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.

Thanks, Rusty. As you said, we had a great year. Our team's had a great year in 2022, so I'm really pleased to share some additional highlights on the results that we had. And I know that many of our employees will be listening to this call later in the day, so I do want to say thank you to the teams that we all have the opportunity to work with that deliver these results each and every day. They're dedicated to our company. They're dedicated to our shareholders. And we're very proud of the great team that we have. I'm going to start out here on page 18. And we all know that our cash flows come from our production. And as Rusty said, we had record production. We had record reserves, record production. We ended the year with an average annual production of 135,000 BOE per day. which represented a 16% increase over 2021. And since 2020, with our entry into the central region, our production has increased 35%. With that increase in production, we're also very proud to talk about our corporate decline rate, which we've maintained at an 8.5%, which is, if not the lowest, it's one of the lowest against our industry peers. With the TANOS acquisition that we had in the first quarter this year, that corporate decline rate will slightly increase due to some newer vintage wells that are coming online. In addition, Rusty mentioned our reserves. And this is something that is, I believe, very impressive for our company. So we've had increasing production. But if you look at the PV10 value of our reserves, it is now at $6.1 billion. And just two years ago, it was at $1.9 billion. So if you look at our company, and you look at the value of the future cash flows that we have available to us, it's significantly increased. And then I also want to point out here at the top of the page here on page 18, Rusty already commented on this, but this is the PB10 value on a per share basis at $3.29 versus our stock price around $1.15. You know, our reserves and our assets are resilient they're consistent, and they have a predictable future cash flow that we believe supports a much higher stock price. Moving on to page 19, like we said, we had a record year in many areas, but we had a tremendously successful year with our sustainability projects in 2022. And our teams are committed to diligent stewardship of our assets. And I'm going to highlight a few of the activities and accomplishments that we had in 2022 here on this page. So we were one of five U.S. operators that received a gold standard for our emissions reporting by the United Nations-led OGMP 2.0 organization. This is a tremendous accomplishment for our company. It's very appreciated recognition by the OGMP for all the work that our teams do each day to aggressively manage and lower our emissions. Rusty mentioned the emission detection surveys that we completed this past year. We had tremendous activity with great success. We did over 174,000 surveys in our Appalachia assets. And these surveys, they really validated the effectiveness of our zero tolerance policy that we've had for numerous years. And we determined with these surveys that over 90%, ended up being around 95%, of the wells that we surveyed had no unintended emissions or no leaks. And so that was a great result there. We have a very robust aerial LiDAR program where we were able to survey over 11,000 miles of our Appalachian midstream. That represented about 65% of our midstream assets. These surveys were very effective in helping our teams identify leaks and be able to repair as necessary. Also, down the graphs here at the bottom of the page, our methane intensity ratio has declined significantly. In fact, 20% this year down to a 1.2. And that's really reflective of the tremendous investment, focus, and projects that our company has implemented over the last several years as we really started to focus on reducing emissions. We had a solid year with our safety results. Our safety metric ended at 0.73, and as you can see in this graph, over the last three years, our rolling three-year average has continued to improve. This is extremely important to us. We talk about it every day with our employees, and we're very pleased with our continued improvement here. Finally, with our asset retirement program, Since 2020, the number of wells that we've retired has increased by 117%, and we were able to retire 200 wells this past year. Also, in connection with our earnings release today, we issued our 2022 climate risk and resilience report, which includes our TCFD-related disclosures. Also, towards the end of April, excuse me, the beginning of April, we'll be issuing our 2022 sustainability report. which we're very excited about. 2021, we earned numerous awards on a global basis, and we believe our 2022 report will provide additional disclosures about all the efforts that we're doing from a stewardship and a sustainability perspective. Moving on to page 20, Rusty talked about our acquisitions that we did this past year, both in our upstream and our midstream business. One great thing about doing bolt-on acquisitions in our central region, just like we have in Appalachia, is we're able to leverage our G&A infrastructure. We're able to leverage the existing management team that's in place, which provides us great expense efficiencies. One of the midstream opportunities that we have with one of the acquisitions was an NGL processing facility in Louisiana. And we believe this has great revenue generating potential for us. It's an underutilized facility, and we're working right now to bring in additional volumes to that so that we can vertically integrate, lower our costs, and increase our margins. Over the last several years, we've done 25-plus acquisitions. So our post-acquisition integration process is a very disciplined approach that we take. to drive value as quick as possible. We start with onboarding employees very early. We work on the integration and standardization of our business processes and our technology. And then we focus on optimization, consolidation, expense efficiency. And the ultimate goal of our integration process is to focus on our one DEC culture of operational excellence through people, process, and systems. Smarter asset management. This is a concept that we have implemented now for several years, and our teams were extremely busy in 2022, and they had a very successful year in identifying and delivering some very strong and value-added projects. I'm going to highlight four of those categories of smarter asset management. First category is RTP wells. That stands for return to production. We were able to return to production 340 wells in our central region during 2022. 340 wells, in many cases, is larger than a lot of private companies in the United States. These were wells that were producing zero the year before that we were able to bring back into production. So a great year with our RTP program. From a workover standpoint, we also completed 305 workover projects. A very successful year, added 40,000 MCFE per day at an average cost of $45,000 and a cash on cash payback of two months. From an optimization and expense standpoint, our midstreams just continually provide cost savings to our company. We were able to generate $1.5 million of expense reductions or annualized savings with the consolidation and reduction of compression assets in our central region. And we also were able to accomplish in our Appalachia area just a very successful, tremendous project where we were able to reroute some gas to a different processing facility, which allowed us to have a 10% uplift in our NGL volumes and provides an opportunity of about $15 million on an annual basis. Our smarter asset management programs are supported by our daily operating priorities. These priorities that we established several years ago are safety, production, efficiency, and enjoyment. And what these daily priorities have done for us, they've allowed us to connect our teams across the 10 different states in which we operate. But one of the specific projects I did want to highlight, and it really is an example of operating in multiple basins and having a vast pool of resources and experience. And this was an artificial lift technique that is used significantly in our central region, but we had not used it in our Appalachia region. We brought our teams together because we were having one of our larger wells in the Appalachia was having some loading issues, we needed to improve the production on it. We brought our central region upstream team together with our Appalachian string team, and we said, let's look at this capillary string lift process that we use in our central region to see if it'll work in Appalachia. Up until this point, we had not used a capillary string lift method in Appalachia. We've implemented it numerous times now. It's been a great success. to allow us to efficiently improve production without a lot of capital expenditures. The charts on the right there show the stabilization and the uplift that we received from that capillary stream project. So we're very pleased with that, with that ability to share ideas across our different basins. Moving on to page 23, one thing we don't talk about often or really enough is the significant investment in efficient technology that we've deployed. We are a large data company. We've worked extremely hard to deploy safe, efficient, and standardized technology across all of our operations. We are a 100% cloud-based company. We have no physical servers. And we do not maintain technical debt from the acquisitions that we complete. And this cloud strategy has provided us with significant flexibility in not only integrating assets, but also operating at a very low cost. With our cloud strategy, with our electronic measurement, we also have a very efficient telecommunications infrastructure that allows us to quickly aggregate and provide information to our teams in a real-time basis. We're leveraging this real-time information both in our midstream and our upstream operations with a centralized operations center. And a centralized operations center, the way I like to describe it is like an AWACS plane in the military. It provides reconnaissance information to the teams on the ground so that we can be very efficient with our operations and be able to address any issues, whether it's production, environmental, or safety, in a much quicker manner. Also, with this TANOS acquisition, TANOS had both Project Canary and CUBE for a real-time continuous monitoring And we're also going to build that into our centralized operations centers. Finally, as we've talked about numerous times throughout the year, and as Rusty mentioned, we've made a real tangible commitment to our asset retirement with the expansion of our plugging operations. This is our next-level energy subsidiary. We believe it has tremendous opportunities to generate value for our company. Next Level Energy is a full-service, well-services company. We have construction, cementing, wireline, transportation, all the well-plugging equipment. But also what we've done is we've invested in our land and our permitting resources so that we can provide a full service both internally but also externally to third parties. And as Rusty mentioned, we believe that the plugging industry in the United States and really across the world is ripe for innovation. We are very well positioned to not only participate in that innovation, but also to benefit from it. And so it's going to be exciting to see what will happen in the US and really across the world as to how we can participate in that innovation and see what happens. So the Next Level Energy has been a very nice addition to our team. We're real excited about it. So with that, I'll turn it over to Eric.

Thank you, Brad. So those following along, I'll pick up on page 26 of the presentation. Really, with more of a reminder that this morning we did issue our full 2022 annual report that you can pull from our website in which we've included our full audited financial statements with the accompanying footnotes and all of the other accompanying parts that you would expect from a premium listed company on the exchange. We do talk about alternative performance measures in and throughout our results. And we've included reconciliations to the closest IFRS measure, both in the appendix to the presentation that we're going through this morning, as well as within that annual report. So please refer to that as appropriate. I'm going to focus my prepared remarks more around the cash generative nature of our business and what we do to mitigate the volatility that we find, whether it be in the macro, a lot of conversations around the banking environment right now, or more specific to our industry and commodity price volatility. So you can see sort of featured in the center of our financial results is that 50% cash margin. So I'm going to talk about what we do to provide consistent cash flow and margin through the cycles. So turning to page 27, if we just look at the last two years alone, you can see consistent results across the period. 50% cash margin and dramatically different price environment. And we've done that by focusing on the components that both Rusty and Brad talked about. Relentless focus on costs a lot of intentionality around vertically integrating so that we have greater control over that cost structure. And then a focus on maximizing realized prices. And we do that a number of different ways. And when you do those two things in conjunction, you can drive consistent margins across periods. But if you look at those margins year over year, you can see that the components or the makeup has changed. In 2021, our cost structure was just under $8 per VOE. versus realized prices of just under $16 per BOE. That step change as we had the full annualization of our central region assets in 2022 and continued to grow in that region, it does have a notionally higher cost structure with costs moving closer to $10.50. But importantly, as Rusty talked about, that access to the Gold Coast market realizes a premium price associated with its production. So correspondingly, you see that step up in our realized price to just under $21 in 2022. If we talk about the vertical integration, it has been a journey. Brad talked about the great work the team has done. You go all the way back to 2017, it started off as smarter well management when we were a company focused on aggregating wells. But with the acquisition of assets and midstream from EQT in 2018 and following on with Core Appalachia, and then continuing to acquire midstream assets from midstream companies where we were the largest producer into that pipe, were to vertically integrate a midstream system into our portfolio. Today, with just under 18,000 miles of midstream and gathering, that allowed us not only to take third-party margin out of our cost structure, but ultimately have greater flow control over where those molecules go to realize higher prices on that production. We moved from midstream to marketing. We previously, back in 2018, used a third-party marketing firm to market our gas. We ended up buying that platform and have significantly invested and grown it, where today it is a top 24 marketer in the United States. So once again, that not only allowed us to remove the margin associated with paying a third party, but importantly gives us the opportunity to maximize the return on that production by selling those molecules into the optimal market, whether it's selling high BTU gas or stripping the gas of its liquids content and monetizing the component. And then you step all the way through to vertically integrating, as Brad just touched on, the asset retirement aspect of our business. We demonstrated visibility associated with our asset retirement program by working with the states to negotiate long-term agreements. We demonstrated consistent costs associated with that program over the last several years. but believe that the next step was to vertically integrate that to make sure that we had control over the process, ultimately can maximize the ability to provide services to third parties and generate margin that will essentially cover the cash costs associated with our programs and ultimately just position us to meet that long-term obligation as we move forward. So I'll move on to page 28 and just remind you that hedging is the last piece of the equation. So Rusty talked about our asset profile of long life, low decline asset. Brad talked about the cost structure, vertically integrating to make sure that we have consistent cost. So consistent, well, cash flow is the last piece of that equation to make sure that we can deliver consistent results regardless of what's going on in the macro. And hedging is how we do that. You can see that the cash flow that we generate has primarily two functions because we're not a development-oriented company. We simply steward the assets that we acquire responsibly to end their lives. which allows us to focus the cash flow from our margin on delivering and making sure that we maintain a healthy balance sheet and returning value to shareholders through that dividend strategy that we talked about. It's worth reminding that Rusty mentioned the growth in our PB10 reserves. If you went back to 2017, the PB10 value of our PDP was $260 million, and today that's $6.1 billion. We have raised, up to 2022, $1.2 billion of equity, but we've returned half of that through a dividend and share buybacks. So if you think about it, that's a net $600 million equity investment to take $300 million of reserves up to $6 billion. So it's tremendous value generation along that horizon. And if you look over that, zoom out from the last two years where we talked about consistent 50% margins, and look at what we've done since the IPO, you see just the consistency that hedging has afforded us across the period. The gray line that you see zigzagging through the bars is the price of natural gas. It's moved from $3 down to nearly $2 in 2020 and up to over $6.50 in 2022. And yet across that horizon, regardless of what's going on with the commodity, you see our margin, absent the very first year before that vertical integration strategy was really employed, of 50% or better margins across the cycle. It's a really impressive place to be. If you look at 2023, you can see that we've hedged a significant portion of our production, and Rusty talks about this as differentiated across our peer group, and by peer, really, just other EMPs, recognizing that our model is unique. But we're hedged anywhere from 85% to 90%. at $3.83 on the natural gas side. And if you flip back a page and look back at where our realized price was in 2022, you'll see that that price is 12% higher than last year's and certainly puts us in a very good position as we move into the current year. Moving on to page 29, this should look familiar and it's just a reminder that we've been committed to hedging and hedging over the long term since we listed back in 2017. Although the we'll say the motivation or the construct around that hedging has evolved. You can see that the next two years were hedged at 85% to 90% in 2023, above the current strip price of $3.15, which is in line with our strategy of being anywhere from 70% to 90% hedged over the next 12 months, always focused really on de-risking the current period so that you have a clear line of sight to the dividend distributions and the de-levering that we commit to. Looking up to 2024, you can see that we're around 80% hedged at $3.32, while the strip's at $3.70. So we'll have the opportunity to opportunistically continue to layer in additional protection as that moves into the next 12-month horizon and move that notional price higher. But our longer-term hedge strategy, you can see that 25-plus-month portion, is really linked to our financing strategy, and we'll come on to that if we move to page 30. which is to remind that our debt structure is quite simple. It used to simply be 100% credit facility represented by the gray portion of the upper bars. So you can see in 2017 and 2018, 100% of our financing was done with a credit facility. But we recognized that long-term assets needed a better home than living on the corporate credit card, but also recognized that the long-term structure for us was not high yield. Not only does the name that it's expensive, but it isn't reflective of the low-risk nature of our business model with low-decline assets. And so we pioneered a well-established financing class, asset-backed securitization, into the E&P space, and in 2019 initiated the first-ever operated securitization in E&P, and have since grown what you see by the blue bars to represent 95% of our borrowings at the end of 2022. And what's important about that is that that blue bar that blue bar, the asset bank securitization, is investment grade, fixed rate, fully amortizing debt. So very different than either an RBL or certainly than high yield that would be at a much higher rate. We're proud of the fact that we did lock in our fixed rate debt at 5.7% on a blended basis. That sits well below where variable or certainly fixed rate debt would sit today. And while you see an increasing debt stack as we've moved forward, remember that's been matched with growing cash flows in tandem. So if you look at the orange boxes or the yellow boxes across the top, whether you're back in 2017 when we had $267 million of borrowings or fast forward to $1.5 billion this year, that leverage profile of 2 to 2.2 times has been very consistent across that period. which demonstrates the discipline with which we've used to finance these assets, and importantly, with investment-grade debt. Not all debt is created equal, and it's the lower portion of this graph that really illustrates the power of that, that unlike high yield that has a bullet maturity where you never know at what rate you'll be refinancing and in what market, whether the window will even be open, With ours, you can see that glide path to being debt-free on a 50-year asset over just the next nine years. In fact, in the next four years alone, we'll repay over $800 million of that debt with hedge-protected cash flows that underpin that delevering, which is 55% of that stack. And then over the next five years, you see that remaining $600 million repaid. If we play that out as it's illustrated here, then at year nine, you're essentially debt-free on an asset that still would have around 40 years of productive life, which means that all of the incremental cash flow, rather than just a portion of that, would be available for an increase in the dividend. And so it's a differentiated model financed a differentiated way that we believe has yielded that differentiated result that we walked through this morning. So with that, I'll hand it back to Rusty for some final comments.

Thanks, Eric. Appreciate it. Real quickly, I'll just close with a few things. 2023, of course, we're already three months in, but it will be a transformational year for Diversify. I will make you that commitment. It will not be a quiet year by any stretch of the imagination. In fact, I'm 100% focused on a three-year strategic plan that will give investors comfort around sustainability of cash flows, dividends, and we're highly focused on that. Some of the main initiatives, as I look at 2023, obviously the US listing is of utmost importance. It will get done. It will get done. That's number one. The market is very active right now. Lots of chatter, lots of stuff, lots of calls, lots of things going on. We'll be focused on strategic opportunities to acquire assets, to look at ways to, as we talked about earlier, enhance production, but also scale up in the regions we operate today. And there could be opportunities to merge and to do things that are a little bit outside the box of what we typically will do. But everything is on the table today. we believe that the opportunity set is large. The other thing that we're going to really focus on heavily in 2023 is finding ways to get that value from our undeveloped assets. So we're having conversations with multiple parties about ways to venture, to find ways to extract that value out of the undeveloped. So we will see opportunities there, and there will be ways to do that and announcements coming. For the analysts, you're going to be busy with us. There's going to be lots of activity that you're going to have to keep up with. For investors, it's going to be a big ride this year and an enjoyable one. So with that, I will stop and I will open it up for any questions.

Yes, so we'll take some questions here in the room first. We do have a somewhat... short window here. We appreciate you guys coming in in person and meeting with us, as well as spending the time to really go through the materials today with us. We did a very wholesome dive into a lot of the areas. So I'll just open the room. Matt, go ahead. Why don't we start with you for questions? If you could hold it to one and maybe one follow-up, and then we'll kind of go from there. Okay.

Thank you very much. Thank you for the presentation. First question around the undeveloped assets. You mentioned excluding TANOS II. You've got 300 undeveloped locations. Can you give some idea of the potential PVT, PV10 value that could be here? Well, I think we, Eric, don't we have some information? We do.

Well, on the 50 locations that are coming in with TANOS II, it's estimated to be about 280 million. Okay, so we do not have a valuation on the 300, excuse me, the other 250 or so. that came with our Indigo, primarily with our Indigo transaction. There probably is some extrapolation or correlation that can be done there because it's in the same Cotton Valley area. And we've also got a lot of vertical integration opportunities in that drilling area as well. So, you know, that's 280 at a minimum, and it'd probably be up over $500 million.

Okay, great. So they're very similar wells to those. It'd be 280, so some salt per year after comparison would not be miles out. It would not be miles out, because it's the same formation. OK, that's really useful. In terms of plugging, so what sort of plugging costs per well do you think you might be able to realize this year? And how low do you think that price, that cost could eventually get to?

Well, we think we're going to maintain consistency with where we are. We're pretty low as it was in the $20,000 to $25,000 range. I don't want to step out and say that we can go lower, but we're very focused on maintaining that level, even during inflationary periods as well. But, you know, a little bit of headwinds we had this past year. But I'm very comfortable in that 20 to 25 range for our Appalachia well set.

Yeah.

Okay. Yeah, I think just for context, last year we plugged around 150 wells at around $22,800 per well. This year we did 200 at about $23,100. So within a $400 difference in a challenging price environment, I think it speaks to the vertical integration and just the efficiency that comes with repetition. So very consistent year over year.

David, go ahead. There's always some nice wins on the smaller asset management. I'm just sort of thinking, though, you know, you've got 70,000 wells and only a certain number of employees. I mean, are you constrained in terms of how quickly you can get after this? And would you like to get after it quicker if you have the manpower?

Yeah, I think I'll let Brad answer the overall question, but I think what we do is we look at it in terms of impact. And you go after the highest impact ones first, or the easiest ones first, whichever makes sense. But I don't bottom of the list. I mean, every year just generates more opportunities to do these things.

But, I mean, Brad, you might want to... Well, like Rusty said, just with our scale, we have a robust portfolio of opportunities. And one of the things that we also do is we really empower the team and challenge the team to come up with new creative ideas. And they continue to deliver. So, you know, I think our manpower set up right now is fine. looking at those high impact opportunities and really with our move into the central region where there's some newer vintage wells that had really been neglected so that's a great opportunity for us to have newer vintage wells with a lot of reserve left on them that you know we're either not producing or underperforming so it's really not a manpower strain it's almost just like a number of days in the year constraint because there's so many opportunities

And a very quick one, just obviously you had a nice reserves jump at the end of this year. Just, I mean, any comments on that? Was that across the portfolio, or did you see any particular asset outperformance there?

I mean, it was largely driven by a price increase. We know that. But with the addition of all the reserves that we've put on over the last several years and the type of assets that we have added, and when you couple in the fact that we've had the expense efficiencies that we've been able to build in, we're really seeing those pull through into our reserves. And our reserve team does a great job of really understanding the production profile, all the economic inputs, and so we've had some nice refinements in that process as well.

The great thing about our reserve base is that when you have a low-decline asset, that reserve base is stable. a lot of the drilling companies, it's a quick fall off in reserves because, I mean, Haynesville alone, for example, which is an area we do operate, you have 70% decline rate year one, 70%. So you've got to maintain reserves on the drilling company. You've got to spend a lot of capital. Ours are very steady and consistent. As Brad said, as prices move up, obviously you have an increase, but you also have a flattening curve that doesn't give up a lot of reserves year over year, which is extremely important to our business model. And so, you know, I think that, you know, obviously prices will come and go, but I think at the end of the day, our reserve base will stay pretty consistent over a period of time.

And just one other addition to that, when we look at our reserves and our production profile, extremely consistent. We do not have surprises in our production profile. And it's also fun to see the impact of the smarter asset management when we do have production wins to see that pull through the reserves. And we definitely have been seeing that.

For the engineers in the room and on the phone, when you have a reserve to production ratio that's 13 to 15, that says a lot about the decline rates on your portfolio because a lot of the developers will be single digits, 7, 8.

Go ahead. Yeah. Thanks for the update, guys. Just a quick one from me. In terms of where the share price is at the moment, are there any thoughts around reinitiating the share buyback program, particularly when you think about the dividend yield at the moment? Is an argument for using or maybe being a bit more aggressive on the share buyback, particularly with kind of your critical position?

Yeah, it's a juggling exercise for us because we do pay such a substantial dividend. You know, we've always been in the mindset, I'd rather give the cash back to our investors, let them determine what they want to do with it, than to pay some amount of dividend and then, you know, hold back to buy shares. I've never been a big share repurchase person. We want to be able to return to our shareholders cash, but we also want to be able to reinvest in the business. Now, that's not to say, you know, if there's some substantial reduction in the share price even further, that we wouldn't have to revisit because at some point we're going to buy the company back at that rate. I mean, that's just the way it is. I mean, if it gets so low that we're so undervalued, it just makes no sense to continue to allow it to happen. But I think at the present time, obviously the macro environment has just been terrible. It's caused massive sell-offs, not only in our sector, but across banking and everything, even staples, you know, that people thought were safe havens. So I think that we need to let the dust settle, see where the markets rebound back to at some point. always on the table, but based on the amount of cash that we return to shareholders, it doesn't, you know, that's a tough situation for us to juggle those two.

But it's not to say that we wouldn't if we had to. Thank you. Go ahead. Just wondering whether you can talk a bit to the M&A market and how things have moved over the last three to six months in terms of valuation and availability of assets.

It's amazing what three months can do. Last year, we were in a lot of transactions and a lot of conversations with people and assets, but reconciling the buy-sell side was tough. I heard this a lot last year. I can do better if I hold it. They're not saying that so much anymore. Prices have dropped. Oil prices have dropped. Natural gas has dropped. People are revisiting their plans and their hold doesn't look as good. So I'm pretty confident this year is going to be, as I said, transformational. I think there's going to be opportunities across the board. We're seeing it already. And from our perspective, what we've told these guys, stick to operations, continue to drive down costs, create as much liquidity as possible, but it's coming and we've got to be prepared because it's a transformational year where either acquisition, merger, whatever, there's going to be something out there that's going to transform the company in 2023. It's very, very active. I had an investment banker tell me last night that they have never seen such a quick move into sell mode that they've seen in the last two months. Permian especially, now we're not Permian players, But the Permian has gotten extremely active in the last 30 days, and I guess that could be part of the oil price drop and such. But we're going to see a lot of activity this year. We're going to be in on a lot of it, but you're going to see a lot in the U.S.

And is that sort of your thinking central region more than Appalachia in terms of expansion? We really don't care.

I mean, we're open to both. I'd love to do more Appalachia, you know, asset acquisitions because it's just more scale. I mean, we can just drive costs down like you would believe the more assets we do there. I think we'll have an opportunity there this year.

Go ahead, Alex. Just a question on maintaining the 50% cash margin you've had for the past few years. I guess 30% increase in costs this year, prices kind of tailing off, but the hedge kind of locks you in. What can really give us confidence that you can maintain that margin for 23, 24, and any inflationary pressures going through the next couple of years? I'll let Eric chime in on this too, but you will see,

We've already started to see at 23, all those variable costs are rolling back down. Actually, in a lower price environment, our margins are higher. I know that's counterintuitive, but it is. It's because of these variable costs. We are hedged, and when prices go up, we get a little squeeze on the margin. But when prices come back off, we actually get an increase in the margin.

Yeah, that's exactly right. So the price-length expenses is a big part of that step up year over year. I mean, gas prices maybe as high as $9, and you're paying a variable production tax on that. yet you have fixed your revenue, you'll fill the squeeze. I think it's impressive that in spite of, as you attributed, 30% inflationary pressure, keep in mind that's really a change in the composition moving from Appalachia to Central that has a corresponding higher price associated with it, that we did see just a four-point margin reduction going from a pie of 54 to 50 over that horizon. So it demonstrates just how durable they are. It's also important to remember that when you think about the inflationary pressure, much of that is in the service sector. supporting the industry. As prices have recovered, so too have the vendors that are providing support. We insulate ourselves from that because we're not drilling and completing well. So seeing a 2x, 3x increase in the total drilling and completion cost has no effect on our business. Most of the smarter asset management that we do, Brad's team vertically integrates, so we're not buying that off the shelf and paying that inflationary price. So even with the inflationary pressures that we saw last year, you saw March and the whole And then I highlighted that we do see we've got a higher hedge price this year relative to last year that will further insulate that cost stack.

All right. Well, listen, again, we appreciate everyone joining on the phone. We're over an hour here. Again, we appreciate everyone that came here in person and brought your questions and obviously did a lot of work leading into that. If anyone has any follow-ups, we're happy to do that, but we're going to end the call here. So, operator... Please end the call, and everyone else, have a great day.

Thank you. This concludes today's call. You may disconnect your lines at this time. Thank you for your participation.