Diversified Energy Company

Greetings and welcome to the Diversified Energy 2024 Interim Results Conference Call. At this time, all participants are on a listen-only mode. A brief question and answer session will follow the formal presentation. If you should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Douglas Criss, Senior Vice President, Investor Relations and Corporate Communications. Thank you. Please go ahead.

Good morning and welcome to our interim results conference call. Joining me here today are Rusty Hudson, our CEO, and Brad Gray, our CFO. For reference, we will make notes and comments around certain non-GAAP and non-IFRS financial measures. All of our disclosures around those are found in our earnings materials or in our earnings release. on our website and also issued via the R&S service. I'll now turn the call over to Rusty Hudson, our CEO. Rusty, please go ahead.

Thank you, Doug. Thank you, moderator, and thank you for everyone that's on the phone today. We're going to go through several slides here, talk a little bit about the first half of the year, talk a little more granularity around a few of those key metrics. And then I'll turn it over to Brad to talk about a few slides on the financial side, and I'll come back and wrap it up. And I'll start here on slide three and really just kind of focus a little bit on some of those metrics that I was referencing in terms of the first half results. Before I do that, I do want to recognize our employees that may be on the phone with us today. or we'll listen to this later, and really just recognize them for their outstanding contributions and their achievements in coming up with these numbers and really just what they do for us on a day-to-day basis. We always talk about them that without them we don't have a company, and they have truly outperformed not only in this first half of the year but over the years, and it shows in these results. Those results of their hard work are highlighted here. A few of those highlights, the free cash flow generation has been 121 million, 38% free cash flow yield. That kind of pairs with the 50% cash margins, which we'll talk about in a minute. We continue to see $108 million of debt principle payments made in our amortizing ABS notes, which is crucial to our overall strategy long term. We are focused on shareholder returns. We've paid around $65 million in dividends and share repurchases through the first half of the year. We'll get into a little more details of that. I think it's really, really important for people to understand that our business, we had a zero percent decline essentially over the last three fiscal But that's a tremendous testing to the work that our guys do in the field, guys and ladies, do in the field on a day-to-day basis in getting additional production and improving, enhancing production on the portfolio. So that's been three straight quarters. I think it's also very, very important to see that since our IPO, we've paid over $850 million of capital in return to our shareholders over a seven-and-a-half-year period, which I think is So, reliable, measurable results, which is what we pride ourselves in. Looking at page four, kind of summarizes our capital allocation framework that we laid out earlier in the year. You can see here kind of a quick update on this, what we call our four pillars. We talk about it, $180 million of debt principal reductions. Our payments, the systematic debt reduction that we talked about, we paid over $55 million in dividends, fixed per share dividends for the first half of the year. We've bought back around 10 million of our shares, 2% of our outstanding shares over the last six months. And then we talked about the growth pillar. We've announced the impressive past acquisition. million worth of accretive acquisitions that will continue to contribute to our future success. So those are our four pillars kind of updating on where those stand for six months of the year. Moving to page or slide five, one of those pillars that we talk about is the growth pillar. And I think you can see here the two acquisitions that either completed or announced that will be completed in the third quarter. It's two great transactions. You know, we have stayed true to our valuation expectations throughout these years. The one thing that we've always said, we're not going to do a deal just to be doing a deal. We haven't compromised our valuation metrics. And you can see here that these two transactions have been in that PD-17 to PD-20 range on just PDP. We still haven't paid for any undeveloped value. in these two acquisitions. The multiples that we paid continue to be under our equity valuation multiples, which is accretive to our shareholders. More importantly, it's adding value for the future and helping to increase cash flows and sustainability of the business model over a long period of time. The way we look at it is we buy good assets. We put our operating procedures and processes in place to operate them better, get more out of them, and it's a big win for diversified. So these two transactions continue that trend that we've set for the last seven years. Moving to slide six, I want to spend the next few slides talking in a little more granularity around a couple of key aspects of our corporate strategy and our business model. Obviously growth is a big aspect, but being capital efficient is also equally important. And what I mean by that is our capital intensity at 10% is significantly lower than most of our peers. And that gives us a big advantage because we have lower CapEx to keep our production profiles, our engineered production profiles, where they need to be to be successful in our going forward forecast. Lower capex to maintain those production means higher free cash flow. And so we have a low decline rate. We have a very low capital intensity. It means higher free cash flow that we can then allocate to those four pillars that we talked about earlier in our presentation. Flipping to page seven. Very proud of this run that we've had. This is since the IPO in 2017. But you can see that we've averaged 50% cash margins over a seven-year period, which I think is pretty remarkable. And that's with a very, very volatile natural gas market, which makes for many years of operations. That's a testament to our ability to acquire good assets and good valuations to replace the production that's rolling off on an annual basis. It shows the effectiveness of our hedging strategy and our ability to have predictability in our production that we can then hedge out and lock in those cash margins for a longer period of time. And then it shows the scale that we've built and our ability to drive down operating costs through geographical concentration and smarter asset management processes. And so that's what's allowed us and given us the ability to be very successful over a long period of time, but more important, not just successful, consistent. And for our business model, that's an extremely important factor. Flipping over to page eight, at the end of the day, You know, you take that low capital intensity that we were discussing, that 10%, you take strong margins, 50% on average, and that equals a high free cash flow conversion rate. And you can see here that we lead the pack as it relates to our peers on the natural gas side in terms of converting EBITDA into free cash flow. And so you can see at a 55%, that's a very, very strong free cash flow conversion rate. And again, it represents free cash flow that can then be allocated to those four capital allocation pillars that result in shareholder returns to all of our shareholders that hold our shares. So very important aspect there. On page nine, this is something I really want to lean into on this call, and I want people to really focus on this because I think it's a very, very important slide and one that I think gets overlooked in the valuation of our company and in our equity. As you look at this, this represents our undeveloped acreage that we've acquired over the years that we've paid nothing for. We have around 8.6 million net acres within our operating footprint, and that includes Appalachia and the central region. All of that essentially is held by production, which means we don't have any time commitments or any reasons to be concerned about losing something because it doesn't get drilled. Of that 8.6 million, 65% of that is undeveloped. It's a large percentage. And you've seen over the last several quarters us leaning into some of those acreage sales. In the first half of this year, we've sold about 15 million of undeveloped acreage sales, potentially mostly in Oklahoma. But if you take that and you look at just Oklahoma alone or the central region, and you take that $1,100 an acre, which is what we've generated on the land sales that we've done so far in 2024, and you apply that across just the central region undeveloped acreage, that's over $800 million of value in Oklahoma alone because we are one of the top one or two acreage holders or acreage positions in the state of Oklahoma. We have value that is being evaluated, and we will, you know, cash in on long term. It gives us the ability. We can do it through monetization. We can do it through organic development or through JV, you know, JV strategic partnerships with others to drill it. But at the end of the day, this is being missed when people look at our company and they take a look at, you know, where's the value in the NAV and all that. We also see this as a way for us to you know, increase liquidity to grow the business long term. As we do these acreage sales, you know, increase or generate liquidity, we can use that to buy PDP and other positions that we can sell the undeveloped acreage down the road. So this is a very overlooked part of our business that I think people really need to take a harder look at on a forward basis. On page 10, You know, we continue to see a discount, our share, you know, our equity value trading at a discount to not only to our peers, but even on a historical basis, you know, where we traded at on a historical average, we continue to underperform our peers in that situation, about a 37% discount to the current peer average. Now, what I see that being is that it's a great, We've only been in the U.S. now about eight months, so we're starting to develop some maturity in trying to get more and more U.S. shareholders involved. We're doing a lot of investor outreach in the U.S. We believe that that trading discount will continue to shrink, and we should see our multiple move up closer to our peers over the next several months as those investors start to to increase in trade in the shares. This is a very important factor and I believe represents a great buying opportunity in the company and in our equity value as we sit here today. And a great opportunity to see multiple expansion moving forward. So with that, I'll stop and I'll turn it over to Brad for a few slides related to some financial metrics.