Me and Peel Hunt
Sitting in a tree
Waiting for a price of...
3,000p 👀
The recent dip in value for Diversified Energy Company PLC (LSE:DEC, NYSE:DEC), coinciding with it latest acquisition, presents a buying opportunity – that’s according to Peel Hunt analyst Sam Wahab.
In London, the DEC share price is down by about a third in the past month and it is ending the week at 911p – which compares to Peel Hunt’s target price of 3,000p.
DEC, on Friday, told investors its recently announced acquisition of Maverick Natural Resources remains on track, and the deal ‘is not, and will not be, impacted or adjusted’.
On Monday, a general meeting will be held to ratify the transaction that promises to boost DEC’s production base in the US.
It announced the $1.28 billion deal in late January, to add add assets in the Western Anadarko and Permian basin. These assets add meaningful scale and increase production, with the enlarged group set for ‘long-term free cash flow generation, superior unit cash margins, and a compelling sustainability profile’.
The deal terms, meanwhile, see DEC take on $700 million of existing debt, pay just over $200 million in cash, and issue new shares for the $345 million remainder.
DEC shares have pulled back in the meantime, against a backdrop of dynamic markets and volatile geopolitics.
Wahab, at Peel Hunt, sees the price as an opportunity.
“We believe the recent share price decline - unwarranted in our view - represents a compelling opportunity for investors ahead of transaction close,” the analyst said in a note, repeating a ‘Buy’ recommendation.
“The combination with Maverick enhances DEC’s position in core geographies across Appalachia, the Western Anadarko, Permian, Barnett, and Ark-La-Tex regions”
Peel Hunt highlighted that the acquisition assets improve DEC’s balance between gas and liquids, 75:25% from 85:15%, and this will yield higher-margin free cash flow.
On a pro forma basis, DEC will see around 200,000 barrels oil equivalent per day, generating US$935 million of earnings (EBITDA) and US$325 million of free cash flow (FCF).
DEC chief executive Rusty Hutson, in January, when announcing the deal, told investors: “This acquisition expands our unique and highly focused energy production company with a complementary portfolio of attractive, high-quality assets.
“We have a proven track record of unlocking value from acquisitions while maintaining our commitment to sustainability leadership, and this acquisition provides us with great assets and employees that complement this strategy.”
“The acquired producing assets have demonstrated leading well performance and are a natural fit with our operating advantage and existing acreage.”