Third Quarter 2022 Trading Statement

RNS Number : 2228G

Diversified Energy Company PLC

14 November 2022

 

14 November 2022

 Diversified Energy Company PLC

("Diversified" or the "Company")

Third Quarter 2022 Trading Statement

Diversified Energy Company PLC (LSE:DEC) is pleased to announce it is trading in line with expectations and provided the following operations and trading update for the quarter ended 30 September 2022.

Recent Strategic Highlights

• Declared 3Q22  dividend of 4.375¢  per share, an annualised increase of ~3% 

• Announced share repurchase program for up to 10% of outstanding shares

◦ Purchased ~8 million shares since announcement

◦ Acquired shares at attractive value given the strength of the US dollar

• Closed $210 million acquisition of ConocoPhillips assets, increasing Central Region operational scale

• Closed $215 million net ABS securitisation, Diversified's fourth securitization in 2022

• Converted the revolving Credit Facility to a Sustainability-Linked Loan ("SLL")

◦ Completed its semi-annual redetermination with a borrowing base of $250 million

• Published an updated Asset Retirement Supplement with an illustrative 50-year model

◦ Generates significant cash flow to cover current  plugging liabilities

◦ Illustrates potential ~$5 billion of dividends (base and excess) equal to ~4x current market capitalisation

3Q22 Operating and Financial Highlights

• Average production rate of 135 Mboepd (808 MMcfepd)

◦ Pro Forma exit rate of 144 Mboepd (862 MMcfepd) including ConocoPhillips assets

• Realised 50% Cash Margin^(a) (76% Unhedged Cash Margin); >20% free cash flow yield

• Recent hedging has increased 2023 and 2024 average natural gas hedge price by 8% and 4%, respectively

• Substantially all borrowings are fully amortising in fixed-rate notes with a weighted average coupon of 5.7%

• 2.2x Net Debt / Adjusted EBITDA leverage ratio^(c) as of 30 September 2022, pro forma for recent acquisitions

• ~$400 million of current liquidity^(d) after ABS issuance and Fall redetermination

Recent ESG Highlights

• Awarded Gold Standard from United Nations Oil and Gas Methane Partnership ("OGMP 2.0")

• Next LVL Energy becoming a regional leader in asset retirement and on track to exceed goals

◦ Retired 150 wells through 3Q22, exceeding full-year 2021 retirements by 10%

◦ Performing third-party work with independent operators and state agencies

• Completed handheld emissions surveys of >99% of operated Appalachian assets, ahead of original commitment timetable of mid-2023

◦ Conducted ~60,300 unique emissions surveys of Appalachian assets, including repeat surveys on approximately 75% of sites surveyed

◦ Achieved consistent rate of no detectable emissions after survey completion on ~90% of assets, with repairs being prioritised based on emissions rates

• Completed LiDAR aerial surveillance over 9,000 miles of midstream, repairing ~75% of verified leaks and progressing additional repairs

◦ Aerial surveillance included 850 miles of repeat flyovers to support asset inspections following extreme flooding in the state of Kentucky

Rusty Hutson, Jr., CEO of Diversified, commented:

"I am pleased to announce an increase to our quarterly dividend reflective of strong asset performance, higher commodity prices and consistent cash margins.  Our unique, yet simple, business model continues to deliver tangible and sustainable returns amidst volatile capital markets. In addition to our dividend and to capitalize on the strength of the US dollar, we also acquired approximately eight million shares under our recently announced share repurchase program that enhance shareholder returns.

Having closed our fourth ABS transaction this year and completed our semi-annual borrowing base redetermination, we have nearly $400 million of liquidity available for accretive acquisitions as we remain nimble in dynamic market conditions. 

In addition to our success integrating and optimising our new Central Region assets, I am pleased with the progress we are making as we integrate of our Next LVL asset retirement business.  Our commitment to vertical integration will allow us efficiently retire our own wells while also generating third party revenues that can effectively offset the cash impact of asset retirement activities. Importantly, our Next LVL team will become a leader focused on process optimisation, innovation and application technology to drive cost efficiencies and safe, effective results." 

Operations and Finance Update

Production

The Company recorded 3Q22 average net daily production of 135 Mboepd (808 MMcfepd), consistent with the Company's estimated ~8-9% annual decline rate.  Diversified exited the quarter producing 144 Mboepd (862 MMcfepd) pro forma for its acquisition of assets from ConocoPhillips.

Cash Margins and Realised Price

3Q22 Cash Margins^(a) of 50% (76% unhedged) increased from 2Q22 (48%; 77% unhedged) reflecting higher price realizations, strengthened by its Central Region assets, and efforts to mitigate inflationary pressures. The Company's 3Q22 average realised price of $21.95/Boe ($44.94 unhedged) increased 16% compared to the 2Q22 average realised price of $18.97/Boe ($43.15 unhedged), offsetting increases to Total Unit Cash Expense of 11% over the same period.

Total Unit Cash Costs

Diversified's 3Q22 Total Lease Operating Expense per unit of $9.39/Boe (2Q22: $8.48; +11%) largely related to higher commodity price-linked expenses including Production Taxes and Gathering and Transportation Expense. General inflationary pressures led to higher Base Lease Operating Expense and Midstream Expense including elevated fuel and consumables costs. As part of its Smarter Asset Management programmes, the Company is actively pursuing opportunities to improve its unit-level expenses including production-enhancing initiatives, such as well swabbing and workovers along with cost mitigating initiatives like reduction compressor rental and water handling costs.

Adjusted G&A expense^(f) increased to $1.57/Boe versus $1.41/Boe and $1.54/Boe in 2Q22 and 1Q22, respectively, reflecting recent investments to support the Company's expanded operating footprint. The Company will leverage these investments to reduce unit-level expenses as it continues to build scale in the region through additional acquisitions such as the recent purchase from ConocoPhillips and through the previously mentioned production-enhancing initiatives.

The following table provides average realized price and unit-expense information for the periods presented:

		3Q22				2Q22
		$/Boe		$/Mcfe		$/Boe		$/Mcfe		%
Average Realised Price1		$  21.95		$  3.65		$  18.97		$  3.14		16%
Total Unit Cash Costs(e)		3Q22				2Q22
		$/Boe		$/Mcfe		$/Boe		$/Mcfe		%
Base Lease Operating Expense2		$  3.63		$  0.61		$  3.20		$  0.53		13%
Midstream Expense		1.56		0.26		1.35		0.23		16%
Gathering and Transportation		2.49		0.42		2.41		0.40		3%
Production Taxes		1.71		0.28		1.51		0.25		13%
Total Lease Operating Expense2		$  9.39		$  1.57		$  8.48		$  1.41		11%
Adjusted G&A Expense		1.57		0.26		1.38		0.23		14%
Total Unit Cash Costs2		$  10.97		$  1.83		$  9.86		$  1.64		11%
Amounts may not sum due to rounding 1 3Q22 excludes $0.31/Boe ($0.05/Mcfe) and 2Q22 excludes $0.12/Boe ($0.05/Mcfe) of other revenues generated by Next LVL Energy 2 3Q22 excludes $0.28/Boe ($0.05/Mcfe) and 2Q22 excludes $0.12/Boe ($0.02/Mcfe) of expenses attributable to Next LVL Energy

Hedging

Diversified continued to optimise its hedge portfolio, with the current average NYMEX floor prices at a premium of 8% and 4% for 2023 and 2024, respectively, compared to the Company's previously disclosed position as of 29 July 2022. During the quarter and integral to its successful hedged-protected financings, Diversified invested ~$110 million in associated hedge modifications as it settled hedges with certain counterparties to establish new positions with counterparties associated with its securitizations.

Year-to-date, Diversified has achieved increase to its average NYMEX floor prices. The table below reflect the results of these enhancements for the 2022-2024 operating periods^(g)(h).

		Wtd. Avg. Hedge Price at 26 October '22		Wtd. Avg. Hedge Price at 29 July '22		% Increase in Wtd. Avg, Hedge Price		Wtd. Avg. Hedge Price at 08 March '22		% Increase in Wtd. Avg, Hedge Price
FY22		$3.47		$3.31		5%		$3.07		13%
FY23		$3.53		$3.27		8%		$3.06		15%
FY24		$3.14		$3.02		4%		$2.92		15%

In addition to recent hedge optimisations, the Company has also added incremental volumes associated with the ConocoPhillips acquisition. The table below represents the Company's full-year hedge positions at 26 October 2022:

	GAS (Mcf)				NGL (Bbl)				OIL (Bbl)
	Wtd. Avg. Hedge  Price(g)(h)		~ % of Production Hedged(i)		Wtd. Avg. Hedge  Price(g)		~ % of Production Hedged(i)		Wtd. Avg. Hedge  Price(g)		~ % of Production Hedged(i)
FY22	$3.47		90%		$32.02		75%		$69.24		80%
FY23	$3.53		80%		$36.65		70%		$69.39		80%
FY24	$3.14		70%		$34.84		40%		$62.54		40%

Financing Efforts

The Company continues to demonstrate its ability to access competitive, long-term, fixed-rate financing evidenced by raising over $1.4 billion of asset-backed securitisations ("ABS") financings through four successful issuances in 2022. Most recently and jointly with Oaktree Capital, the Company completed its $460 million securitization during 3Q22 ($215 net to Diversified).

Substantially all of the Company's borrowings exist in these fixed rate (5.7% weighted average), fully-amortising, largely-investment grade instruments that insulate the Company from rising interest rates.

Inclusive of collateral from recently acquired ConocoPhillips assets, the Company's Sustainability Linked Loan Credit Facility ("SLL") syndicate approved a $250 million borrowing base (previous: $150) during the facility's semi-annual redetermination. This SLL remains undrawn and fully available to fund accretive acquisitions and support other corporate initiatives and contributes to current liquidity approximating $400 million.

ESG Update

Oil and Gas Methane Partnership 2.0

The United Nations OGMP 2.0 program recently awarded Diversified with the Gold Standard, recognising the Company's commitment to reduce its methane emissions and provide measurement-based transparent reporting.  As one of only 14 upstream companies globally (1 of only 5 in the U.S.) to qualify to date for the Gold Standard, the achievement further validates the creditability of our long-term initiatives utilizing data-driven actions to address methane emissions, further bolstered by the success we have demonstrated through our recent efforts. We believe this milestone positions Diversified to offer Responsibly Sourced Natural Gas ("RSG"), a differentiated commodity sought by utilities and Liquified Natural Gas ("LNG") buyers for its independently verified  low-methane attributes.

Asset Retirement

Available on its website, the Company posted an updated Asset Retirement Supplement that reflects its vertical integration of asset retirement capabilities, the significant improvement in the forward price curve for natural gas and potential benefits related to carbon sequestration and carbon credits. Within the presentation, the Company refreshed its illustrative 50-year model that demonstrates its ability to safely retire its entire portfolio of producing assets, repay its borrowings and generate ~$5 billion distributable cash flow for shareholders (i.e. dividends and/or share repurchases), which exceeds the Company's target of distributing 40% of its free cash flow and equates to approximately four times its current market capitalisation.

With 15 rigs in its fleet, Diversified wholly owned asset retirement subsidiary Next LVL represents a significant amount of asset retirement capacity within Appalachia. Next LVL will leverage its high retirement volume to drive efficiencies while also seeking to explore emerging technologies and innovative techniques to reduce costs, shorten cycle time and increase equipment capacities. Accordingly, the Company is well-positioned to meet or exceed its commitment to retire at least 200 Appalachian wells per year by 2023. Diversified will utilize its excess retirement capacity to provide well retirement and related services to other operators and to State Governments for orphan wells creating the potential to use these earnings to offset the cash costs associated with retiring its own wells.

Diversified safely retired 150 wells through 30 September 2022 including 53 by Next LVL.  Additionally, Next LVL retired 46 wells for third-parties.

Emissions Reductions

Upstream Efforts

Diversified substantially completed its handheld emissions-detection surveys, performing ~60,300 unique voluntary emissions surveys of Appalachian wells (>99% of operated wells in the region) as of 30 September 2022,nearly nine months earlier than its original commitment.

Importantly, these survey's documented that >90% of Diversified's wells were leak free with well tenders repairing identified unintended emissions  at the time of inspection for little-to-no cost. In addition to these well surveys, the Company has re-inspected ~46,000 sites with  ~95% remaining leak-free, demonstrating high asset integrity. Consistent with the Company's zero leak policy, Diversified's field personnel are actively working to eliminate the remaining emissions.

Informed by these handheld surveys, the Company expects to report a further 10% reduction of its greenhouse gas emissions vs 2021.

Midstream Efforts

The Company progressed its aerial midstream assets surveillance to identify and reduce natural gas emissions. Utilising Bridger Photonics' advanced LiDAR aerial leak detection technology, through 25 October 2022 the Company has surveyed ~9,000 miles of Appalachian midstream assets, repaired ~75% of confirmed leaks at minimal cost. and is actively progressing the remaining repairs.

U.S. Dual Listing Update

Diversified has made substantial progress in the review and comment process with the Securities and Exchange Commission ("SEC") on its previously disclosed registration statement with respect to a potential offering of U.S.-listed American Depository Shares. The registration statement remains subject to further amendment in respect of updated financial information and any potential updates to our business.

The Company believes its strategy of consistent cash flow generation that provides meaningful dividend distributions combined with a significantly improved long-term outlook for natural gas supports demand for a dual US-listing.

Shareholder Engagement

The Company places great value in fostering long-term relationships with shareholders and, as part of its investor relations efforts, maintains open and transparent dialogue to proactively address issues important to its shareholders. In the six months following the Company's 2022 Annual General Meeting and as part of its engagement related to items on which shareholders voted at that meeting, the Company engaged in discussions with shareholders regarding share allotment authorities.  Shareholders with whom the Company engaged expressed no concerns on this matter, and the Company made no use of these authorities in the last six months. The Company will continue to engage with shareholders and will provide an update on these efforts in the Company's Annual Report for the 2022 Financial Year.

Footnotes (for Company-specific items, refer also to the Glossary of Terms and/or Alternative Performance Measures found in the Company's 2021 Annual Report):

(a)	As used herein, Cash Margin is measured as Adjusted EBITDA, as a percentage of Adjusted Total Revenue. The key distinction between Cash Operating Margin and Cash Margin is the inclusion of Adjusted G&A. The Directors believe that Cash Margin is a useful measure of DEC's profitability and efficiency as well as its earnings quality.
(b)	Represents incremental value of hedging on Natural Gas volumes between the previously disclosed position at 8 August 2022 and current position as of 30 September 2022, representing approximately 15% of illustrative natural gas production volumes in 2023 and 2024.
(c)	As used herein, Net Debt-to-TTM Adjusted EBITDA, or "Leverage" or "Leverage Ratio", is measured as Net Debt divided by pro forma Trailing Twelve Months ("TTM") Adjusted EBITDA, which includes adjustments for the trailing twelve months ended 30 September 2022 for the Indigo, Blackbeard, Tanos and Tapstone acquisitions as well as Oaktree's subsequent participation in the Indigo transaction to pro forma their results for a full twelve months of operations.
(d)	Calculated as the Company's liquidity resulting from the issuance of ABS VI as announced via RNS on 27 October 2022, adjusted for the impact of the Company's increased borrowing base announced on 14 November 2022.
(e)	Total Cash Expenses represent total lease operating costs plus recurring administrative costs. Total lease operating costs include base lease operating expense, owned gathering and compression (midstream) expense, third-party gathering and transportation expense, and production taxes. Recurring administrative expenses is a non-IFRS financial measure defined as total administrative expenses excluding non-recurring acquisition & integration costs and non-cash equity compensation.
(f)	As used herein, Adjusted G&A represents Base G&A plus recurring allowances for expected credit losses. The Directors use Adjusted G&A because this measure excludes items that affect the comparability of results or that are not indicative of trends in the ongoing business.
(g)	MMBtu prices have been converted to Mcf using a richness factor of 1Mcf=1.07MMBtu.
(h)	Weighted average price reflects the weighted average of the swap price and floor price for collar contracts as applicable.
(i)	Illustrative percent hedged, calculated using December 2021 Exit Rate and assuming a consolidated annual corporate decline rate of 9%.

For further information please contact:

Diversified Energy Company PLC	[phone]
Doug Kris	[e-mail]
www.div.energy
FTI Consulting	[e-mail]
US & UK Financial Public Relations

About Diversified Energy Company PLC

Diversified Energy Company PLC is an independent energy company engaged in the production, marketing and transportation of primarily natural gas related to its synergistic US onshore upstream and midstream assets.

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