Diversified Energy Company PLC (NYSE:DEC) Q1 2025 Earnings Call Transcript

Diversified Energy Company PLC (NYSE:DEC) Q1 2025 Earnings Call Transcript May 12, 2025

Diversified Energy Company PLC misses on earnings expectations. Reported EPS is $-2.09051 EPS, expectations were $0.02.

Operator: Greetings. Welcome to Diversified Energy’s First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Douglas Kris, Senior Vice President, Investor Relations and Corporate Communications. Thank you. You may begin.

Douglas Kris: Good morning. And thank you all for joining us today. And welcome to our first quarter 2025 results conference call. With me today are Diversified’s Founder and CEO, Rusty Hutson; and President and CFO, Brad Gray. Before we get started, I will remind everyone that the remarks on this call reflect the financial and operational outlook as of today, May 12, 2025. These outlooks entail assumptions and expectations that involve risks and uncertainties. A discussion of these risks can be found in our regulatory filings. During this call, we also reference certain non-GAAP and non-IFRS financial measures. Our disclosures regarding those items are found in our earnings materials, on our Web site and in our regulatory filings.

Additionally, as noted in the first quarter 2025 results announcement issued this morning, all financial and operational metrics and our underlying results represent only two weeks of contribution from our recently closed Maverick Natural Resources acquisition. I will now turn the call over to Rusty.

Rusty Hutson: Thank you, Doug. And thank you all for joining the call today. Before I start my prepared remarks, I want to highlight and emphasize that we have significantly transformed and strengthened our company since the start of the year. I appreciate the tremendous efforts of our employees to deliver outstanding results and live by our culture of getting stuff done to help us be [indiscernible] every day. This team has positioned Diversified for an exciting future. I’m confident that our presentation will reinforce my excitement. Additionally, while we recognize the current uncertainty, increased volatility and sharp market sell offs related to tariffs and other factors, we also believe it is essential to address why these items do not affect Diversified’s fundamental business.

Here are a couple of important, unique and differentiated factors of the Diversified business model. We are predominantly a natural gas focused company with the commodity seeming to have a positive macro outlook and tailwind. We are the only publicly traded PDP champion with a focus on the management of mature producing assets. We are a high cash margin business with a large protective hedge book paying a fixed rate dividend and maintaining an active share repurchase program. We have built vertical integration and economies of scale to help insulate against inflation. We have built near adjacent businesses in coal mine methane and well retirement. We are financially sound with approximately $450 million in liquidity. Our model is to use low cost capital to acquire and take advantage of an often overlooked segment of the oil and gas sector that is historically highly cash generative.

Bottom line, the magnitude of any tariffs direct or indirect impact on our bottom line financial health is extremely limited. While it’s sometimes a challenging environment to operate in, we know that if it’s hard, there is opportunity. For those of you following along with our first quarter 2025 results slide deck, which we posted to our IR Web site this morning, I will cover a few slides and then turn the call over to Brad to discuss a few highlights from our financial results. After Brad, I will provide some additional thoughts on our guidance for our powerful path forward in 2025 before opening the call for your questions. Starting on Slide 3. We continue to focus the core of our capital allocation strategy around our four key pillars that are really deliverables to judge us by; systematic debt reduction, returning capital to shareholders through dividend distributions and through share repurchases and growing the company through accretive and strategic acquisitions.

Last year, we checked that box and we continue to build that credibility in 2025. You can see here our progress year-to-date in 2025. Debt principal reduction totaled approximately $51 million during the first quarter of 2025. Additionally, we returned approximately $59 million to shareholders in the form of dividends and strategic share repurchases. Importantly, we believe our shares remain a compelling investment at current levels and we will continue to take advantage of the current cycle and market dislocation to opportunistically repurchase shares. And we accomplished all this while continuing to focus on our growth initiatives with approximately $2 billion in announced acquisitions, inclusive of the recently closed transformational Maverick acquisition.

We maintain flexibility in our capital allocation strategy to ensure we deploy capital to the highest value opportunities. Taken together, we believe our capital allocation strategy balances investment in the business and growth initiatives while enabling a tangible shareholder return framework, all of which creates long term value to our stakeholders. And we will remain focused on these key strategic pillars. With that, I’ll turn it over to Brad to discuss our financials in additional detail.

Brad Gray: Thank you, Rusty. Let me share the highlights of our financial and operational results for the first quarter. We’ll start with production. The average daily production exit rate for March was approximately 1.149 million cubic feet equivalent per day and our quarterly production averaged over 860 million cubic feet equivalent per day. Over 50% of our produced volumes were generated in our central region. The growth in our production base has put the company in a fantastic position to participate in both LNG exports and data center needs while continuing to supply energy to our local communities and commercial customers. Our total revenue was approximately $295 million and adjusted EBITDA was $138 million, which represents an approximate 47% adjusted EBITDA margin, which was relatively flat quarter-over-quarter despite dramatic decline in oil prices.

Notably, as we continue our integration process and improve the combined company cost structure, coupled with a recovery in liquids pricing, we anticipate margin expansion to grow above our historic 50% level. This quarter’s free cash flow was $62 million, delivering an approximate 45% free cash flow conversion rate. Our net debt stood at approximately $2.56 billion. And as part of the Maverick transaction, the company’s RBL capacity increased to $900 million. And today, we have the largest but most importantly, we have the strongest balance sheet we have had. With a net leverage reduction quarter-over-quarter and over $450 million in liquidity, our balance sheet strength is giving us the financial optionality and the financial flexibility to navigate and potentially take advantage of volatile markets as well as commodity price cycles.

Our investment grade rated and stable longer term ABS structures help contribute to our financial resilience. In summary, the strong execution of our strategy from all of our teams during the year delivered our positive results, enabling strong free cash flow generation and allowing us to continue to prioritize returning capital to shareholders and paying down debt. Now, we’ll turn over to Slide 5. One of the main benefits of our recently closed Maverick transaction is that we have multiple drivers of cash flow growth. The combined company will benefit from our low decline production profile, commodity diversification, a continued disciplined hedging program and the potential for additional upside from anticipated operational and administrative synergies with this acquisition.

As a result, the chart on the right side of the page shows that the 2025 guidance for combined free cash flow totaled $420 million, an approximate 200% uplift from Diversified standalone results in 2024. Now, we’ll turn over to Slide 6. Our differentiated business model, including our low capital intensity, combined with our strong cash margins, result in a strong free cash flow conversion rate of 45% as seen on this slide. Within our natural gas peers, you can see how Diversified’s business model is differentiated and we continue to be a leader in the natural gas sector, besting many companies with market capitalizations, enterprise values and production profiles meaningfully larger than ours, with our impressive free cash flow conversion rate of approximately three times our peer group average.

Additionally, our fixed rate investment grade debt from our ABS notes helps lower interest expense, which also benefits our free cash flow. Our ability to generate strong free cash flow allows us to direct cash towards the four pillars of our capital allocation strategy. Turning now to Slide 7. We have a proven approach and an ability to identify and achieve synergies in our acquisitions. Our stewardship operating model supported by our long tested smarter asset management practices is all about optimizing the assets we acquire through production enhancements and expense efficiency. We use every lever at our disposal to increase cash margins, increase returns and increase free cash flow from our investments. With this acquisition, we have already identified and achieved synergies by increasing asset density in our field operations, we’ve integrated processes and we’re improving material contract turns, which deliver better compression and chemical cost.

Additionally, we have upgraded and reduced redundancies in staffing in several areas across our organization. Anytime you have the opportunity to bring talented groups together, there is the opportunity to utilize the best from each other, whether that’d be professional experiences, tools, processes or procedures. Now turning over to Slide 8. We continue to believe our share price is undervalued and has been impacted by macro headwinds that are not connected with our company’s fundamentals or our consistent and compelling performance. Based on the EV to EBITDA metrics where we have historically traded and compared to multiples of our natural gas peers, we strongly believe there is a real opportunity for our re-rate in our shares. With a number of near term catalysts on the horizon, including the integration of Maverick with meaningful identified and quantified synergies, the unlocking of additional hidden acreage value, our emerging coal mine methane opportunity and the continually consolidating landscape of North American operators, we believe that there is a meaningful shareholder value to be captured from our differentiated business model.

It’s worth noting that one of our capital allocation pillars is strategic share repurchases. And as Rusty briefly mentioned earlier, we will continue to take advantage of the market dislocation and valuation to repurchase our shares. With that and those comments, I’ll turn the presentation back to Rusty for his additional comments.

Rusty Hutson: Thanks, Brad. Let me provide a couple of thoughts on our now combined company outlook and how we believe the combined company will look in the coming year before we take questions. On Slide 9, we continue to maintain momentum into the second quarter with the Maverick integration progressing in a way that we believe will exceed our targeted run rate synergies of $50 million. Importantly, with our targeted production of over 1 Bcf per day and more than doubling the free cash flow compared to Diversified on a standalone basis to over $420 million, the company is positioned on a path that creates a unique and compelling investment opportunity. Turning to Slide 10. As we continue to emphasize, we are a differentiated energy producer that seeks to optimize existing long life and often overlooked and undervalued US energy assets.

We seek to drive shareholder returns in a unique way by minimizing traditional E&P risk, optimizing our low decline production and by being good stewards of our capital while driving meaningful and consistent cash flow. Our results reflect our continued focus on building a strategic resilient energy producer. We believe we are the champion of the PDP subsector within the upstream E&P space. We are the one and only publicly traded company executing this strategy, offering investors a vehicle to invest in a similar fashion to the private equity PDP roll up strategy. Importantly, compared to those private entities, Diversified offers unique value creation attributes, which provide us with a competitive advantage. With our large operational scale, vertical integration and corporate infrastructure that leverages a leading technology platform, we have a proven process of integration that allows us to streamline and capture meaningful synergies.

We have executed that playbook 27 times over the past seven years and we are well on our way to accomplishing that again for the transformational Maverick Natural Resources acquisition. Every industry subsector needs a standout or go to investment, which usually has several strategic advantages to its business model. Today, as the only publicly traded PDP focused company, we believe Diversified is that winning investment and has a distinct opportunity to grow our business and rerate the shares. We are excited about the prospect of transforming the valuation of the business through continued execution of our strategy, and we thank our shareholders for their continued support. We remain focused on building a portfolio of assets through value accretive transactions while simultaneously unlocking hidden value through our unique operational framework, strategic development partnerships and growing adjacent business segments, including coal mine methane.

With the combination of maturing assets and M&A activity leading to growth oriented E&P’s recycling capital through divestment of assets, in many cases, mature producing assets, there remains an ample opportunity for Diversified’s continued growth. Additionally, given our industry wide reputation and the current upstream market dynamic of E&Ps making acquisitions to backfill and expand undeveloped inventory, Diversified provides a creative and actionable solution as a PDP partner in joint acquisitions. We have been steadfast in executing our strategy since our IPO, driving strong financial and operational performance. The right company, right time mindset for the type of assets we manage delivers consistent free cash flow and returns to shareholders and serves a fundamental role in sustaining the US energy markets.

Before I turn the call over to the operator for Q&A, I’d like to take a minute to recognize our employees for their outstanding achievements and contributions during the year. Without their excellent work in the field and in the corporate office, these results would not be achievable. With that, I’d like to turn it over to the operator for the Q&A portion of today’s call. Operator?

Q&A Session

Operator: [Operator Instructions] Our first question is from Tim Rezvan with KeyBanc Capital Markets.

Tim Rezvan: First one I had today, it makes sense with Maverick having just recently closed that you would leave the 2025 outlook unchanged. Obviously, gas tailwinds are at your back. But I was curious on the Permian joint development opportunity, which is sort of the biggest component of your CapEx comes from Maverick. Can you talk about how set in stone that program is? I know WTI 63 today but it’s been weak. Just kind of curious on how you’re thinking about that CapEx should we see oil kind of retrench back into the 50s?

Rusty Hutson: I think maybe just for clarification purposes, the largest JV opportunity we have is in the Cherokee and Oklahoma. We do have some smaller JV opportunities running right now in the Permian. But right now, most of the CapEx that we’ve committed to has been in the Permian — or in the Cherokee in Oklahoma. That said, a lot of that production there is really one third, one third, one third. And what I mean by that is one third oil, one third NGLs and then one third natural gas. So the overall — even with the downturn in oil prices that really hasn’t been impacted significantly as a one that was pure oil in the Permian. So we continue to monitor it with our operator, with our partner. But as of right now, I would say that it’s primarily on course for what we originally anticipated. Obviously, if gas and oil both go down throughout the year, we’d have to take a look at that. But right now, I think it’s business as usual on that program.

Tim Rezvan: But and then your Permian activity, you feel pretty good about 2025?

Rusty Hutson: I mean, it’s minimal compared to what we have going on in Oklahoma, to be honest. And so we’re going through a full assessment of all of our acreage in the Permian right now, acre by acre, to see where our best value is to be obtained for that acreage, whether that’d be JV-ing it with someone to drill it, whether it’s something that we don’t think will be on our radar, therefore, we should monetize. But for the most part, even — we have very little capital for this year for the Permian allocated but what we do have is still on tap for the rest of the year.

Tim Rezvan: And then as my follow-up, I thought Brad’s comments were interesting. It kind of seems like you all are — even though you just closed Maverick, you’re on your front foot for potential incremental M&A. I think you said that you’re ready to take advantage of things and you highlighted the strengthening balance sheet. So if you could just — can you talk about your inclination to do M&A if an opportunity arises, do you feel like despite integration, you’re ready to transact if something comes up?

Rusty Hutson: Tim, I think that’s a great question about talking about the integration. Really the integration, even for the little bit of time a little over a month now that we’ve been working on it, we’ve identified, as I’ve said in my comments, synergies above and beyond what we originally anticipated when we announced and closed the deal. So we feel like that’s going — that’s on course to happen throughout the rest of the year. The integration has gone very smoothly. For two large companies, this has been a very clean, very cooperative integration so far. And so we’ve had very little and minimal impacts. We’re moving forward with all the stuff that we knew we needed to do. So integration is going well. And so the key to — I say this pretty much every time we talk, but we can’t choose when things become available.

And so we’re always monitoring, we’re always looking, we’re always seeing — we have a list of things that we feel like are the best things we could do if they ever became available and we always want to be ready when that happens. The good news is we’re sitting here, we have the ability to do something. Doesn’t mean we will. But we could sit here for the next month after month after month and just operate and get our synergies and do what we’re doing, and we will be — do very well. But we’re also always on the lookout for the things that are going to add significant shareholder value into the future. And so what we’re doing is we’ve got the balance sheet in a very good place, we’ve got significant liquidity and we’ll sit here and we’ll free cash flow the business like we have through the first quarter and we’ll have our options in front of us and we’ll take advantage of the ones that we believe will add the most shareholder value.

And so that’s kind of where we are at this point.

Operator: [Operator Instructions] Our next question is from Sam Wahab with Peel Hunt.

Sam Wahab: It’s really a follow-up to Tim’s question around the JV activity in Oklahoma in particular. It’s more around sort of the timing of that, what the activity looks like and what success would look like following that CapEx spend?

Rusty Hutson: I think, it’s just like I said, the original schedule that we had with our partner has had just minor tweaks here and there. And honestly, we don’t see any kind of change from what we anticipated when we announced the deal back in March. So complete — look, these drilling programs, you set a schedule and there’s some adjustments here and there, because completions don’t happen on time or whatever but ours — right now, we look great. And from our perspective, there’s no reason to make any great adjustments, because we — obviously, we have a different revenue stream on these wells than we would say in the pure Permian, which would be mostly oil. So these have a little more gas to them in NGLs and the overall returns look great.

The IRRs are still high and definitely above our low end and where we would anticipate for us to not participate would be we’re way above that. So I don’t think there’s any reason to make any adjustments at this point. We’re going to just hang in there with our operator and our partner and stay on schedule, the wells look great.

Brad Gray: And I would just quickly add, Sam, that it’s important to have a quality partner, and we do, that we’ve got a lot of confidence in. So we’ll maintain good dialog and good visibility there as to what’s going on as Rusty indicated. And we’re confident that we’ll both be able to make good quality business decisions.

Sam Wahab: And then just very briefly on the coal mine methane outlook and obviously, with the Summit acquisition, there was increased potential there. Has anything you’ve seen since that’s been integrated that has changed your view or probably increased your outlook on that particular revenue stream?

Rusty Hutson: We were able to achieve some additional cash flow in the first quarter as a result of closing that Summit acquisition. We’re confident that that increased activity will continue throughout the rest of the year. So no changes from that standpoint. We like our acreage position where we are generating these credits. And we believe there’s opportunity to continue to grow that revenue stream.

Brad Gray: I think we also made the comment that maybe it was back at the year end numbers that we felt that this could be increased up to 300% from 2024 levels by the time 2026 and we’re well on our way to do that.

Operator: Our next question is from Paul Diamond with Citibank.

Paul Diamond: I just wanted to quickly touch on the kind of M&A landscape, a bit deeper than we talked about already. Given the current disconnect markets, call it uncertainty, are you seeing more opportunities on the oil side or nat gas side and things, the bid ask widening out? I guess, how are those conversations going, how should we think about like near term opportunities given current dislocations?

Rusty Hutson: As you can imagine, the oil plays or the oil companies aren’t really that psyched up about trying to sell in the market where it’s at. So I think there definitely has been some freezing up, I would say, on the oil side as people try to get — try to figure out kind of where it’s going. And I mean, one day you’re down to 55, next day you’re back up to 62, 63, which as we know volatility makes anything hard to price and to value. And so I think you’re kind of in a place where you were with natural gas a couple of years ago when everybody just kind of sits, because there’s dislocation in terms of value just based on the volatility. On the natural gas side, it’s a little more vibrant, I would say, and you’re seeing a lot more activity there in terms of just — prices have been more stable and have held up a little better.

And so I think you could see some of those kind of transactions, not necessarily just from us, but in general. I think there’s some out there that may transact over the next several months and/or several weeks. And so I think natural gas seems to be the place where there’s more — probably more activity right now. The other thing for us, one thing we’ve been really focused on too is we believe there’s still way too many small cap oil and gas companies and oil and gas stocks and we believe there’s value there that can be created through G&A reductions over time. And so that’s another area where we’re focused on and just watching. And I think that those values will be tough to come back even with the market coming — having an uptick here, I think those will be harder to come back from.

And so we believe there could be some value to be had in that small cap stock universe as time goes by also.

Operator: [Operator Instructions] Our next question is from Simon Scholes with First Berlin.

Simon Scholes: I’ve just got one. Just looking at lease operating expense, unit lease operating expense in the first quarter, I mean, it’s quite a way above what you had last year. I was just wondering if you could give us an indication of where you expect unit lease operating expense to be over the next couple of quarters?

Rusty Hutson: I’ll let Brad add some additional color here. But you’re going to — for us, we’ve just added an acquisition that has a much higher liquids value than we’ve had in the past. If you go back to last year’s first quarter, it would have been 85% nat gas. This year, it’s 70% exit rate nat gas and 30% oil and NGLs. With that comes a little higher operating expense on the liquids side but you also get a bigger uplift on the revenue side. Therefore, margins should continue to be pretty strong in terms of where they were even as of last year. I mean, Brad, do you want to add anything to that?

Brad Gray: Couple of points. As Rusty indicated, definitely the liquids weighting is going to impact. So we’ll — as the year progresses, you’ll start to see more consistency in our lease operating expenses as we roll these in. We just had two weeks of Maverick here but — and we will also be achieving the synergies, which as Rusty has indicated a couple of times, we’re well on our way to do that and very excited about that. The other thing I would just quickly say, there were some pretty severe weather events that occurred early in January and February that did impact some levels of production that may have or they did provide a little bit higher operating expense on a per unit basis. All those production volumes have come back in line with our plans and thoughts.

And so there was just a little bit of impact there in the quarter from those pretty severe events. But we — as I said in my comments, we’ve got a high level of confidence that the return back to our historic levels of 50% plus margins is well within our grasp.

Operator: With no further questions in the queue, I would like to turn the floor back over to Rusty Hutson for closing remarks.

Rusty Hutson: Thank you all for joining today. Again, we’re very excited about the first quarter, and looking forward to continuing our success in our operations throughout the year. And thank you all for joining and we’ll talk soon. Thank you.

Operator: Thank you. This does conclude today’s conference. You may disconnect your lines at this time, and thank you for your participation.