I’m assuming it’s not an entirely independent view, but it makes a nice change to hear some positive views about DEC.


Stifel has resumed coverage of Diversified Energy Company PLC (LSE:DEC, NYSE:DEC) with a bullish outlook, highlighting the firm's strategic growth initiatives, value enhancement through acquisitions, and efficient capital reallocation.

Diversified's recent acquisition of Oaktree Capital's interest in certain Central Region assets, valued at approximately $410 million, represents the group's largest venture in the Central Region of the US to date and is expected to significantly bolster its financial positioning.

The acquired assets are forecast to generate an adjusted EBITDA of $126 million in 2024, with an expected payback period of less than five years.

“In our view, these steps put Diversified in a much improved financial position that enables management to make the best value-creation decisions going forward, and ultimately should remove many of the market's funding concerns,” said Stifel.

“Investors taking a fresh look at Diversified today will see a well-managed growth business that generates best-in-class cash flows, despite low gas prices, and still pays a leading dividend.

Stifel reiterated its Buy rating with a 2,800p price target against an 881p price at publication.

The Motley Fool

The days of a 30% yield may be over, but I’d still buy this FTSE 250 share for dividend income!
Story by James Beard

Until 19 March, Diversified Energy Company (LSE:DEC), the US gas producer, was the highest yielding share on the FTSE 250.

And it’s easy to see why. Since March 2023, Diversified Energy’s stock price has fallen 52%. But during this period it maintained its dividend at a generous $3.50 (£2.75) per share. This helped lift its yield to over 30%.


But on 19 March, along with the release of its 2023 results, the company announced an immediate 67% reduction in its quarterly payment, to $0.29 per share.

The cash that it saves from reducing its payout will be used to reduce its borrowings and fund acquisitions.

However, the directors claim that even with a revised yield of 10%, the company remains within the top quartile of FTSE 350 stocks.
Different properties
My interpretation is that the company isn’t reducing its dividend because it’s running out of cash. Instead, it wants to use its surplus funds in a different way, in an attempt to arrest the fall in its share price.

The company’s business model involves acquiring existing gas wells rather than drilling new ones. It then seeks to extend their productive lives before capping them forever.

But the problem with this strategy is that it needs to buy more fields to grow its earnings, increasing its debt further. And investors tend to shy away from highly geared businesses.

At 31 December 2023, net debt was $1.284bn, equivalent to 2.3 times its adjusted EBITDA (earnings before interest, tax, depreciation, and amortisation). I think this is on the high side, although currently manageable. The company has a target of keeping this below 2.5.

To reassure investors, the company has prepared a detailed financial model. This ‘proves’ that it will generate enough cash to retire all its wells — at current values plus inflation — and repay all its debt.

And according to its latest report on its well closure programme, it will be debt-free within 10 years. This is a significantly shorter period that the average life of its wells, which is estimated to be 50 years. This all sounds very positive to me. And not typical of a company that’s decided to slash its dividend by two-thirds.

Opportunities
The company believes there’s currently an over-supply of gas in the US. This is likely to put downwards pressure on prices. But with a low cost base and a high proportion of its output hedged, it claims it can cope with a downturn.

It also predicts that the anticipated slump will create opportunities to buy more businesses with “extreme valuation disconnects”. I think that’s American for ‘bargains’!

The company had a solid 2023. Its preferred measure of profitability — adjusted EBITDA — increased by 8% to $543m, compared to $503m, in 2022.

But on 19 March, there was no mention of the letter it received in December 2023 from four members of a House of Representatives committee. The correspondence raised concerns about its accounting for the costs associated with the closure of its wells.

And even though the company claims its business model is better for the environment, it’s out of bounds for most ethical investors.

But despite the risks — and even though its dividend cut is disappointing — I’d still buy the stock if I had some spare cash.

I'll probably be looking to get in August. Paying down debt and buybacks in time for a gas price rise. Being patient for a rise in commodity prices is one thing I learnt 20 years ago having lost money and learning the hard way.

Share price up 25% in a month got to be some profit taking soon.
Almost at break if I exclude the dividend.

Latest results out today. Here’s the Proactive summary.

Diversified Energy Company PLC (LSE:DEC, NYSE:DEC) chief executive Rusty Hutson described the company’s first quarter as “solid”, and said that an ongoing focus on cost-cutting is paying off.

"Building a portfolio of high-performing, mature producing assets and optimizing the cost structure has been the foundation of our strategic vision since inception," he said in the statement.

“The company's ability to continue to deliver solid results, both operationally and financially, reinforces the success of this strategy."

“I am pleased that our ongoing focus on cost reduction opportunities has translated directly into a 7% sequential quarterly operating cost improvement, allowing us to effectively navigate the current natural gas market headwinds.”

DEC reported its first-quarter production at 121,000 barrels oil equivalent per day, with the quarter’s ‘exit’ rate marked at 124,000 barrels.

This meant the production performance was “essentially flat” and was a continuation from the prior quarter, which also yielded 121,000 boepd.

Operating cash flow amounted to $107 million, and after non-cash adjustments (for fair-value of derivatives held by the company), it reported a $15 million net loss.

Earnings (adjusted EBITDA) came in at $102 million and the company said it had $74 million of free cash flow.

Operating cash costs per unit reduced by around 7% quarter-on-quarter, to $10.10 per barrel equivalent.

In the field, the company is enhancing operations through an expansion of facilities at the Black Bear site.

“I am excited to announce that our Black Bear processing facility has begun service. Completing this strategic project demonstrates our success in leveraging in-house expertise to unlock value and facilitate meaningful cash flow generation,” Hutson said in a statement.

“This facility will integrate our own natural gas production in the area and is expected to deliver approximately $9 million of additional margin creation annually while providing additional potential upside from any non-utilized capacity to process third-party gas from other operators and accretive bolt-on acquisitions in the Cotton Valley and Haynesville region.”

For shareholders, DEC confirmed it has so far returned $830 million to through dividends and share buybacks since its 2017 stock market float.

In 2024, it bought back 400,000 shares worth £3.9 million, at an average price of £9.74 each, and it announced an interim dividend of 29 cents per share for the quarter.

Hutson added: “I am confident that the reliability and consistency of our assets will continue to provide meaningful cash flow, financial flexibility and support our ability to return value to shareholders."