Diversified Energy Co Q4 FY2024 earnings call

• Strengthened the company through acquisitions over the past year, including the recent Maverick acquisition. - Focus on systematic debt reduction, returning capital to shareholders via dividends and share repurchases, and growing through accretive acquisitions. - Consistent average cash margin over 50% since IPO due to differentiated operations, high capital efficiency, effective hedging, and strategic bolt-on acquisitions. - Expansion into coal mine methane capture and sale of environmental credits, with anticipation of over 300% growth in free cash flow from this segment over 24 months. - Partnership with FuelCell Energy and TESIAC to power data centers with natural gas and coal mine methane, leveraging midstream infrastructure and micro grid capabilities in the Southern Appalachia region.

Total revenue for the year was approximately $950 million, and adjusted EBITDA was $472 million, representing an approximate 50% adjusted EBITDA margin. Average net daily production came in at approximately 790 million cubic feet equivalent per day, with a December exit rate averaging over 860 million, and over 50% of produced volumes generated in the central region. The company has approximately 8.6 million net acres within its operating footprint, with 65% (approximately 5.6 million) being undeveloped, representing significant untapped value. Debt principal reduction totaled approximately $205 million in 2024, $105 million was returned to shareholders in dividends and $20 million in strategic share repurchases, and over $2 billion in announced acquisitions were made.

• Combined company's 2025 free cash flow guidance is $420 million, which is approximately a 200% uplift to Diversified's standalone 2024 results. - Anticipate over 300% growth in free cash flow from coal mine methane revenue and associated environmental credits over the next 24 months. - Potential for additional upside from strategic bolt-on acquisitions, monetizing undeveloped acreage, implementing synergies, and leveraging joint development agreements.

• Market volatility impacting the natural gas market, which has made it difficult for most companies to maintain high cash margins. - Macro headwinds impacting the company's share price that are not connected with industry fundamentals or the company's performance. - Uncertainties related to the execution of projects with FuelCell Energy and TESIAC, and the timing and success of undeveloped acreage sales.

Q: Hi, good morning, team. Great update. My first question is on the macro. A few of your peers have used 4Q earnings to kind of shake up their plans, focus on growth through the drill bit, just want to get your thoughts there. Is organic growth in the plans? Do you maybe still see low-cost PDP acquisitions making the most sense or maybe how do you weigh those options just plowing all free cash flow back into share repurchases?

A: Great question. No, we still see our business -- we have the non-operated working interest participation that we are acquiring through the Maverick transaction and we will invest in that. But really our goal is to continue to grow the business through acquisition -- on accretive acquisitions. We feel like that there's a lot of opportunity for that still in the market and we've set ourselves up to be able to take advantage of those as we move forward. The one thing that -- even with this acquisition and the fact that we're picking up a non-operated JV, our business model hasn't changed, Bert, and that is, we're going to grow our business through accretive acquisitions and we're not going to change who we are and what we do.

Q: Maybe the second question is on the data center project JV. It looks like you've got pretty solid group of experts for each role in that build-out, and I know it's super early, but just wondering if you could maybe elaborate on how the cash flows come back to Diversified. I would imagine you're going to get revenues from selling the gas, you probably get some sort of coal mine methane if it's applicable to those volumes, and then there's probably some discussion on a hydrogen credit. So I just didn't know if -- is that being split among all parties? Do you maybe carve out one for you and one for the other guys or just any details on how those revenues net back to diversified?

A: Yes. Hi, Bert, this is Brad. You answered the question pretty well yourself with the elements. But specifically as it relates to the splits of each of the projects that we're looking at, we have not developed those splits at this time. But I think an important point that you made is that these projects do have the ability to stack multiple revenue streams and we see that as very positive. And clearly, I will provide specific response to one. We will definitely be selling the gas to the project. And we do have the energy and that puts us in a unique spot with these projects that we are looking at and the locations is we do have the energy source. So we're very confident about our ability here to execute on these.

Q: Good morning folks, and thank you for taking my questions. I was intrigued by the prepared comments about repurchases and you all mentioning that you are leaning in given you see some volatility now. Given the hedges in place, providing pretty good lens on free cash flow for the year. I know you can't talk about how much you're buying now, but can you talk about what that capacity could be in terms of like what's left on the authorization and theoretically how much you could lean in if liquidity provides the option?

A: Yes, that's a good question. We obviously have, I think repurchased about 3% of our 10% authorization from last year's annual general meeting approvals. So between today and the next AGM, which I believe is in early April, we still have approximately 7% under that authorization. So, you said it best. We feel that there's a dislocation. The value of our shares are have been impacted by a lot of macro events and things that nobody really has the ability to control. But we see our shares being at a level that would make a lot of sense to see some activity from us in a repurchasing program. So, and then at the AGM in April, we would - I think we would be looking for another 10% authorization. So yes, I think that's kind of where we would leave it at this point.

Q: Okay. That's fair. Thank you. And then as my follow-up, in the news last week about the acquisition closing, you mentioned the CEO of Maverick, Rick Gideon will join as COO. Can you talk about kind of - I don't know how much of a deviation this is from kind of traditional strategy or kind of what adding that as formal COO role, will sort of do kind of for the company with the larger asset base. So just kind of curious your thoughts on that.

A: Yes, no, I think he brings a unique skillset to our overall executive team. We've always had great leadership as it relates to operations. I mean that's apparent across the Board. I mean you've seen the way that the results from our operations over the last several years. But I think bringing someone in at the executive level that has multi base and experience with a lot of engineering background, has been at some larger companies and understands different ways of doing things, I think it's always great. I mean you bring people in and it helps to refresh, find new ways of doing things, add some additional leadership capabilities. So net-net just a great opportunity for us to kind of increase the bench strength across our executive management team.

Q: Hi guys, thanks for the call. I just had a quick question around the dividend. So the fixed dividend per share, if you put that on the enlarged share cap, is I think about $94 million a year and that plays against your free cash flow this year of $420 million [technical difficulty] So looks very well covered. Just wondering whether you got an update on what you said last year around dividend sustainability. So I think you're looking at three years or at least a minimum of three years on the back of the O2 deal. Has that moved on at all post Maverick?

A: Yes, thank you Tim for that question. The one thing that we've been very clear on, I've tried to make it very clear over the last several times that we've had calls or we've had reach outs with investors. The dividend, the per share dividend is fixed. It's sustainable. I said three years last year and I got a lot of people asking was it only good for three years into the future? Don't worry about it. It's set and we feel like it's sustainable for a long extended period of time under our current business. And that's a fixed per share amount. So even with the additional shares that we've issued, the $1.16 I believe is fixed and sustainable for a long period of time.

Q: Thanks guys for taking my questions and congrats on a really strong set of results. I suppose we've already discussed this to a certain extent in terms of the free cash flow guidance of $420 million going into 2025. I was wondering if you could give a bit more color on the assumptions driving that. Obviously we know that synergies will be around $50 million and there will be an element of land sales in there. But just how we should be thinking about decline rates on the overall combined company just so we see how that moves from the $343 million up to the $420 million and also what sort of commodity price assumptions we should be putting into our models.

A: Yes. Hi Sam, thanks for the question. In regards to production declines, we've - in all of the information that we've shared since announcing Maverick, we've maintained that 10% corporate decline rate and we would - we believe that that's still the case going forward. So I would guide you to that. Clearly there'll be some additional newer production that's coming on through the JV, the CapEx that we're spending on the JV. So there's a component of production that'll be coming online with that. So that's where I would guide you on the production side.

Q: Yes, good morning. Thanks for taking my questions. I've got three. First of all, I was wondering if you could tell us what unit LOE midstream and transport costs were in '24 for Maverick. Second, I was wondering if you could tell us in which line of the P&L you've booked the environmental credit sales. And third, I was wondering what the outlook for third party plugging is this year. I think there were some constraints last year, some bureaucratic constraints. I was just wondering if they've loosened up this year. So if there's any prospect of you getting anywhere near the number you did in '23.

A: I'll address the last question there on the plugging side, on the asset retirement. We do believe that there will be a pickup and we've already seen some through the first quarter on the third party asset retirement revenue that will offset the existing well plugging on our side. So we do believe that we'll get back to a closer to a normal number in 2025. So you can kind of draw some assumptions around that.

A: Yes. And Simon, this is Brad on your other two questions. We have not published any specific cost information related to Maverick. What we have talked about is the quantifiable and identified synergies that we'll be delivering with a combination of the strong position that we have in the Western Anadarko Basin and Western Oklahoma, as well as just the combination of the administrative functions within the company. And so as we move forward, now that we've got the acquisition closed and we start posting results on a combined basis those results will start blending in. From a synergy standpoint, we've provided you some guidance related to that and we would anticipate achieving those synergies on run rate basis annually by the end of the year. On the environmental credit question that we booked that in other revenue within our P&L. So it's just a component of that line item. And I think we stated at our year-end trading update that we booked approximately $8 million to $10 million of environmental credits in 2024.