Diversified Energy Company

Greetings. Welcome to Diversified Energy Company's 2022 Final Results Conference Call. At this time, all participants will be in 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 from your telephone keypad. Please note that this conference is being recorded. At this time, I'll turn the conference over to Douglas Criss, Vice President of Investor Relations. Douglas, you may now begin.

Good morning and thank you for everyone who is joining us here in person as well as on the line. We are doing a hybrid call here this morning, so we have a number of our research analysts here in the room with us. Joining me here today for our year end 2022 call is Rusty Hudson, our CEO, Eric Williams, our CFO, and Brad Gray, our COO. And we'll turn the call over to Rusty here to get started with our presentation.

Good morning. Thanks for everybody coming in person and also joining by phone. I'm going to go through a, from the end of the presentation, talk a little bit about 2022, which was a record year for us in a lot of ways. Give some real quick notes about some of the accomplishments from 22. Talk a little bit about the natural gas macro, kind of how we see the remainder of 23 and forward playing out. and then finish up with a quick comment or two regarding the rest of the year and a forward-looking diversified. I'm going to start here on page four, talk a little bit about the strategic objectives that were met in 2022. Obviously, a record year across the board, record production, record revenue, record shareholder returns. If you take a look at all three of those, those are the three most important things that we look at on a day-to-day basis. We obviously completed $566 million in complementary acquisitions, including the one we just announced a month ago. With those acquisitions, we expanded the scale and the capacity of our Appalachian Asset Retirement Program and our company that we started there last year. We scaled it up. We also added a lot of additional scale and vertical integration in our central region area, which is extremely important. We've talked about that as we move forward. we will continue to scale that area to duplicate what we've done in Appalachia. So we're able to do that in 2022 with the acquisitions that we did. We advanced our emissions reduction programs, made a lot of progress there. You probably saw this morning that our methane intensity rate is now lower than previous year at a 1.2, which is tremendous. It puts us in a very enviable position across our industry in the US. Completed the mission surveys way ahead of schedule. We talked about our Appalachian assets and completing that in a certain timeline. We were able to do that far in advance of what our specific targets were. So we now have done over 100% of that and have done duplicate visits to those same sites throughout the year in 2022. We also progressed our aerial surveillance with over 11,000 miles flown over our midstream asset. We delivered record operational financial performance. We obviously had a record year of production, 135,000 VOE per day, with an exit rate of about 141,000 with the Conoco deal that we did in late third quarter. We generated over 503 million, or generated 503 million adjusted EBITDA 2017, continue to utilize our hedging strategy and our operational efficiencies to maintain that cash margin. This is the one that we're the most proud of. Obviously, you know, not only are we focused on our shareholders, but I'm also a big one. So being able to return capital to our shareholders is what we really put our time and attention to. We paid company high 17 cents in 2022, which is 6% above the 2021 mark. And we distributed over $178 million in dividends and share buybacks to our shareholders. So that was a record for us also. We maintained a strong and differentiated balance sheet. We obviously financed our business differently than most E&P companies. We used ABS amortizing notes to fund and create liquidity. which we have been very successful in doing. We've maintained leverage. It's a long-term financing. Interest amortization allows us to maintain it two times in that ballpark of two times leverage over the course of those notes. And also in 2022, we were able to align those notes and also our RBL with long-term ESG commitments. So that was... I think the box to the right says a lot on this slide. If you look over the last three years, increase in our PD10 PDP reserves, only PDP, is about 166% average increase. And if you look at it on a per share basis, which we started to do here recently, you can see, and this is net of ARO and hedges and et cetera. you can see that on a per share basis, a tremendous increase in value that should be starting to flow through to the share price. We're lagging that significantly as you look at our reserve increase, which is at a record $6.1 billion at the end of 2022. Flipping to page five, the hallmark of our business model has been our hedging strategy. Sometimes, as I said last year, sometimes it makes you look bullish, and other times it makes you look great. We came out of 2022 with people asking us if we were going to reduce our hedge strategy moving forward. I obviously said no, and 2023 makes me look good. So hedging has always been integral for what we do as a business, making sure that we're locking in our cash flows. That's the most important part of what we do. So we de-risk it. de-risk the model, taking that pricing volatility out of it, and it helps us to generate pretty robust margins. I think the key thing, and this is, as we looked at 2023, we're 85% hedged at about $3.39 on average. If you look at our peers in the U.S. gas market, there's seven of them on this page, or eight of them, I'm sorry. You can see the differences in how the companies are approaching the hedging their portfolios. And I think what you're going to see, especially now, I think the next closest peer was hedged at around 80%. On average, around 50% of their production is hedged. That's going to put a pretty nice drag on what they're able to accomplish as these prices have rolled off over the last few months. And it has been a substantial drop in a very short period of time. So I think peer number eight is going to be really having a difficult season or a difficult year they only have 6%. So we've managed to continue to hedge at a pretty high rate, making sure that we're locking in the margins we need to be successful. Moving on to page six, just talking a little bit as we enhanced our operational scale in the central region. You can see here we've done the two upstream assets in 2022, the Texas Gold on the ConocoPhillips assets in late third quarter of 2022. Obviously those were very attractive multiples, PB values, which is again, hallmark of what we do as a business. We actually added some strategic midstream assets in that central region to help enhance control of the product flow of where we want to put our gas and to take out some of the margin that we're paying others to move gas. And then we obviously scaled up our asset company now adding around 12 retirement rigs and giving us the ability to do up to 350 wells per year, which some of those will be for external parties like the state with the federal money that they're getting to reduce their orphan wells in the state's portfolios. We also did the TANF's acquisition in the first quarter of 2023. And if you flip to page seven, A lot of you have seen this slide, but again, a very attractive multiple in a lower price environment. We were looking at this asset in 2022 and we're looking at $350 to $400 million purchase price. We were able to get it for $250 million by waiting to the first quarter. Prices rolled off and gave us the ability to buy it at a much more attractive price than what we would have been otherwise. And again, The important thing about this transaction was it continued to beef up our undeveloped capabilities and value in the central region, adding about 50 new undeveloped locations. And when you combine that with what we already had in the central region, we now have over 300 undeveloped locations that we will be looking to monetize and determine how to create value for our shareholders moving forward. So all in all, a very attractive acquisition. that will add value on a going forward basis. Page eight, we talked a lot about our undeveloped. We've really started here recently to leg in and try to determine what's the best way to get value for our shareholders out of that undeveloped. This is an illustrative example of one of the things that we've been looking at. It's an acreage position in Louisiana where we would essentially divest about 50% of the PDP on a lease acreage position, also be carried in a drilling program of one to four wells, get carried interest, and this would be shared with Oaktree, obviously, as our partner in this area, but giving us the ability to sell the assets, the 50% of the assets, for a much better and more attractive price than what we bought them at, and also to be able to participate without any capital in a drilling program on that leasehold that would then kind of risk out that leasehold and give us the ability to be part of it going forward if the wells turned out to be profitable. So it keeps us out of the capital expenditure for the wells, gives us the ability to monetize at a more attractive price than what we've acquired them at, and then also be carried in some of the wells that they're drilling on them. So it's a win-win across the board. And this is just one example of how we're approaching the undeveloped acreage in this region and parts of the portfolio. Turning to page nine, again, we generated a lot of cash flow and shareholder returns, $503 million of EBITDA, $178 million of dividends and share repurchases. paid over $230 million of debt amortization, continued to see 50% cash margin, free cash flow yield 18%, and a too high 15% dividend yield. The dividend yield is too high based on the share price. It should be lower. And we've been doing this now for going on seven years. We've proven the model. We've proven that it's doable and sustainable. We feel like that the share price should reflect that. You can see over the course of since 2017, total shareholder return of 204%. Some of that has been affected by the share price reduction here recently, which has kind of tailed off obviously with the net gas price. But at the end of the day, we're still returning a lot of capital to our shareholders over a long period of time. Flipping to page 11, let's talk quickly about the natural gas macro. The macro, don't let the price of natural gas that we're seeing right now fool you into what is going to be long term. There definitely has been a very mild winter, especially in the US. I know it has been in Europe also. We also had two BCF a day of natural gas production at Freeport LNG facility offline for almost eight months. Those two things together, if you put the LNG capacity back online for that period of time, Even with the mild winter, the storage story in the U.S. would be average. It would be right on par with where it normally is. That says a lot. If we would have had any kind of winter, if that would have been online and we would have had any kind of winter at all, natural gas prices would be very, very high right now. So we need to look at it in terms of the macro. The macro still is very strong. On page 11, you can kind of see that right now we're doing about 12 BCF a day off the Gulf Coast of Louisiana and Texas in LNG exports. By 2025, that's going to increase by another six BCF a day. By 2030, we're more than doubling. That's a lot of capacity coming online over the next few years. Production is not expected to grow that much. The infrastructure situation in the U.S., a lot of what we consider to be tier one Drilling has been, you know, we've come through that already. And so I believe that we're setting up for a very, very strong macro for natural gas in the next few years. And this here just kind of shows you, gives you an idea of the stuff, the LNG export facilities that are coming online by 2030. Page 12, I thought this was very interesting. And I think especially for those who aren't real educated on how the situation in the U.S. works, This was the Christmas holiday weekend where we had some of the coldest weather. They called it Winter Storm Elliott. It pretty much covered the whole continental US in terms of the coldest spell that went through. It was all over the weekend of Christmas. You can see here that during that 24-hour period, which was the strongest power demand that we had on December the 23rd, that the peak times, natural gas represented over 70% of the demand. of the power demand. It kicked in when the wind and the solar and all the other types of renewables kicked off. And I believe this is indicative of where we're going, not only in the country, but across the globe, is that natural gas will be part of the equation, and we're going to show some slides in here that will show that, but natural gas is not going anywhere. It's going to be part of the equation for a long period of time, and it's going to be a strong supply of power, not only in the U.S., but across the globe. And we'll talk a little bit more about why that's important. If you flip to page 13, emissions, you can see from 2005 to 2021 in the U.S., power generation has more than doubled in natural gas from 18% in 2005 to 37% in 2021. And over that same period of time, CO2 emissions have dropped in that same proportion. It's not a coincidence. Natural gas is the way that we're going to reduce emissions across the globe long term as we move coal. Toby Rice, CEO of EQT, said this all the time. We need to unleash the US LNG. It will help to reduce emissions globally that we can't do otherwise. And so this is going to be the way we do it. So it's going to, again, contribute to a very strong natural gas macro as we move forward. Moving to page 14, you can see here there's lots of these surveys and there's lots of these charts that show this, but they're all pretty, you know, they all look about the same, comparable. We're going to see a reduction between now and 2050. We're going to see a reduction in coal. Coal will come down. It will come down pretty substantially over that period of time in terms of power generation. Renewables will have a steep increase. No doubt about that. And we're supportive of that. We think we need it. But the thing that will continue to go up is the natural gas. And you can see here that global natural gas demand is set to increase by 36% over that period of time. Fossil fuels will be forecasted, because oil doesn't really come down that much either over that period of time. But fossil fuels will be 63% of the market until 2050. So not much of a drop, even with the increase in renewables over that same period of time. I've seen multiple studies on this now. They're all very comparable in what they're showing. On page 15, as we look at our CO2 emissions, in the United States we've dropped, since 2017, we've dropped over 12% of our CO2 emissions over that period of time. Again, mostly because of the coal to natural gas switching that we've seen. But over that same period of time, China has increased over 7%. China continues to build significant amounts of coal power generation and will continue to be on the increase. We've got to make changes across the globe if we're going to bring emissions down. It's going to be done utilizing natural gas over that same period. China's coal power generation was five times what the U.S. was in 2022. So it's significant. Page 16, I'll just finish up with a few comments here as we look at the future of Diversified. We obviously believe that the future is extremely bright. We think that there's going to be, and I've made this comment multiple times, that one or two publicly traded consolidators of mature producing assets. We're going to be one of them. And I'll talk in my closing remarks about the strategies around that. We want to be the consolidator of mature producing assets. We're going to see opportunities to do that. We'll continue to focus on vertically integrating the business, becoming as efficient of an operator as we possibly can, taking that production to end of life, deploying smarter asset management across our portfolio of assets and across our operations to drive down costs, to get every molecule of production we can out of these wells. It's extremely important. We've got to keep all the existing wells producing as long as we can. The supplies need can't continue just to drill our way through this. We've got to make sure that we're producing the mature assets just like we are the ones that are being drilled. And as a result of that, we're not only going to deploy smarter asset management to increase production, but we're also going to deploy it to lower our emissions. And we're highly, highly focused on that. And then lastly, we've expanded our retirement capacity. We want to be in the technology realm of leading the industry in finding ways to retire wells with more innovation, more technology, lowering the cost of being able to do it long term so that the retirement of wells doesn't become burdens on companies. It becomes part of their process. We believe we're in a very good position to work with regulators, state, and even up to the EPA in finding ways to be able to do that. and lead the industry from that perspective. So with that, I'm going to turn it over to Brad to talk to some of our operational updates in 2022.