WTI (Mar) $77.90 -$1.78, Brent (Mar) $84.90 -$1.76, Diff -$7.00 +2c, USNG (Feb) $2.67 -17.2c, UKNG (Mar)* 149.58 +9.58p, TTF (Mar)* €58.65 +€0.95 * Feb expiry.

Oil price

As I mentioned yesterday the oil price is watching all the meetings with interest. Expect no change from Opec, +.25 bp’s from the Fed and .5 bp’s from the BoA and the ECB.

Nothing from Sleepy Joe lately but the retail gasoline price is $3.489 on average which is up 7.4c w/w, up the full 26c m/m and a rise of 77.6c y/y. All that hard work is wasted….

Diversified Energy 

Diversified has announced the following operations and trading update confirming 2022 results are in line with market expectations.

Diversified will release its 2022 full-year results and host an investor call on 21 March 2023.

Recent Operating and Financial Highlights

• Annual production of 135 Mboepd (808 MMcfepd), up 14% vs. 2021
• 4Q22 average of 134 Mboepd (805 MMcfepd), which included weather-related downtime
• 4Q22 average of 138 Mboepd (826 MMcfepd) excluding weather-related downtime(a)
• December 2022 exit rate of 141 Mboepd (846 MMcfepd) excluding weather-related downtime(a)
• Total Cash Expenses(b) per unit of $10.41/Boe ($1.73/Mcfe)
• Full Year Cash Margins(c) of 50%
• ~85% of 2023 production hedged(d) at an average natural gas price of $3.63/Mcf(e)(f)
• Represents ~27% price premium and ~70% increase in  coverage from year-end 2021
• Average hedge price ~3% above current NYMEX strip for 2023(g)
• ~2.3x Net Debt / Adjusted EBITDA(h) leverage ratio as of 31 December 2022, pro forma for recent acquisitions

Recent Environmental, Social and Governance Highlights

• Asset-Retirement Progress / Update on Next LVL Energy, DEC’s well retirement subsidiary:
• Next LVL continues to be awarded retirement contracts from third-party operators and state orphan well programs, with >150 wells contracted in 2023
• DEC retired 200 wells (incl. 72 by Next LVL) during 2022, up 47% vs. 2021 (136 wells)

Emission Reduction Initiatives:

• Conducted ~174,000 handheld emissions surveys of upstream Appalachian assets during 2022, completing upstream surveys ahead of original commitment
• Achieved no-leak rate on >90% of  surveys upon completion of site visit
• Completed 2+ surveys on ~95% of producing sites; no-leak rate of >95%
• Completed LiDAR aerial surveillance over ~11,000 miles of midstream assets
• 75% of verified leaks repaired; progressing additional repairs

Rusty Hutson, Jr., CEO of the Company, commented:
“Once again, the team delivered another exceptional year for our stakeholders. In a year marked by volatility underpinned by significant geopolitical activities, we once again delivered on our strategic goals of generating strong cash flows, reducing emissions, and providing tangible value to our stakeholders.

“Protecting our cash flow and, in turn, our dividend and debt payments have always been core to our strategy. We opportunistically capture higher natural gas prices as we add additional hedge protection.  We begin 2023 again on solid footing, with ~85% of our natural gas production hedged at an average floor price of $3.63/Mcf, with downside protection ~27% better or $0.78 higher per Mcf compared to the values reported as of year-end 2021.    

“In 2022, we navigated a challenging inflationary environment while maintaining strong cash margins by vertically integrating the assets we acquire and realising synergies, including establishing our Next LVL asset retirement business.  Our investment in expertise and equipment positions us as one of the largest full-service well retirement and related activity providers in Appalachia.  Importantly, we safely and efficiently retired over 200 wells during the year and ahead of our 2023 target date to reach this milestone. Our progress highlights our long-standing commitment to be a responsible steward of our assets from acquisition to end of life, and we are now using our expertise to help third parties retire their wells, including orphan wells within certain states in which we operate.”

“We recognize that energy-company stakeholder expectations continue to evolve and now include energy security and affordability in harmony with expectations around ESG, and Diversified remains committed to and has a track record of responsibly and sustainably producing our assets. Our investments in emissions measurement and tracking technologies were integral to Diversified being awarded the Gold Standard from the United Nations Oil and Gas Methane Partnership. As one of only five U.S.-based companies to receive that achievement, we are proud of this accomplishment and its affirmation of the team’s commitment to our stated emission reduction-related goal.”

Today with our more than 1,500-people-strong organization, we achieved strong financial and operational results. I would like to thank this group of talented individuals for their dedication as we continue our work in 2023 and beyond.” 

Yet again Diversified has demonstrated its ability to deliver trading results in-line with best market expectations and at a time when adverse conditions in energy markets make that a very solid achievement. 

Production numbers speak for themselves, FY 2022 was 135 Mboepd (119) with the 4Q number being 134 but hit slightly by Storm Elliot but still exiting at 141 Mboed, a very solid figure. Full year cash margins were yet again some 50% which were aided by the hedging book, with over 85% of 2023 at $3.63/Mcf, a substantial premium to end 2021 and c.3% above 2023 strip prices. 

These numbers translate into a very strong free cash flow which of course leads to the ability to pay out regular and increasing dividends to shareholders, something I addressed in my note a couple of weeks ago.*(Malcys blog 9th Jan 2023 see malcysblog.com archive.) Here I suggested that the chart in the current presentation to my eyes says it all and when I first saw it I understood why the company have coined it as ‘the Money Slide’.

It illustrates that even when the long term commodity price environment is being more ‘conservative’ the large amount of FCF generation from the aforementioned business model not only pays down the debt, retires all 72K wells (and retires some of those that are still economic) but also has the ability to pay the target base dividend for over 50 years AND still have ~$2bn of cash left over that can also be paid to shareholders. So it really does come back to FCF generation as that is ~7X the current market cap.

The hedge strategy shows that when Natural Gas prices fall they are offset by the higher hedged production portfolio( c.90%+) and as a result steady, reliable cash flow which delivers ~50% cash flow and that in itself pays a meaningful and growing dividend at the moment giving shareholders a 20%.

So, finally what I like most about DEC is that it gives investors a certain strength and a unique offering through its model which does not mimic E&Ps and accordingly is not exposed to large capex inflation and no notable service cost inflation for the company.

This ‘exceptional’ year to quote the CEO has again delivered and I see no reason why it can’t repeat the process. The team keep a tight rein on costs, deliver to the environment and investors alike. It seems that there has been a while since an acquisition so maybe the teams have been on the move on that front, it would certainly help the further generation of revenue, cash flow and dividend payments to shareholders, three cheers for that.

KeyFacts Energy Industry Directory: Malcy's Blog