Boe)  | 
| e) | As used herein, Annualized Free Cash Flow Yield represents Free Cash Flow for the six months ended 30 June 2024 as a percentage of Diversified’s average total market capitalization for the six months ended 30 June 2024, annualized; Free Cash Flow is calculated as net cash provided by operating activities less expenditures on natural gas and oil properties and equipment and cash paid for interest; excludes the impact of working capital | 
| f) | Calculated as Net Debt at 30 June 2024 divided by Pro Forma Adjusted EBITDA; Pro Forma Adjusted EBITDA as reported for the twelve months ended 30 June 2024, including the unrealized impact of estimated NTM Adjusted EBITDA for previously announced acquisitions for the twelve months ended 30 June 2024 | 
| g) | Excludes $266 million of net consideration for the Oaktree transaction and the assumption of Oaktree’s proportionate ABS debt, as well as the pro forma impact of the unrealized impact of estimated NTM adjusted EBITDA for the Oaktree transaction | 
| h) | Includes combined value of the sale of certain leaseholds, acreage positions and non-operated interests in producing properties; value presented is 2024 year-to-date, as of the date of this announcement | 
| i) | Includes the value of shares purchased by Diversified Energy Company’s Employee Benefit Trust, which was established in 2022 to purchase shares already in the market and is operated through a third-party trustee. The objective of the EBT is to benefit the employees of the Company and its wholly owned subsidiaries and in particular, to provide a mechanism to satisfy rights to shares arising on the exercise or vesting of awards under share based incentive plans and reduce dilution for shareholders. |

_For Company-specific items, refer to the Glossary of Terms and/or Alternative Performance
Measures found in the Company’s 2024 Interim Report_

Adjusted EBITDA

As used herein, EBITDA represents earnings before interest, taxes, depletion, depreciation
and amortization. adjusted EBITDA includes adjusting for items that are not comparable
period-over-period, namely, accretion of asset retirement obligation, other (income)
expense, loss on joint and working interest owners receivable, (gain) loss on bargain
purchases, (gain) loss on fair value adjustments of unsettled financial instruments,(
gain) loss on natural gas and oil property and equipment, costs associated with 
acquisitions, other adjusting costs, non-cash equity compensation, (gain) loss on
foreign currency hedge, net (gain) loss on interest rate swaps and items of a similar
nature.

Adjusted EBITDA should not be considered in isolation or as a substitute for operating
profit or loss, net income or loss, or cash flows provided by operating, investing,
and financing activities. However, we believe such a measure is useful to an investor
in evaluating our financial performance because it (1) is widely used by investors
in the natural gas and oil industry as an indicator of underlying business  performance;(
2) helps investors to more meaningfully evaluate and compare the results of our 
operations from period to period by removing the often-volatile revenue impact of
changes in the fair value of derivative instruments prior to settlement; (3) is 
used in the calculation of a key metric in one of our Credit Facility financial 
covenants; and (4) is used by us as a performance measure in determining executive
compensation. When evaluating this measure, we believe investors also commonly find
it useful to evaluate this metric as a percentage of our total revenue, inclusive
of settled hedges, producing what we refer to as our adjusted EBITDA margin.

_The following table presents a reconciliation of the IFRS Financial measure of 
Net Income (Loss) to Adjusted EBITDA for each of the periods listed:_

|   | **Six Months Ended** | 
| _(In thousands)_ | **June 30, 2024** | **June 30, 2023** | **December 31, 2023** | 
| **Net income (loss)** | **$                   15,745** | **$                  630,932** | **$                  128,769** | 
| Finance costs |                      60,581 |                      67,736 |                      66,430 | 
| Accretion of asset retirement obligations |                      14,667 |                      13,991 |                      12,935 | 
| Other (income) expense^((a)) |                          (755) |                          (327) |                            (58) | 
| Income tax (benefit) expense |                     (97,997) |                     197,324 |                      43,319 | 
| Depreciation, depletion and amortization |                     119,220 |                     115,036 |                     109,510 | 
| (Gain) loss on fair value adjustments of unsettled financial instruments |                      80,117 |                   (760,933) |                   (144,762) | 
| (Gain) loss on natural gas and oil property and equipment^((b)) |                           249 |                          (899) |                           919 | 
| (Gain) loss on sale of equity interest |                              – |                              – |                     (18,440) | 
| Unrealized (gain) loss on investment |                       (2,433) |                              – |                       (4,610) | 
| Impairment of proved properties^((c)) |                              – |                              – |                      41,616 | 
| Costs associated with acquisitions |                        3,724 |                        8,866 |                        7,909 | 
| Other adjusting costs^((d)) |                      10,451 |                        3,376 |                      14,418 | 
| Loss on early retirement of debt |                      10,649 |                              – |                              – | 
| Non-cash equity compensation |                        3,669 |                        4,417 |                        2,077 | 
| (Gain) loss on foreign currency hedge |                              – |                           521 |                              – | 
| (Gain) loss on interest rate swap |                          (100) |                        2,824 |                          (102) | 
| **Total adjustments** | **$                  202,042** | **$                (348,068)** | **$                  131,161** | 
| **Adjusted EBITDA** | **$                  217,787** | **$                  282,864** | **$                  259,930** |

(a)    Excludes $0.5 million in dividend distributions received for our investment
in DP Lion Equity Holdco during the six months ended June 30, 2024.

(b)    Excludes $7.5 million, $6.8 million and $17.3 million in proceeds received
for leasehold sales during the six months ended June 30, 2024, June 30, 2023 and
December 31, 2023.

(c)    For the year ended December 31, 2023, the Group determined the carrying amounts
of certain proved properties within two fields were not recoverable from future 
cash flows, and therefore, were impaired.

(d)    Other adjusting costs for the six months ended June 30, 2024 primarily consisted
of expenses associated with an unused firm transportation agreement and legal and
professional fees. Other adjusting costs for the six months ended June 30, 2023 
primarily consisted of expenses associated with an unused firm transportation agreement
and legal and professional fees related to internal audit and financial reporting.
Other adjusting costs for the six months ended December 31, 2023 primarily consisted
of legal and professional fees related to the U.S. listing, legal fees for certain
litigation, and expenses associated with unused firm transportation agreements.

Net Debt and Net Debt-to-Adjusted EBITDA

As used herein, net debt represents total debt as recognized on the balance sheet
less cash and restricted cash. Total debt includes our borrowings under the Credit
Facility and borrowings under or issuances of, as applicable, our subsidiaries’ 
securitization facilities. We believe net debt is a useful indicator of our leverage
and capital structure.

As used herein, net debt-to-adjusted EBITDA, or “leverage” or “leverage ratio,” 
is measured as net debt divided by adjusted trailing twelve-month EBITDA. We believe
that this metric is a key measure of our financial liquidity and flexibility and
is used in the calculation of a key metric in one of our Credit Facility financial
covenants.

_The following table presents a reconciliation of the IFRS Financial measure of 
Total Borrowings to the Non-IFRS measure of Net Debt and a calculation of Net Debt-
to-Adjusted EBITDA and Net Debt-to-Pro Forma Adjusted EBITDA for each of the periods
listed:_

|   | **As of** | 
| _(In thousands)_ | **June 30, 2024** | **June 30, 2023** | **December 31, 2023** | 
| Credit Facility | $                  268,000 | $                  265,000 | $                  159,000 | 
| ABS I Notes |                      90,847 |                     111,007 |                     100,898 | 
| ABS II Notes |                     114,945 |                     136,550 |                     125,922 | 
| ABS III Notes |                              – |                     295,151 |                     274,710 | 
| ABS IV Notes |                      88,418 |                     113,609 |                      99,951 | 
| ABS V Notes |                              – |                     329,381 |                     290,913 | 
| ABS VI Notes^((a)) |                     273,805 |                     183,758 |                     159,357 | 
| ABS VIII Notes |                     607,740 |                              – |                              – | 
| ABS Warehouse Facility |                      71,000 |                              – |                              – | 
| Term Loan I |                      98,023 |                     112,433 |                     106,470 | 
| Deferred consideration and miscellaneous^((b)) |                      90,717 |                        8,319 |                        7,627 | 
| **Total debt** | **$               1,703,495** | **$               1,555,208** | **$               1,324,848** | 
| LESS: Cash and cash equivalents |                        3,483 |                        4,208 |                        3,753 | 
| LESS: Restricted cash^((c)) |                      54,976 |                      41,188 |                      36,252 | 
| **Net debt** | **$               1,645,036** | **$               1,509,812** | **$               1,284,843** | 
| **Adjusted EBITDA** | **$                  217,787** | **$                  282,864** | **$                  259,930** | 
| **Pro forma TTM adjusted EBITDA^((d))** | **$                  584,261** | **$                  633,875** | **$                  549,258** | 
| **Net debt-to-pro forma TTM adjusted EBITDA^((e))** | **2.8x** | **2.4x** | **2.3x** | 
|   |   |   |   | 
| **Net debt, excluding Oaktree^((f))** | **$               1,245,556** |   |   | 
| **Pro forma TTM Adjusted EBITDA, excluding Oaktree^((f))** | **$                  474,561** |   |   | 
| **Net debt-to-pro forma TTM adjusted EBITDA, excluding Oaktree^((f))** | **2.6x** |   |   |

(a)    Includes $133 million for the assumption of Oaktree’s proportionate share
of the ABS VI debt as part of the Oaktree transaction as of June 30, 2024. Refer
to Note 4 in the Notes to the Interim Condensed Consolidated Financial Statements
for additional information regarding the Oaktree transaction.

(b)    Includes $83 million in notes payable issued as part of the consideration
in the Oaktree transaction as of June 30, 2024. Refer to Note 4 in the Notes to 
the Interim Condensed Consolidated Financial Statements for additional information
regarding the Oaktree transaction.

(c)    Includes $28 million and $3 million in restricted cash attributable to the
ABS VIII Notes and ABS Warehouse Facility, respectively, offset by $7 million and
$8 million attributable to the retirement of the ABS III Notes and ABS V Notes, 
respectively.

(d)    Pro forma TTM adjusted EBITDA includes adjustments for the trailing twelve
months ended June 30, 2024 for the Oaktree transaction to pro forma its results 
for a full twelve months of operations. Similar adjustments were made for the trailing
twelve months ended June 30, 2023 for the Tanos II and ConocoPhillips acquisitions
as well as in the trailing twelve months ended December 31, 2023 for the Tanos II
Acquisition.

(e)    Does not include adjustments for working capital which are often customary
in the market.

(f)     Excludes $266 million of net consideration for the Oaktree transaction and
the assumption of Oaktree’s proportionate ABS debt, as well as the pro forma impact
of the unrealized impact of estimated NTM adjusted EBITDA for the Oaktree transaction

Free Cash Flow

As used herein, free cash flow represents net cash provided by operating activities
less expenditures on natural gas and oil properties and equipment and cash paid 
for interest. We believe that free cash flow is a useful indicator of our ability
to generate cash that is available for activities other than capital expenditures.
The Directors believe that free cash flow provides investors with an important perspective
on the cash available to service debt obligations, make strategic acquisitions and
investments, and pay dividends.

_The following table presents a reconciliation of the IFRS Financial measure of 
Net Cash from Operating Activities to the Non-IFRS measure of Free Cash Flow for
each of the periods listed:_

|   | **Six Months Ended** | 
| _(In thousands)_ | **June 30, 2024** | **June 30, 2023** | **December 31, 2023** | 
| **Net cash provided by operating activities** | **$                  160,810** | **$                  172,566** | **$                  237,566** | 
| LESS: Expenditures on natural gas and oil properties and equipment |                     (20,848) |                     (32,332) |                     (41,920) | 
| LESS: Cash paid for interest |                     (47,632) |                     (60,215) |                     (56,569) | 
| **Free cash flow** | **$                   92,330** | **$                   80,019** | **$                  139,077** |

Total Revenue, Inclusive of Settled Hedges and Adjusted EBITDA Margin

As used herein, total revenue, inclusive of settled hedges, includes the impact 
of derivatives settled in cash. We believe that total revenue, inclusive of settled
hedges, is a useful because it enables investors to discern our realized revenue
after adjusting for the settlement of derivative contracts.

_The following table presents a reconciliation of the IFRS Financial measure of 
Total Revenue to the Non-IFRS measure of Total Revenue, Inclusive of Settled Hedges
and a calculation of Adjusted EBITDA Margin for each of the periods listed:_

|   | **Six Months Ended** | 
| _(In thousands)_ | **June 30, 2024** | **June 30, 2023** | **December 31, 2023** | 
| **Total revenue** | **$              368,674   ** | **$              487,305   ** | **$              380,958   ** | 
| Net gain (loss) on commodity derivative instruments^((a)) |                   77,749    |                   54,525    |                 123,539    | 
| **Total revenue, inclusive of settled hedges** | **$              446,423   ** | **$              541,830   ** | **$              504,497   ** | 
| **Adjusted EBITDA** | **$              217,787   ** | **$              282,864   ** | **$              259,930   ** | 
| **Adjusted EBITDA margin** | **     49 %** | **     52 %** | **     52%** | 
| **Adjusted EBITDA Margin, exclusive of the impact of Next LVL Energy^((b))** | **     50%** | **     53 %** | **     52 %** |

(a)    Net gain (loss) on commodity derivative settlements represents cash (paid)
or received on commodity derivative contracts. This excludes settlements on foreign
currency and interest rate derivatives as well as the gain (loss) on fair value 
adjustments for unsettled financial instruments for each of the periods presented.

(b)    As adjusted, excludes revenues of $8 million and operating costs of $9 million
for the six months ended June 30, 2024, revenues of $17 million and operating costs
of $12 million for the six months ended December 31, 2023 and revenues of $12 million
and operating costs of $10 million for the six months ended June 30, 2023.

Adjusted Operating Cost per Mcfe

Adjusted operating cost per Mcfe is a metric that allows us to measure the direct
operating cost and the portion of general and administrative cost it takes to produce
each Mcfe. This metric, similar to adjusted EBITDA margin, includes operating expense
employees, administrative costs and professional services and recurring allowance
for credit losses, which include fixed and variable cost components.

Employees, Administrative Costs & Professional Services

As used herein, employees, administrative costs and professional services represents
total administrative expenses excluding costs associated with acquisitions, other
adjusting costs and non-cash expenses. We use employees, administrative costs and
professional services because this measure excludes items that affect the comparability
of results or that are not indicative of trends in the ongoing business.

_The following table presents a reconciliation of the IFRS Financial measure of 
Total Operating Expense to the Non-IFRS measure of Adjusted Operating Cost per Mcfe
and Adjusted Cost per Unit, excluding the impact of Next LVL Energy  for each of
the periods listed:_

|   | **Six Months Ended** | 
|   | **June 30, 2024** | **June 30, 2023** | **December 31, 2023** | 
| **Total production (Mcfe)** | **              135,763** | **                                 154,182** | **                                  145,450           ** | 
| Total operating expense | $                               196,112 | $                               227,299 | $                                         213,263 | 
| Employees, administrative costs & professional services |                                    40,482 |                                     38,497 |                                     40,162 | 
| Recurring allowance for credit losses |                                          – |                                                – |                                       8,478 | 
| **Adjusted operating cost** | **$                               236,594** | **$                               265,796** | **$                                         261,903** | 
| **Adjusted operating cost per Mcfe** | **$                                      1.74** | **$                                       1.72** | **$                                                1.80** | 
|    Impact of Next LVL Energy | $                                   (0.06) | $                                    (0.06) | $                                             (0.08) | 
| **Adjusted Operating Cost per Unit, Excluding  Next LVL Energy** | **$                                     1.68 ** | **$                                       1.66 ** | **$                                                1.72** |

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