Diversified Energy Company plc (LON:DEC) was the topic of conversation when DirectorsTalk interviewed Gervais Williams, Co-Fund Manager of Premier Miton UK Multi Cap Income Fund
DirectorsTalk asked: Diversified Energy has announced the $1.8 billion acquisition of Birch, substantially expanding its portfolio in the Permian Basin. How does this transaction strengthen the business and its potential to generate long-term shareholder returns?
Gervais noted: This company was actually first issued in 2017, so it’s been on the market for just under 10 years. Most particularly, it buys into conventional gas production onshore in the US.
It’s a dull sector, because what tends to happen is these gas wells, which have been going for many years, continue to produce gas, probably at a slightly declining rate. So, from that point of view, a lot of people find them fairly dull assets.
What is interesting is they buy assets from distressed sellers or sellers who aren’t expecting much. They can buy them extremely cheaply and as they buy a number of these assets, they get productivity improvements because they’ve got numerous wells in the same area. With the Birch acquisition recently, it means they get a very good cash payback on their acquisitions.
Specifically, this is a company which having generated some nice returns over the last nearly 10 years, still yields, according to Bloomberg, nearly 7.8%. I remind you that the UK yields about 3%. So, you get a great yield.
You then get the option value as to what the US gas price is going to be. Currently, US gas prices are very low, way below the normal market levels, they’re way below the European levels. That’s because, if anything, there’s a little bit of surplus gas in that market.
You need new LNG plants, liquefied natural gas plants, to actually liquefy the gas and then export it to Europe, they’re being set up. The gas price at some stage will come into a shortage and when we get that, we see the gas price move back towards world levels. So, we think we’ve got that free upside option.
In the meantime, it’s a great diversifier. As you know, there’s been all sorts of uncertainty; gas prices worldwide have shot up during the Russian invasion of Ukraine, during recent Iranian conflict. Effectively, we have an option value in an energy asset, which is producing plenty of return from good and growing income in the meantime.
We have about 16 holdings in the energy sector in the portfolio, this is one of the most significant parts of it. Along with financials, many of the materials stocks, mining stocks, and energy, you’ve got well over 50% of the total portfolio.
So ultimately, this really shows the range of holdings. The other 50% is other things that actually generate the good and growing income. The opportunity for share price appreciation should some of these valuations, some of the prices of gas, go up a lot more than people think.
