Diversified Energy Company PLC Q4 FY2025 earnings call

Strategy and Culture - Emphasize being proven, an inflection point in the industry, with a focus on strategy, culture, and the company's position despite industry changes like consolidation, commodity price volatility, etc. - Founder Rusty Hudson proud of the business built, team professionalism, asset quality, financial condition, and business model, highlighting people are key. ### Year in Review - 2025 had innovation from the Mountain State Plugging Fund and Carlisle Strategic Financing Partnership, transformation from ~$2 billion accretive acquisitions including Maverick Natural Resources and Canvas Energy, and focus on improving financial leverage, expanding investor universe, and achieving sustainability performance. ### 2026 Initiatives - Announced acquisition of Sheridan Production Partners in East Texas, which is a bolt-on to existing operations, funded with current liquidity, expected to close in Q2 2026. - Achieved listing and reporting objectives, moving to US markets as an SEC-regulated accelerated filer. - Proven business model focuses on systematic debt reduction, return of capital through dividends and share repurchases, and growing cash-generating assets through accretive acquisitions. - Portfolio optimization program (POP) generated ~$170 million in 2025, repositioned cash for strategic actions, and has cumulative $314 million proceeds in last three years enhancing ROI. - Non-op joint venture partnership in Western Anadarko Basin had ~60% rate of return on new wells (trending ~75% liquids) and a new Permian Basin non-op partnership added. - Stewardship operating model with smarter asset management practices to optimize cashflow through production enhancements and expense efficiency, with daily priorities of safety, production, efficiency, and enjoyment.

In 2025, daily production exit rate for December was approximately 1.25 BCFE per day, and annual average was approximately 1.1 BCFE per day. Total revenue was 1.83 billion and adjusted EBITDA was $956 million for the year, with adjusted EBITDA margin at 58%. Adjusted free cash flow was $440 million (burdened with ~$55 million transaction costs). Net debt stood at ~$2.8 billion at year end, and leverage improved by over 20% to 2.3 times. The Sheridan Production Partners acquisition in 2026 is expected to add 61 MMCFE per day of natural gas production, have a ~6% production decline profile, contribute ~$52 million in 2026 EBITDA, and has estimated reserves of ~397 BCFE.

2026 Guidance - Published full-year 2026 guidance using same operational and financial metrics, not incorporating the Sheridan production acquisition announced. - Anticipates cash generated from portfolio optimization programs in adjusted EBITDA and adjusted free cash flow to be approximately $100 million for the full year 2026. - Continues to focus on disciplined capital allocation with priorities of debt reduction, return of capital to shareholders, and growing cash-generating assets through accretive acquisitions. ### Acquisition Guidance - The Sheridan acquisition is expected to contribute ~$52 million in 2026 EBITDA, add production, and create value through synergies and asset integration.

Q: Morning, gentlemen. Nice details. I'm addressing my first question just on cap allocation and Now, in prepared remarks, you kind of gave the rankings, but I'm just quite curious about how you think about you've always had a good dividend. Is there a, you know, sort of an optimal dividend yield that you all target? And then in that same vein, with leverage, you've been able to take that down. Is there, you know, an optimal or kind of a leverage goal as well?

A: Yeah, no, I don't think we really sit around and think about what our dividend yield is. We have a dividend, fixed dividend that we feel comfortable that The free cash flow we'll support that will give our shareholders a good return. And then, you know, that's where we stay. We don't really look at the dividend yield. That's going to be based on the share price and where it goes, and we just kind of try not to focus on that. We focus on what we feel like we have the financial capabilities of paying with free cash flow. On the other hand, as it relates to leverage, you know, we've stated our business with the type of – funding that we that we use with the abs the asset back securitizations you know we're very comfortable having that two to two and a half range um there's times when it could come down closer to two and there's times where it may go a little higher than that at two and a half but staying within that range is a real is a goal for us and and really important for us as we grow the business through acquisition and neil one thing i would add as it relates to leverage uh You know, one fact that I would not want anybody to just skate over is the fact that we paid down $277 million worth of debt last year. So our business continually deleverages. It should be close to $300 million this upcoming year. So we continually deleverage and build up equity value in these ABS nodes.

Q: my second question just on debt. non-op activity. It seems like you have a lot of, I was going to ask about acquisitions, but I'm just excited on your non-op activity. It seems like there's a lot of upside potential. I mean, whether that's MoveOren and MidCon or others, could you talk about just what you're currently seeing in the non-op? Are you seeing, you know, where, you know, I know there's a sort of non-op writer talked about some private sort of shutting things down. It seems like你're having just the opposite where you're having some sort of fantastic activity. Could you talk about potential upside around your non-op activity?

A: Yeah, our Western Anadarko, you mentioned, in Oklahoma with Mooborn, we've just seen tremendous results there. The commodity prices haven't affected those IRRs to a level where we would ever think about shutting that down. They're just that good, and we've seen – Great success there. We still have a runway to go. And so we're going to continue to invest alongside of Mooborn in that program. We're also seeing, you know, we mentioned it in our comments, we're the largest leaseholder, one of the largest leaseholders in the lower 48. That gives us a lot of flexibility and a lot of optionality. And so we're leaning into that in our Permian acreage with another non-op partner. and fully expect to invest along the line as we move into 2026 and see some pretty good returns there, especially with the uptick in oil that we've seen here recently. So we're excited about the non-op piece. It allows us to have some organic growth within our portfolio without having to put the G&A cost that running a program ourselves would do And so it's a big piece of what we're going to be doing moving forward.

Q: Good morning, Rusty and Brad, and to the rest of your team there. Good morning. Good morning. Yeah, I'd like to start off with, to ask for a little more color around this, the Sheridan acquisition you guys announced yesterday. It looks like to me that that's an area that has a lot of historic Cotton Valley production, but also it's more recent in the last few years there's been a lot of horizontal Haynesville production there. So I wonder if you could talk about that. When I look at the 6% decline you gave us for that, though, it really suggests to me that there hasn't been a lot of recent drilling, or at least a lot of recent horizontal drilling there. I wonder if you could talk about the nature of that production, what zones它's coming from, how much is horizontal versus vertical, and really one of the things I'm aiming at is an idea of how much undeveloped acreage you guys might have there that's a candidate for your portfolio optimization.

A: Hey, Charles. The way we've really looked at this acquisition opportunity, it is a perfect strategic bolt-on to our business franchise there in East Texas. We've got tremendous overlap with our field operations, with our midstream business. And so it is a great tuck in where we can add in highly high margin production into that area. Along with it does come some additional acreage. And I think we highlighted that in the press release. So we'll have一些 opportunities there. And as we've done with our POP program, we'll look for the best ways to bring value forward, whether that's through some type of development or some type of just sale. or some type of non-off relationship. So this is a perfect tuck-in acquisition. It's only $245 million for us. It's adding reserves, and it's also adding incremental cash flow to just the overall corporate cash flow that we produce. And just to add on to that, it's kind of a mix. It obviously has horizontal wealth in the package. To your point, they haven't been drilled in the last few years. but the other real important factor here is this is in the proximity of our processing facility in that area, and so it gives us some potential upside there to move gas maybe down to our processing facility and get the liquids exposure as well. The other thing I would say is, too, is that You know, this is an area that's gotten really, really active and hot, pretty much the whole area down there. But so as Brad was mentioning, you know, we'll look to find the best value for that undeveloped acreage, whether it be a JV, like he was saying, or a sale or whatever. So there's lots of optionality here, lots of synergies that we can lean into. And really key to our acquisitions, Take an acquisition, pay for it, and get additional value that brings what you paid for it to a better valuation. Yeah, well, Charles, last comment I'd say is just there's a page in our presentation that talks about the strategic value of in-basin acquisitions, that framework. This one hits every box there.

Q: Yeah, it definitely seems like it could be a good fit. On the financing of it, is this already in process with a Carlisle ABS structure, or what's the state and path forward for the financing?

A: Yeah, we've got the liquidity on our credit facility to finance this acquisition, and that's our initial plans to close it with that.

Q: Hi, good morning. Thank you for taking our questions. Just on the non-op side, you said the two non-op partnerships together, they're expected to offset about half of the natural decline in 2026. Just looking forward to How are you thinking about the scale that you'd like to get for these non-op partnerships? For example, would you look to have enough partnership activity to offset all of your base decline?

A: Well, we'd love that. We'd love it. But you ultimately have to have the programs that make sense and that are, you know, have good rates of return. So these two that we've mentioned have that. And so these would be the two that we're going to lean into. There could be more coming in the future. And, you know, as I've stated, I believe the last call that we did, we're high grading our acreage. We're looking at multiple opportunities to lean into all that value. These are two that are extremely important to us and that are already kicked off, but there could be more coming in the future. One thing我would say, we did this Canvas energy acquisition at the end of 2024 that came with a lot of acreage and a lot of opportunity. And so with commodity price movement, if there is any commodity price movement upward, that price movement will unlock additional development opportunities for us. So like we said in our comments, we've got a lot of cash generating levers In our portfolio. The last thing I would say there as well is that don't underestimate Appalachia. We have some acreage in Appalachia that has some really, really good prospects at some point. We're kind of monitoring the situation that's going on there, but it could end up being a big, big win for us up there as well.

Q: I just want to ask about the asset sales. You previously talked about maybe a $40 or $50 million run rate of asset sales is a good baseline. We saw 2025 come in over $160 million. With the 2026 guidance, including about $100 million of these proceeds, how do you just think about the updated run rate for这些 land sales? And are you seeing more buyer interest today?

A: Yeah, I mean, I would say there's buyer interest. Again, we're high grading our portfolio. We're looking at all of our acreage positions. You know, last year was the first year with all the acreage that we had acquired through Maverick and Canvas. This year, we'll have a little more, you know, we've seen a little more interest levels in a couple of things that we didn't anticipate last year. But, you know, I think, Brad, you can comment on this as well. I think 40 to 50 is a run rate type expectation on a normal year? Yeah, post-2026, we've already issued expectations and guidance on 26 at $100 million. But on a go-forward basis, we believe that $40 to $50 million is a comfortable number. We have a vast portfolio of assets in acreage, and so opportunities come our way very often. And I find it interesting that a lot of the areas that people didn't think about or didn't really put a lot of attention, all of a sudden are regaining interest levels, and people are starting to come back and look at different things. So that's what gives us comfort in the guidance.

Q: Thank you for taking the call. Just drilling down a bit more on the Permian JV. In the central basin, we have a bit more of the details, but is there anything else you can disclose on locations, working interest, expected production run rate through the year, anything like that?

A: I would say We'll have more data around that after the first quarter. Give us a little time on that. But no, look, it's really close to moving forward here and getting kicked off. And so we'll have better data to kind of help you to drill down more so at the end of the first quarter.

Q: Understood. And then jumping over, can you talk about one of the bigger news or news pieces last year is the plugging fund. Can you talk about the status of where that sits and, the potential opportunity set and how you go about potentially extending that to other states?

A: Yeah, I'm still surprised at how that got kind of gotten just kind of blown over by most people. But that was a big win for us, you know, as it relates to asset retirement. We have a really, really good financial assurance policy there now that, you know, we've made our first payment into that. That'll go on for 20 years. We'll continue to plug the wells that we have committed in the state already for the next 20 years as well. We want to utilize that in some of the states where we have the higher well counts for sure, especially in Appalachia mostly. And so we're working to try to get inroads there. I would tell你that there's a couple states that would probably do it very quickly, and we'll probably circle back to them this year. but we're working on one as we speak and really want to get that one squared away. It's a great product. The whole industry应该be looking at this as a way to deal with asset retirement obligations long-term. I think even the states themselves with their Orphan Well Program should be looking at something similar. It was a big win for us. Obviously, my relationship with with the politicians in West Virginia gave us the ability to take advantage of that there first. And so we'll continue to work with some of the other states and you'll probably see us do something else with a couple of the other states this year. And Paul, I would just add this program, as Rusty indicated, we're very excited about This program, when it works as designed, and it will because it really is just math和time, moves the financial liability for plugging our West Virginia Wells off of our balance sheet and away from future cash flows of this business. It is a significant victory for our company.

Q: Hi there. Hi, everyone. Congrats on another great set of results. A lot of my questions have been answered, but one that still stands out is sort of linked with the Sheridan transaction and the strategic partnership with Carlisle. I noticed, obviously, the Sheridan deal is very much gas-weighted compared to Maverick last year, where you introduced a lot more liquids. I mean, is that a signal of intent in terms of strategy? You talked earlier about data center demands, LNG opportunities. Would that partnership be more gas-weighted going forward? And what does the landscape look like for opportunities? And is gas at the moment a better deal than potentially oil, given the uptick in prices?

A: Yeah, good question. We are, you know, I've说this before, we're not really focused on whether it's liquids or gas. What we're focused on is the value that we can get from the acquisition. In this case, it was mostly gas, obviously, but it was sitting right in our geographical operating area and just gave us all kinds of opportunities to drive the costs down, increase them. We bought it on a margin. We think we can increase that margin. And so that's what made it so attractive to us. um you know the carlisle partnership they're they're they don't really care whether it's uh liquids or natural gas either and so um but they do have a size you know they obviously want to do deals a little larger than this one uh and so uh that's primarily the reason why we just did this one on our own uh through our own liquidity uh but you know they they're they don't have a preference You know, whether it's liquids or natural gas, we're all about where can we get the best return. That's what we're focused on. And whether it's liquids, whether it's natural gas, it doesn't matter to us.