Diversified Energy Company

Greetings and welcome to the Diversified Energy Company's 2021 Final Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rusty Hudson, CEO. Please go ahead.

Thank you. Appreciate everybody's time this morning. As most of you know, we reported our 2021 earnings this morning at market open. We'd like to go through some slides today to talk a little bit about the year. I'm going to spend a little bit of time talking about what I consider to be the state of the union for the company and then talk a little bit about 21 highlights And then I'm going to turn it over to Brad, Brad Gray, our chief operating officer, to speak about the operations and some of the highlights for 21. And then Eric will finish us up with some financial highlights, and then I'll come back and talk about 22 and kind of where I see the rest of the year going. I'm going to start here on slide five. As most of you know, or a lot of you know, I should say, when we went public five years ago, I made a lot of the what I consider to be promises as to what the company would do and how we would operate and how we would conduct business and really what we wanted to do, which was focus on shareholder returns. We talked about the type of asset profile that we would look at, low decline, long life assets. You can see that for 21, we have a 9%, approximately 9% consolidated corporate decline, the lowest in the industry. If you look at the public's, In the U.S., we are 50% to 100% lower than most. I think the next lowest is 20%. We talked about not taking a lot of price risk and protecting our cash flows through hedging and making sure that our margins were protected. You can see that for 22%, we're approximately 90% already hedged. In 21, we were 90% hedged through most of the year, protecting that cash flow that we'll talk about in our financial highlights in a little bit. Hedging, very important to us, and we continue to be very prudent in making sure that we're protecting our cash flows. We talked about smarter asset management, operating wells better than the previous owners, and putting time and attention into operating wells versus drilling and completion. results in efficient operations, reducing costs, enhancing production on wells, and really generating higher margins in the business. And you can see for 21, a 50% margin. We've been operating for several quarters now, greater than 50% in the EBITDA margin category. And then the last thing, which you've heard me say over and over again, is if you don't have cash flow, you don't have a business. We talked about how the industry has operated on negative cash flow for several years and is now coming back around to what our business model has been since day one, which is operating through significant cash flow. You can see we're operating at around 20% free cash flow yield, 40% cash flow margins. We continue to generate a lot of cash flow, and it's helped us. You can see here we've distributed over $350 million in dividends since our 2017 IPO, which I think is an incredible feat for us, starting from such a small company back in 2017. You can see up above that our dividend has increased every year since IPO, and we're generating a total shareholder return over that period of almost 180%. So the company has performed. we continued to do the things that we said we would do from day one, and that's really what I wanted to do since the IPO, and that's be consistent, do what we say we're gonna do, and perform, and return, and perform and generate significant shareholder returns, which we've done. So let's, flipping to page six, talk a little bit about 2021 highlights. 21 was a very, very active year for us. accomplished a lot. We obviously moved into our central region, which was a strategic entry for us in our first time outside of Appalachia. We executed on four acquisitions of high margin assets. And really what's really important for us is that this new region, we believe, gives us a lot of opportunity to grow the company As there's a lot of assets in this area that we can look at, we'll continue to be focused on disjointed ownership of assets with a lot of different types of assets that fit the mold of what we look for in the asset profile of acquisitions we do. We produce record annual volumes of 119,000 BOE per day. We exited the year at 139,000, which is a record. That was the average annual volumes was a 15% increase over 2020, which was really a direct result of the acquisitions and Smarter Asset Management, which Brad will talk about in his operating section. We generated $343 million of hedged adjusted EBITDA, also a record achieving that 50% cash margin that we talked about. More importantly, we delivered $252 million of free cash flow. Again, a record for us with a 20% free cash flow yield. That $252 million of free cash flow obviously was able to not only to create liquidity for additional acquisitions, but to support and sustain the dividend that we pay. We also were able to do all this by maintaining a leverage ratio of 2.1, which is then comfortably within the range that we've identified. that we would try to stay in as we operate the business. So 21 was a very, very active year. A lot of activity that we'll talk about as we flip through these next several slides. Going to page seven, advancing our ESG initiatives. Back in November, we talked about, at our Capital Markets Day, our ESG objectives, and we identified some of the projects and made some commitments that we would fulfill as we kicked off 22. We talked about a $15 million commitment to the emissions-related projects to reduce methane emissions. We also talked about reducing our Scope 1 methane emissions intensity by 2030 by 50% with an intermediate goal of 30% reduction by 26. Again, we'll talk about some of this as we flip through these next few slides. And then we talked about, and we've committed to accelerating our net zero emissions target, bringing it forward from 2050 to 2040. And we have a very ambitious program that we'll talk about in how we plan on getting there. All of these initiatives, these aren't really new to us. A lot of these things that, as Brad gets into the operating section and talks about some of the things that we're doing from an ESG perspective, These were things we were doing all along. We're just now putting a lot of highlight and making sure that you, as investors, understand exactly what we're doing to reduce emissions and to disclose that. And we'll talk a little bit, too, about the fact that we, for the first time, as part of our capital markets, say we committed to a third-party validation of our ESG numbers, which we have completed also. So with that, I will turn it over to Brad and let him talk a little bit about the operating structure and business this year.

Okay. Thank you, Rusty. I'm pleased to share some highlights for 2021. Last year was the fourth year of delivering a creative result for our shareholders since our 2017 initial listing on AIM. During this period of time, we've integrated and completed 18 acquisitions. Our team has grown from 80 employees to 1,450 employees in 10 states. And so I want to express my appreciation to our employees for their commitment, their diligence during 2021 as they were able to accomplish many great projects, integrate four acquisitions in New Basin, and deliver record results. So hats off to the great diversified team members. We'll start with some specific comments and more detail on our ESG efforts. And 2021 was a significant year for all aspects of our ESG programs. Throughout 2021, we were able to substantially enhance and improve all aspects of our ESG results. Particularly with our E portion of ESG, we advanced numerous initiatives. As we presented back at our Capital Markets Day in November of last year, we implemented a specific project that we called Project Fresh, which focused on the continuation of improving the accuracy of our emission calculations. Since our initial sustainability report in 2019, we have consistently discussed two aspects of our emissions calculations. The first is our intentional decision to be conservative with our calculations so that we did not understate emissions. And the second is our commitment to incorporate and improve the equipment inventory and measurement information from the assets that we've acquired over the past few years. So during this past year, we were able to improve our emissions calculations to more accurately reflect the actual emissions from our operations, in particular with our upstream operations. And with our improved information that we obtained from extensive well reviews and capturing actual physical measurements, we revised our 2020 methane intensity ratio for our Appalachia assets from 4.2 down to 1.6, due to a 648,000 revision in reported metric tons of carbon dioxide equivalents. Further, we continued our efforts to eliminate methane emissions. Our methane intensity ratio in 2021 for these same Appalachia assets further reduced to 1.5, or a 6% reduction. The methane intensity ratio for the Central Region assets is also at 1.5, thus placing our consolidated methane intensity ratio at 1.5 for 2021. Our 2021 sustainability report is scheduled to be published in early April, and this report will provide extensive details on our emissions information. Also today, I'm pleased to report that we have publicly released our 2021 Enhanced Task Force for Climate-Related Financial Disclosures report. This full TCFD report is available now on our website. Additionally, during 2021, we implemented a comprehensive emissions detection program during late 2021, which has also rolled into the first quarter this year, which includes our handheld emissions detection equipment for our field deploys and an aerial LIDAR detection program with our partner, Bridger Photonics. Both programs are well underway in 2022, and we're pleased with the results from these programs. On the bottom right of this slide, we are providing some initial results from our handheld emission surveys. We have completed approximately 14,000 unique site surveys, of which 12,000 of those, or 85% of the sites, had no detectable emissions. And I'll point out that our handheld emission devices are designed to detect emissions at one parts per million. Additionally, of the 2,000 sites where emissions were detected, our field employees were able to immediately repair the unintended emissions at the time of the survey for another 1,300 wells. Thus, after the surveys were completed, 95% of our visited locations had zero unintended emissions. So we're pleased with these results, while at the same time, we are also pleased to validate that our longstanding zero emissions tolerance policy has been effective. Moving on to the S of ESG, we were pleased with the results of our initial employee engagement survey that we completed last year. We had a terrific response rate, and our ratings for employee and manager relationships were 13 percent and 17 percent higher than external benchmarks. Considering the pace our employees have worked over the past several years, These high scores reflect the hard work our leaders exhibited to build a strong culture and diversified energy. On the governance portion of ESG, we exceeded our gender diversity goal of 33% with the addition of Sylvia Kerrigan to our board. So now we'll go to the next slide and talk some about our integration and acquisitions. So as we've already discussed, our move into the central region has provided us with additional opportunities to extract and create value. From an integration perspective, we have fully integrated the Indigo, Tanos, and Black Bear transactions. With the December 2021 Tapstone transactions, our teams are fully engaged on a planned mid-year system integration and conversion for Tapstone. From a field operations perspective, our integration is complete, and we are very pleased with the great talent and experience from the former Tapstone employees. As a reminder, we continue to be fully committed to our one DEC strategy for systems and business applications with all of the integrations and conversions from 2021. And our one DEC strategy fully leverages our 100% cloud-based architecture. I'm very proud of our information technology team that's led by our CIO, David Myers. For each of our central region acquisitions, we implemented our smarter asset management programs with a focus on returning wells to production. Our new Tapstone employees successfully returned over 450 wells to a producing state during 2021, with 110 of those wells coming online after our due diligence period began, which further enhanced the value of this acquisition. With the significant experience and talent of our employees, we constantly look for ways to leverage their abilities across all operating areas. With our move into the central region, we have successfully utilized the talents and leadership from our Appalachia operations in both upstream and midstream functions. And we've also been able to deliver some great knowledge transfer from our central region employees back to several functions in our Appalachia operations. And this level of teamwork is great to watch. Moving forward to some more information in regards to Smarter Asset Management, this program continues to be an important aspect of our operational excellence and is closely aligned with our four daily priorities of safety, production, efficiency, and enjoyment. Our field teams delivered some great results with some large projects throughout all areas of our operations, including our new central region in early 2022. A few highlights of the Smarter Asset Management projects include a seven-mile pipeline we constructed in southern West Virginia, which became operational in early fall of last year. This new pipeline segment allows us to sell our produced gas into premium-priced markets. In the second quarter of this year, we will further expand this pipeline with a two-mile extension, which will allow us to increase our gas supply to this premium-priced market by 50%. Also, our marketing teams have worked closely with our midstream teams to identify inefficient pipeline costs, which has allowed us to eliminate no longer needed firm transportation expense. Removing unnecessary firm transportation costs provides an immediate margin enhancement. And then finally on Smarter Asset Management, we continue to drive expense efficiencies with compressor consolidations and eliminations. These efforts not only help increase our margins, they also generate tangible emission reductions. We also continue to review our spend with outside contractors as we prefer our internal operated model. We recently implemented a program to convert upstream contractors in our former TANOS assets to company operated employees. This decision alone will lower our annual expense with these assets by $2 million. Moving on to discuss production and reserves. Clearly with these four central region acquisitions, our production, reserves, and PV10 value all experience material increases. Our December exit rate for our net production of 139,000 BOE per day was an increase of 35% compared to 2020. Our PDP reserves increased by 27% to 774 million BOE, and our PV10 grew to 3.8 billion with the increased reserves and the strength in commodity pricing. As Rusty mentioned earlier, our consolidated corporate decline rate of approximately 9% continues to support the sustainability of our cash flows for many years. Finally, I'll wrap up my comments regarding our plugging operation. And as we have discussed and shared over the past weeks, we continue to view our plugging operations as a core component to our business. Just like our upstream and midstream operations, we are striving for operational excellence in our recently expanded plugging business. Last year was our first year with an internal plugging team in West Virginia. And we're very pleased with our West Virginia results. as we achieved a 30% savings in plugging costs with this internal team. Additionally, in 2021, we retired 136 wells, which exceeded our state agreement obligations by 70%. We have further increased our well plugging capacity in 2022 with a recently announced acquisition of Next Level Energy. With addition of Next Level, along with the further planned expansion of our internal teams, we will have six plugging crews operational by the second quarter of this year. We also increased our inventory of heavy equipment that is necessary to support a professional plugging operation. And so with our increased capacity, we have strengthened our ability to meet our expanded retirement targets, and we've created the ability to sell excess service capacity to third parties and to states to generate revenue. And that revenue will effectively offset the cost of our of our own plugging program. Also, with our expanded internal capacity, we're mitigating the potential for cost increases from third party contractors. Finally, we believe that we're well positioned to further expand our plugging operations with our aim to have 10 to 12 crews in place over the next six to 12 months, which will have the capacity to plug up to 400 wells per year. Those are my comments for highlights for 2021. Now over to Eric Williams, our CFO.