Earnings Transcript for DECPF - Q4 Fiscal Year 2023

Operator: Ladies and gentlemen, good morning. And welcome to Diversified Energy 2023 Final Results Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Douglas Kris, SVP IR and Corporate Communications. Please go ahead, sir.

Douglas Kris: Good morning, and welcome to the Diversified Energy 2023 Results and Acquisition Conference Call. Joining me today are Rusty Hutson, our Founder and Chief Executive Officer, and Brad Gray, our President and Chief Financial Officer. During this call, we will make certain references to non-GAAP financial measures. Reconciliations to those financial measures are in both of our earnings release as well as our annual report, which was published this morning and available on our website, as well with our filings with the SEC. Now, my pleasure to hand the call over to Rusty Hutson. Rusty, please go ahead.

Robert Hutson: Thank you, Doug. I appreciate it. Real quickly, just to kind of base the presentation today, I'm going to kick it off, talk a little bit about the 2023 numbers, the success that we had in 2023. I will turn it over to Brad Gray, our Chief Financial Officer, to discuss financial metrics associated with the year. And then I will come back on and update on the acquisition that we announced this morning, along with a 2024 strategic outlook for the remainder of the year. So, with that, I'll go to page 3 of the presentation pretty and start there. Just want to say that we’re pretty proud of our year in 2023, the strategic successes that we had. It was a great year for diversifying a very challenged commodity price environment. We'll talk a little bit about this, but our hedging program and our hedging portfolio was very successful in insulating us from a lot of that commodity price risk that we saw in 2023. But overall, very good year. You can see here on page three some of the highlights that I'd bring to note. Keeping [ph] the production was strong through 2023, 821 million a day natural gas production on average. We continue to see very resilient decline rates as we held it under 10% again, which is the key to our success long-term is the mature producing assets that we operate, which gives us the ability to hedge and be successful with cash flow profile. We had $543 million of EBITDA for the year, which was a record for us. Net debt at 2.3, again, within the margin of the two to two and a half that we talk about with our investors. Cash margin strong at 52%. That has been a stable since 2017. And I think which is a very key factor that investors should be pleased with is over the last, since our IPO, we've returned $800 million of cash back to our investors. Over 700 million of that in dividends and the other portion in share purchases. In December, we publicly listed on the New York Stock Exchange, which was something that we had been striving for, for about a year and a half prior to that. Very important factor for us as we move forward and being able to access the public markets and the institutional investors in the U.S. Free cash flow of $219 million. Again, on the ESG perspective, continue to see great results around our emissions and our identification and reduction programs. Again, the OGMP awarded us with the gold standard for the second consecutive year. And we retired over 400 wells last year through our asset retirement program and next level asset retirement company. So all-in-all, a great year. We'll talk about some of the specifics around some of that as we go through the presentation. Moving to page four. Delivering our de-risk model and really it results in de-risking four things. Commodity price risk, which we do through our hedging program. Our operational risk, which we do through our smarter asset management and our ground gain on a day-to-day basis with people that operate in the field. And really striving and driving for those lower decline rates by operating the assets more effectively. The financing risk and the ability to finance our company's programs, both from an RBL, but also through some of the ABS and the financing structures that we've used to finance the business, to create liquidity, and also to pay down debt over a period of time. And then our environmental risk, which we do through our stringent ESG programs that we, for emissions detection and reduction, and which we believe is best-in-class in our sector. All of that leads to a very low risk model with generating consistent cash flow, which you can see now since 2017, we've operated with these 50% cash margins consistently since 2017. Looping over to page five, again, a very [Indiscernible] leading decline rate in 2023 10% or less which is what we described for on an annual basis and that kind of is including the whole portfolio and you can see it across all of our peers that that is a pure leading decline rate, but more importantly and very peer [ph] leading capital intensity rate. The $0.25 per mcf compared to all of our other peers [Indiscernible] by the way this just show how little cash flow that we have to re-invest are to keep our decline rates where they are, so we have superior capital intensity which enhances our free cash flow which creates regular value for the shareholders and returns over a period of time. Flipping to page six real quick, hedging strategy. 2023 will be a very challenged commodity price environment. Well, that didn't stop. It carried over into 2024. But again, the hedging program that we deploy across our portfolio gives us an advantage because you can see here our hedge price for natural gas at 309, about 85% of our production hedged through the remainder of this year. The remainder of 2024, strip prices of 245. So it's a pretty robust hedging price above and beyond the current strip. And you can see our program at 85% hedged in 2024. We probably around 70% or a little less, maybe in 2025 and forward. So that will continue because we underpin the business through that hedging program for the long haul. You can see as it relates to our peer average, we're at 85% hedged on an average basis across the rest of our peers that they're at about 44%. And I think the key to that will show as 2024 continues to remain low in terms of pricing, that our peers' leverage will continue to elevate over the period of time. This gives us the ability to pay down our debt and continue to lower our leverage profile as 2024 goes on. On page seven, one of the things that we did in December that you saw us announce was an innovative asset sale where we were able to essentially bundle up an asset and essentially sell it to institutional investors for a much higher multiple than we would have been able to sell it to a third party. We sold that asset for 5.7 times, even that multiple in December. We had a liquidity impact or uplift, I should say, of $90 million and we de-leveraged the business with this structure. We retained a 20% minority interest in that asset, but at the end of the day, we were able to reduce debt, be able to sell the asset for a much higher multiple. And this is a structure that we can continue to use moving forward as long as the institutional investors are there to acquire those assets out of the structure. So, a very innovative asset sale that provided liquidity, reduced debt, and helped us to reduce leverage as we entered 2024. With that, I'm going to turn it over to Brad to run through some additional financial metrics and then I'll come back on and talk about the acquisition in 2024.

Bradley Gray: All right, thank you, Rusty. It's good to be back in London and it's good to be back in a financial leadership role with our company. I thoroughly enjoyed my six plus years as Chief Operating Officer and I'm extremely proud of the growth and the results that our operational teams delivered during this time period. I'm also enjoying being back in the role of Chief Financial Officer, which is providing me the opportunity to build relationships with our talented finance and accounting teams, our investors, and bankers. But it's also allowing me to help direct, impact, and strengthen our financial operations and results. So, thank you for the opportunity to re-engage in this part of the company. My comments today will reflect on our solid financial results in several areas of our operations and I'll start out on page nine. As Rusty mentioned in his initial remarks, 2023 was a great year in many respects for our company. We generated a record $543 million of adjusted EBITDA, and we delivered our sixth year in a row with approximately 50-plus percent gross margins. This $543 million of EBITDA translated into $410 million of cash provided by operations, which included a large use of working capital in the first six months of the year. We ended 2023 with an average daily production of 821,000 cubic feet equivalent, which was another record year for us. Our product mix continues to be heavily weighted to natural gas at 86%, while our exposure to liquids was 11% for natural gas liquids and 3% for crude oil. Our disciplined and consistent hedge program produced a healthy net realized price of $3.48 for Mcfe, and our operating cost improved from $2,022 to $1.69 for Mcfe. In spite of a very challenging commodity price environment, our assets continue to provide our shareholders with a notable future value, as seen with our net asset value per share of slightly more than $28. Our operational teams continue to deliver outstanding results with our focus on sustainability. We retired 384 wells in our Appalachian operations. Our gold standard OGMP measurement detection practices and our LDAR work have helped us ensure a 98% leak-free rate of our wells, and we continue converting our pneumatic devices on more than 50 well pads. Moving on to page 10, our annual report is also being published today. In this annual report, we share significant information on our company's strategy, priorities, and the key metrics we track to determine our success. Our KPIs are provided here on this page. These KPIs were set by our board of directors, and we monitor, review, and discuss the progress and results throughout the year. Most of these KPIs have been discussed by Rusty or me, but there is one on this page that we're highlighting for the first time, which is our methane emissions intensity ratio, which ended 2023 at 0.8. The attainment of this ratio is a significant achievement for our company and all of our teams that have been involved in this. This was our 2030 goal that we set back in 2021. So our teams, our investments, and our commitment to be a responsible operator have driven us to achieve this goal seven years early. Moving on to page 12, page 11, excuse me, our discipline hedge practices, as Rusty mentioned early on, continue to underpin our ability to produce very healthy cash margins and cash flows. For 2024, which again, as we've seen and we've talked about, has been a very challenging commodity price environment, our natural gas hedge price is 25% higher than the 2024 NYMEX strip. For natural gas, we're 85% hedged in 2024, with primarily swap contracts, NGLs and oils were hedged around 50% to 60%. Moving on to page 12, this page provides some additional insight into our low decline production, our effective hedge program, and our efficient vertically integrated call structure, which leads to a healthy cash margin of 52% in 2023. In spite of dramatically lower commodity prices, our revenue actually ended up higher in 2023 compared to 2022. This result is really a testament to our low decline assets and our thoughtful hedging program. From a cost perspective, our price length expenses declined in 2023, while our field teams continue to utilize our smarter asset management program to deliver cost savings and efficient operations, all which allowed us to generate the 52% cash margin. Moving on to page 13, this is an area we don't talk about as much as we probably should, but it really is becoming a significant advantage and competitive advantage for our company, and that's technology. It's a critical part of our success, and by being a company that generally grows through acquisition, it's extremely important for us to be disciplined and efficient with integrations and also in how we manage and use data. I'm proud to say that our Chief Information Officer, David Myers, was named as one of the top CIOs in energy in 2023 due to his leadership and creativity in building out our information technology capabilities. We built a 100% cloud-based technology platform, and we're also committed to running our company on consistent single software applications. This commitment is part of our One DEC culture, where we strive to eliminate technical debt from previous companies and we strive to provide our teams with one consistent view of data. And what we found is that when our teams are all looking at the same set of trusted information, our ability to make timely and value-added business decisions is significantly improved. On page 14, we talked about our Smarter Asset Management Program for many years, and it continues to deliver great results for us. Whether these Smarter Asset Management efforts are focused on optimizing production, vertically integrating operations, or just eliminating unnecessary spending, the objective is the same, and that objective is to increase and improve our cash margins. With our inventory of assets, we have continual opportunities to create value. Our Central Region teams produce some great results with numerous projects in 2023, and here on page 14, we provided a few numbers to highlight that success. Moving on to page 15, as I mentioned earlier, we achieved our 2030 target of 0.8 ratio for methane emissions intensity here in 2023. Again, that's seven years earlier than our established target year. Our board and leadership team established numerous climate-focused targets back in the fourth quarter of 2021, and over the last two years, we've worked extremely hard to make significant progress. We're all extremely proud of our teams for significantly beating this target time period, and led by our Senior VP of Environmental Health and Safety, Paul Espenan, our work on emissions detection, measurement, and mitigation has been very thoughtful and effective. On page 16, an additional area of our climate-focused goals has been with our asset retirement programs. We made intentional investments during 2022 to expand our internal retirement assets and our capacity. We combined four different plugging companies during 2022, and we created our Next Level Energy company. 2023 represented our first full year of operation for Next Level. And just to remind everyone, Next Level is a full-service retirement company. What does that mean? That means that it includes service rigs, cement trucks, wireline trucks, transportation, and construction equipment. We've also built into our Next Level entity dedicated resources for permitting and land work to ensure that our operations are focused on efficiency. We're very pleased with the results from our retirement teams in 2023. With 384 wells plugged in Appalachian, and a total of 404 wells plugged overall, our Next Level Energy team plugged over 150 wells for third parties, which generated revenues that were available to offset the cost of plugging of our own inventory. So in closing, I'll just say that 2023 was a challenging year in many ways, but as seen in our results, it was also a significant year of accomplishment for our teams. Rusty, back to you.

Robert Hutson: Thank you, Brad. And I'll be speaking from slide 18. As you guys have seen this morning, we made an announcement of a strategic acquisition, which really should come as no surprise to anybody that's watched the company for any period of time, as I've been previewing the ability to acquire the Oaktree working interest back at some point. I've always called it kind of on-the-shelf assets waiting for an acquisition at some point. We were able to accomplish that. The Oaktree working interest participation and our partnership with them has been a great partnership. It helped us to accomplish what we really set out to do three and a half years ago, and that was to enter a new region and scale that region up more rapidly than we would be able to do just on our own. Reason being the synergies and the ability to lower the operating cost with a higher and more concentrated geographical presence was the important part of entering that new region. So Oaktree and their partner were great partners. We were able to accomplish that. But it was a great time for us to acquire this asset back. This is a very, very accretive and synergistic opportunity for us. We're paying $386 million net purchase price, which represents about a PV17 on PDP future cash flows and strip. It represents about a 3.1 times multiple, and if you remember back in December, we talked about the asset sale we did at almost a six times multiple and being able to take some of that liquidity and reinvest it back into an asset at three times is a great trade-off for us. And so we created liquidity at six times and we're reinvesting at three times, which is great. These assets are very synergistic. And what I mean by that is we operate them already. We have all the backroom operations and the G&A for these assets already embedded in our numbers. We've operated them now for over 24 months, so we have a very good handle on the operating procedures and the metrics and the stability of the assets. They're already on our IT systems. They are already really factored into our existing debt profile. We shared an ABS with Oaktree back in 2022 on these Oklahoma assets. All of these assets are already in our emissions reporting, so they won't result in any additional emissions or emissions intensity or anything like that because they were already in our numbers. And so that's all very positive attributes of the acquisition. We're adding about $122 million a day in natural gas production. That's very, very relevant from the standpoint that that is essentially covering decline rates into 2025. So we won't have any reinvestment rate that would be necessary just to hold production flat into 2025. These are heavy margins, 65% EBITDA margins on these assets. They'll contribute $126 million of EBITDA in 2024. The PV17 on these assets was $462 million. Again, we bought these at a PV17. This is a very, very strategic asset for us. It was the best asset we could buy in this market. The one thing that we wanted to do was if we're going to acquire this asset, we definitely didn't want to wait until 2025 and 2026, which we believe will have an increase in natural gas prices as the export facilities start to come online. We didn't want to wait and have to acquire that asset in a higher price environment. It's a very strategic asset for us at this time in our company. Flipping to page 19, again, adding scale. You can see where these assets are located. Obviously, we already operated and owned 51% of these same assets, but we're increasing our exposure, very importantly, to the Gulf Coast gas pricing. Even though we don't, in essence, sell to these export facilities, we do benefit from the pricing that comes along with the index basis differentials on the Gulf Coast. So now we operate all these assets. 100% of the production belongs to us, and it gives us more scale in our marketing activities for this gas. So all-in-all, very, very strategic acquisition. 82% natural gas. All the assets in East Texas, in Louisiana, are natural gas assets with some natural gas liquids that go along with them. The Tapstone asset in Oklahoma now belongs back to us at 100%, which gives us some flexibility on the ABS that we did with Oaktree back in 2022 to extract additional equity value and liquidity out of it at a point in time in the future. So all-in-all, a very strategic acquisition. If you move to page 20, you can see how this benefits us. 2% reduction in our unit costs. $15 million in cost efficiencies that we see across the portfolio with no G&A addition required. It will increase our 23 reported margins to 54% from 52%. We see a significant amount of smarter asset management opportunities that we can now take advantage of because we own 100% of the asset and we can reinvest in a way that's meaningful for the future. And then the system integration is next to zero risk. We essentially will do nothing more than flip the working interest in our accounting system from Oaktree to Diversify. That's essentially the only systems integration that needs to take place here. So it's a very simple operating procedure to get these assets removed from Oaktree and put back onto Diversify's working interest. On page 21, this is a very important factor. As part of this transaction, we're no-baiting Oaktree's 2024 hedges that they had on their portfolio for their assets that they owned for their working interest at $3.89, which represents almost 100% of the gas production in East Texas and Louisiana. That's a significant uplift for us and our company. It represents approximately $60 million to $70 million in value in 2024. It will increase our average floor price 25% from the $3.09 provides a $0.10 uplift to our proforma average price for 2024 and more importantly there’s no hedges onto 2025 and 2026 which gives us some optionality. I truly believe that 2025 and 2026 that the price of natural gas will rebound pretty strongly as the uncertainty around the natural gas export facilities take place and the prices will respond to that. And so if that does, it gives us some optionality. We will hedge some of that 2025 and 2026 exposure, but we will definitely leave some upside to leg into the prices we believe will come next year. And then to just de-risk our acquisition multiple by having these, the hedge book that we're bringing in from a debated perspective from their working interest percentage. So all-in-all, this money, in the money hedge is highly accretive to our asset acquisition. And as we move to page 22, I spoke about this just a minute ago, but the increased exposure to premium golf coast pricing. As you believe that the price of natural gas in the U.S. is going to be highly fragmented between basins, and this basin the golf coast is going to have the best or have the ability to have the best pricing because of it’s export facility of natural export facilities. You can see on the map there are the ones that already do exist, and then the ones that are coming online in the next year, year and a half. By the end of 2026, we could see 20% to 25% of our current U.S. production being exported, which is significant. And I believe we'll underpin the gas price for a long-term, long time into the future. We have all the takeaway we need. We're currently working on different, some different operational projects within the region to get more gas behind our own facility, operating facility down there that will give us higher natural gas liquid exposure and increase the exposure for the amount of natural gas liquids we're producing off of these assets. But all-in-all, you can see that this is going to have a big impact, gives us a lot more exposure to the energy or the natural gas liquid export facilities, and gives us a chance to lay into some much higher prices over the long haul. And then on page 23, I want to bring a note and bring some light to this. We've seen a significant amount of merger, I call it merger mania in the U.S. over the last six to 12 months. I don't think this is by accident. We're seeing a lot of interest levels in the institutional investors calling for fewer companies, bigger companies with bigger balance sheets, more stronger balance sheets, and more, drilling inventory and such. And really I believe it's going to expand and go to each company having a more, being more exposed to different basins than just for one that they're currently in. This is taking place as we speak. You can see some of these public to public transactions that have occurred. Not all of them have closed yet, but they've all been announced. We've seen some private to public transactions occur over the last several months. These are, $215 billion in corporate transactions over the last 12 months. $16 billion of those have been natural gas weighted deals. I do believe that the natural gas companies will continue to merge over the next several months. There's a backlog of mergers out there that will be coming to light over the next several months, and we will look to that as they being a couple of positives, which I'll talk about. One of the things that's really interesting is if you look on here that if you look at our sector, the EMP sector, the U.K. year-to-date approximately down 19%, the U.S. is up 3%. There's a dislocation between the two markets in terms of value being attributed to public EMPs. It's a very important factor that as we get more and more exposure to U.S. and institutional investors that we would see that hopefully trickle back towards where the U.S. peers have been from a year-to-date perspective. This historic consolidation, we haven't seen this kind of consolidation in our industry since the 1990s. What I really like about it is that these big companies combine the amount of divestitures that is going to be required by the FTC to close these deals is going to be significant. And I've said it to the degree that there will be large companies generated and built off the divestment of assets of these big corporate mergers, which leaves us in a very good position as we move forward to be in line for these assets. And we'll talk about this in a minute when we’ll talk about 2024. A lot of it will be generated through institutional investors requiring it. But I truly believe that the market is calling for this because the fewer companies, capital availability will be harder and harder to come by as time goes by. And being larger, bigger balance sheets with access to capital markets is extremely important. So we'll continue to see this. And I wouldn't rule out a diversified being involved in something like this in the future as we go forward, looking for merger partners that can grow and scale this stuff over a period of time. With that, let's turn to 2024 and talk about 2024 and some of the highlights that we put in our RNS this morning. And I'll start here on page 25. We see this 2024 being a renewed emphasis on our business model and our strategic plans that we laid out over the last seven years. We want to get back to free cash flow generation through unlocking hidden asset value in the portfolio in the assets that we've acquired, enhancing production, enhancing our revenue using our hedge book and our hedge strategies, growing through accretive growth and driving scale through the operation, which again has impacts on our margins, on our lowering our cost across the portfolio, maintaining financial and operational flexibility. We've been very successful in finding ways to access capital outside the normal means, which is typically in this industry is RBLs in high yield. We've been able to find other ways to do that, whether it be through value creating asset sales or through the ABS transactions and the amortizing debt. These have been ways that we've been able to be successful in finding capital to grow and to run our business. Also, we're going into 2024 with a heavy, heavy cost optimization plan and being able to continue to drive down costs in a very low-price environment and vertically integrate the business. And I think what Brad said earlier about technology is a big part of that. We need technology to be driven further into the operational base and finding ways to use it to our advantage to lower costs. We'll continue to do that. And then our sustainability and the innovation that we've deployed there. We are best in class. We'll continue to invest and find ways to not only to identify, but also to reduce and mitigate emissions over the long haul. We call our focus five. This is where we're setting our business up for the future. And from this point forward, these things will be the focus of our business and they will be part of our everyday plans, discussions and operations. Flipping to page 26, talking about our capital allocation framework. Obviously, we talked about it on the slide at the beginning. The last seven years, we've paid up, close to $800 million back to our shareholders. It's significant. We've done a fabulous job of creating a very resilient business that we've been able to increase cash margins, drive cost synergies, increase cash flows. And we've rewarded our shareholders with that. One of the things that we decided as we look at our focus five and as we sit here today, we want to be able to be a -- and the dividend has been the way that we've returned capital to our shareholders over that period of time. The reallocation or the recalibration of our dividend that we announced this morning was for a purpose other than just, reducing the dollar pay-outs of that dividend. It was really to be more holistic in the way that we look at our business and the way that we reward our shareholders. And we know as we move forward with new U.S. institutional investors and but also even with our U.K. investors that we've been extremely grateful for and continue to hold in high esteem, we want to be able to be a more holistic approach to this shareholder allocation framework. We want to be able to reduce debt. I think it's extremely important. We've seen very low-price environment. We need to be focused on the balance sheet and continue to reduce the overall levels of debt on the balance sheet. And as we do that, increase NAV value, which is equity appreciation for our shareholders. And so we'll continue, we'll reallocate some of that cash for that. We want to pay a meaningful but sustainable dividend. We announced this morning that the dividend where it's being set at is sustainable for at least the next three years if we do nothing else in the business. It doesn't mean we can't grow that over a period of time if we grow the business pretty substantially. But where we are today will be sustainable for at least the next three years. Somebody asked me, well, what about years four and five? We really focused on the next three years. That's how we focus our business. That's how we forecast our business. So that can happen in three years. But that is a sustainable dividend that is achievable for at least the next three years with the business where it's at. We want to be able to reallocate cash and be more strategic in the way that we repurchase shares. You probably will see us put some type of share repurchase plan in place that will be just kind of what I would call on the shelf. We'll give our share repurchase program over to our brokers, allow them within certain guidelines to buy shares on a daily basis, and keep us out of restrictive periods that here's the guidelines, here's the framework, go buy as long as it falls within that, and you'll see us to redeploy cash into that over the next several months. And then fourth, the one thing that kind of has gotten lost over the last three to four years, I believe, in just the way that we create value for our shareholders, we've got to grow the business. We've got to be able to redeploy cash. We've got to be able to cover our decline rates. We've got to be able to grow our production and our revenues to be able to be successful long-term. And so we're going to be able to do that now and have excess cash to assist in that methodology. In fact, the deal that we announced today, the Oaktree deal, a lot of that purchase price will be able to be funded through what we're saving on the dividend over the next 18 months. So it just gives you an idea of how we're going to redeploy cash. And you can see down below, we're still going to be in a very, very strong quartile as it relates to our FTSE peers, but also in our U.S. peers. We'll be at the top of our U.S. peer group in terms of dividend yield and current price. So turning to page 27, I'll just end with this and then we'll open it up for some questions. Our 2024 action plan, we will reduce debt. Now, the acquisition will entail utilizing some of the purchase price will be through leverage. Obviously, we'll take back the APS structure from Oaktree, which will add about $120 million along with the deferred payment of 90. We'll put us, that will be, but a lot of that 90 will be paid off using the free cash flow that we're generating from the recalibration of the dividend. So we will reduce our overall borrowings by $200 million this year and continue to decrease our overall leverage. Our fixed dividend, which we sent this morning, is sustainable over the next three years. We want our investors to know that. We also want them to know that the dividend yield is in the top quartile, not in the U.K., but it will be above in the U.S., our existing U.S. peers. The strategic share repurchases, it gives us the ability, we will conduct strategic and regimented buybacks instead of buying on days or kind of a tender offers. And we're just going to set a strategy and it's going to be deployed on a daily basis from here until going on in the future. And we'll just continue to buy back shares until the value of the shares doesn't make sense to buy anyone. So that will be started as soon as we're able to start buying back shares again. And then lastly, this Oaktree acquisition was a big opportunity, but it's also a big strategic move for us in 2024. We will continue to see that benefit our numbers and our cash flows throughout the year and into 2025. But we'll continue to be, very, I would say, picky, but we're going to be watching for our acquisitions and trying to be strategic in the way we look at them on a going forward basis and increasing the scale and access to premium price markets. So that's our 2024 action plan. We will pay down debt. We will pay our fixed dividend for the next three years at this level. Regardless of, we don't even acquire another asset. We will be strategic and regimented in the way we buy back shares and we'll continue to be active on the acquisition front if they make sense. So with that, I will stop and I will turn it over for questions.

Douglas Kris: Operator, can you open the lines up for Q&A, please?

Operator: Thank you. [Operator Instructions] Our first question is from the line of David Round with Stifel. Please go ahead.

David Round: Thank you. Morning, guys. Thanks for the call and thanks for the detail you provided so far. Can I just ask a follow up on the acquisition? Are you able to talk about payback at all? Because I know a multiple will give us a good steer, but I'd be interested in the point at which you'll be generating incremental cash from this deal, please.

Bradley Gray: Yes, David, this is Brad. Thanks for the question. As Rusty indicated, we've shown a 3.1 multiple on a cash basis. The assets generate a sub-four payback period. So again, for all the strategic requirements or for all the strategic elements of the transaction, the financial ones are equally as compelling.

David Round: Okay, great. And the follow up just went to a separate area. I know a lot of shareholders have been asking you, particularly Rusty, to reallocate cash from the dividend for a while. I mean, whether that was to buy back to debt reduction or even to M&A. I mean, I think you alluded to the freedom that this is going to give you on the capital allocation slide. I'm just interested, how much was the previous situation just distracting you from concentrating on value creation?

Robert Hutson: Well, a dividend recalibration is never a situation that you want to, really think about. But at the same time, as we started looking out over the course of the next 12 months and forward, it was apparent that the share price wasn't going to respond appropriately to price the dividend into the shares. And so if it's not pricing it, then for us, we need to create value to get the share price where we believe it needs to be because it's not reflective of the true value of the company right now. And so we want to be able to on the back end of this, we're going to go into the U.S. markets, the institutional investors in U.S. And we're going to hit them hard over the next several months. We believe that getting this behind us in terms of the -- it was essentially impossible to get a meeting set up until we got this dividend yield in place where it made sense. I mean, people in the U.S. are going to look at it, so you got 30% dividend yield. Why would we talk to you? But now, number one, we've got a recalibrated dividend that's not only affordable but also sustainable over a period of time. This gives us the entry into the U.S. markets now where we can go and market, be confident in what we're doing, but also be able to sell this Oaktree acquisition because I'm telling you, people aren't giving it enough attention, but it's a substantial accretive value to our company. And it was extremely important to me. It's been extremely important to me since the day that we entered the agreement. I knew it was an inventory of assets for us to acquire back. So, yes, the distraction's over. We've done extremely well for our shareholders, which I'm a big one. So when you're a big shareholder like I am, none of these decisions are easy, but they're the right move. They put our company in a position to be on the offensive going forward and be able to buy back shares and really do things that we probably couldn't have done previously. So, I think it's -- when we look back a year from now, I think we'll see a lot of potential upsides that we didn't have coming into this presentation. So, I'm pleased. I think we're going to see a big opportunity set going forward. It gives us more flexibility around acquisitions and the ability to take advantage of that. But more importantly, buying back shares and doing other things other than just paying straight dividends, I think is a big, big plus for us moving forward.

Bradley Gray: And, David, I would just add with all the discussions that we had at senior management or at the board level, the results show that the company and our teams were not distracted. And I think that's an important factor that we continue to produce good results, great results in many respects throughout the company. So, we addressed it at the appropriate level. We ensured that our business model was sound and the results show that. So, we're real proud of that. All right. That's really helpful. Thanks, guys.

Operator: Thank you. Our next question comes from the line of Matt Cooper with Peel Hunt. Please go ahead.

Matt Cooper: Thank you very much. And thanks for the presentation. So, the first question is post the closure of the Oaktree deal, are you able to give a bit more colour on how you expect to reallocate the $110 million a year between paying down debt, buybacks and M&A? So, for example, should we expect this year's buyback quantum to be similar to the one in 2023?

Bradley Gray: Yes. So, obviously, with the $110 million reallocation, I think it's going to be, we have a multitude of options there. As I said, I think we'll probably set some regimented share repurchase program in place. We have, I think, about a 10-day period of time here under SEC rules where we're kind of locked out. But as soon as that opens back up, you'll probably just see us set up a regimented program in place. And that could, for the full year, it could be anywhere from 3% to 10% of the total shares. I mean, what many less than 3%, let's just say that. Now, it'll be set based on the parameters. And if those parameters are exceeded, then we won't buy back shares. I'm not a big proponent of buying back shares just to be buying them back. But in what the intrinsic value of our shares are undervalued, then I think it's a good use of cash. So I would say, anywhere from 3% to 10%, it will be a regimented program that won't be, tender offers and this kind of thing. And I'll tell you why. I don't have any problem with tender offers, but the problem with it is it's costly. And if I'm going to spend $1 million, $1.5 million to do it, the tender offer, I'd rather use that $1 million, $1.5 million to buy back our shares. And so, the programs, these tender offer programs are just extremely expensive because of the work that you have to do, attorneys and advisors and those kinds of things to get it all set up. So I would say somewhere between 3% and 10% of the shares, along with our fixed and sustainable dividend, and then, we'll continue to pay down debt. We've set a goal of $200 million quantum of the debt for the year, depending on where the share price is and where we -- the program comes in at as it relates to share repurchases, we may go -- we may do more than that. We may see a period of time here where it looks like selling, through a structure like we did previously makes sense and we may even do more. If it's – if the price is – I've said all along, if I could sell the whole company at six times, I would. So it's not a situation where, that's – to us, that's just a great asset sale when you can sell something for six times. So all of those things are really playing into my mind, but that $110 million will be sold just on shareholder return.

Matt Cooper: Great. That makes sense. Thank you. And then I just wondered if you could give an update on the current state of the U.S. M&A market in terms of the number of quality of opportunities. And also, actually, does the Oaktree acquisition also come with some undeveloped reserves?

Robert Hutson: Yes. Well, let me answer that second one first. Yes, we have undeveloped reserves already. Obviously, we own 51% of it prior to this acquisition. So we will see opportunities to do one of two things. If price is rebound -- and when I say rebound, it's probably above 350. There are opportunities for us in that acreage position to leg in to some upside, okay, whether it be through JVs, drilling ventures, whatever. We have the ability -- and anything we add along that Gulf Coast is a benefit, okay. It's going to be a benefit as we move forward. As it relates to the U.S. M&A market, we've seen a -- it seems like most of the M&A has been these public mergers. And I think that will continue throughout the year, as I said before, but it's going to spin off quality asset divestitures. For these guys to close those transactions, the FTC Federal Trade Commission will make them offload some of their assets. And as part of that, those are not going to be bad assets. They're going to be really nice assets. And so I believe recalibration of the dividend and the capital returns was important from the standpoint of being able to align ourselves with the ability to take advantage of that on a going forward basis. And again, the mergers, the public market mergers is not lost on us. And our ability to grow the company in size and scale quickly to take advantage of a much more robust capital market situation. We're seeing high yield being raised in the U.S. for the first time probably in the last four or five years at a high level. We're seeing equity being raised and we're seeing equity being able to be utilized for acquisitions. And I believe that having a larger and much more diverse, not only asset-based but also investor shareholder base is going to help us to take advantage of that as we move forward.

Matt Cooper: That's great. Thank you, I’ll hand over.

Operator: Thank you. Our next question comes from the line of Tim Hurst-Brown with Tennyson Securities. Please go ahead.

Tim Hurst-Brown: Hello, gents. Thanks for the call. Very useful. So just had a couple of questions, some of which have already been covered. But just on trading liquidity in the States, so now I think trading in the States roughly represents 50% of total traded volume. Just wondering how and when index trackers become involved here in the States. How do you see that kind of playing out?

Robert Hutson: Yes, that's a great question. Let me say this. We are surprised how quickly the level of trading picked up in the U.S. versus the U.K. total share trading, primarily because we didn't issue any equity in the U.S. I mean, we literally just opened up a structural listing and then we've seen a significant amount of activity coming out of the U.S. buying the shares across the platform. And we think probably somewhere between 30% and 40% of our existing shares probably are U.S. domicile holders now, both from the buying that's occurred since December and then the previous ones that we had on the register already. And so that's been a significant surprise for us. We didn't expect it to be this much volume this quick. Now, what I would say is that every June, I believe it is, the Russell 2000 index rebases itself and would put us in a position, come June to enter the Russell 2000. We hit the thresholds very easily. We're fully qualified for it. And all of our indications are that we would be entering that potentially in June. Now, to put that in perspective, Doug can probably give you a better indication, but that's a significant amount of tracker volume. That's a big index in the U.S. with a lot of companies, obviously 2000 companies in it, but a lot of trackers involved in that. Doug, I don't know if you wanted to add anything to that.

Douglas Kris: Yes, just two quick points on that. I think one of the aspects that makes it really exciting for us is that one of the contingents that we really think will be a large ultimate investor from the U.S. perspective is the small to mid-cap general's investors. So they are going to now have a company that's introduced to their benchmark that gives them energy exposure without a large degree of commodity price risk. And we've already seen a lot of engagement from that investor class. The other aspect would be that there are going to be the knock on effects of ETFs that trade relative to the Russell 2000 and a number of quantitative trading strategies that trade to the Russell 2000. So, in terms of the magnitude, it will have a meaningful effect and significantly more index trading than what currently goes on in the London market alone right now.

Tim Hurst-Brown: That's great. Thanks for that. And then just to follow up on something different. So, Rusty, I think you said on the M&A slide that you wouldn't rule out some kind of merger activity in the future. Just wondering what that might look like. What sort of ideal characteristics of a merger partner?

Robert Hutson: Yes, I would say that there's nothing really that I can pinpoint at this point in time. I just know that there's a lot of discussions between a lot of different companies going on across the spectrum. And if it, for us, it would have to meet the criteria. It would have to be accretive. It would have to improve our business and improve our -- but more importantly, nothing – this is the most important thing – our free cash flow profile. We want – anything we do has to be accretive from a free cash flow profile and distributable cash flow profile. Because everything we do from here on out, we want to have the flexibility of spreading that cash across the four main pillars that we talked about in terms of shareholder returns. So, I don't have one specifically pinpointed, but I can tell you that there's a lot of discussions going on in the market. And if it fits us and it improves our business and is a creative to our shareholders, then we'll look at it. And some other benefits from a merger transaction is scale. And with scale comes access to capital, larger pools of capital, different types of capital that, you know, to date we have not been able to access as easily maybe to some of our larger peers. So that's a big opportunity for us as well, just from gaining scale.

Tim Hurst-Brown: That's great. Thanks.

Operator: Thank you. Our next question is from the line of Simon Scholes with First Berlin. Please go ahead.

Simon Scholes: Yes, good morning. Thanks for the very informative presentation. And thanks for taking my questions. I've just got a couple. I mean, first of all, I was very interested, Rusty to hear what you were saying about the prospects for the gas market and particularly as it relates to LNG exports over the next five or six years or so. I mean, my understanding is that there isn't really much uncertainty over the next three years because you're talking about projects have already been financed. It seems to me that most of the uncertainty kicks in around 28, 29. And surely a lot of that relates to the outcome of the next U.S. election. So I'll be interested in your comments on that. And secondly, I was just wondering if you could say something more about the possible structure, possible volume of the potential private placement you were talking about in the press release this morning.

Robert Hutson: So let me talk about the LNGs and the natural gas liquids and the LNG export facilities. What I would tell you about that is that currently the ones that have been approved and that are in process to your point are represented about 20%, 25% of the existing production in the U.S. today, which is very strong and which should put a floor under pretty much the prices as we move forward. The ones after that, what I would say is yesterday there's a thing going on in Sarah in Houston, Sarah Week they call it. The Energy Secretary under Biden made a comment yesterday that this slowdown in permitting for new export facilities, she made the comment that by this time next year you should see that gone and that those should be opened back up. Now that's her speaking. So I would say that she's probably as into it as anybody.

Douglas Kris: Well, it was also John Podesta who's probably baking the call.

Robert Hutson: Correct. And so I think we'll see that open back up, Simon, and then the flood gates will open because there's going to be a significant amount of those additional export facilities permitted and moving forward, which again increases the amount of export capacity further. And, I think that I don't necessarily believe that the election is going to have much of an impact on that one way or another. Another big positive event that occurred yesterday was that Senator from West Virginia, Joe Manchin, made a comment at Sarah that there has been significant bipartisan support and they've made headway on a permitting and regulatory bill, which is probably more important than the export moratorium because we need infrastructure in the U.S. to move gas around and get it to these export facilities. So I think that between that and the bill related to the permitting, the export facilities and the permitting, I think that, that is going to have a massive impact on the stability of natural gas prices in the U.S. As it relates to the private placement, what I would say is that it's an option for us. We've been looking at it for a while. It's liquidity. If we did want it would be liquidity enhancing. It's been a very active market in the U.S. here in the last year. Lots of opportunity set and a lot of capital providers providing this. It's just an option on the table to us and that's it. If it was something that we decided to utilize, that we would inform the market of it and make sure that it was just an option along with asset sales and other things.

Simon Scholes: Okay, thanks very much. That's very helpful.

Operator: Thank you. Our next question comes from the line of Noel Parks with Tuohy Brothers. Please go ahead.

Noel Parks: Hello. Good morning. I just had a couple. I didn't want to turn for a moment to the work you've done on emissions detection and mitigation. And I'd say over maybe a year, 18 months ago, many companies were talking a lot about their efforts and it feels like that has sort of slacked off. Maybe consolidation is more of a topic. So I wonder if you could just talk about some of the efforts you've made where you view yourself as being more rigorous than many of your peers?

Robert Hutson: Yes, well, I'll just say this. To my knowledge, it seems to be that there has been a slowdown from a lot of the industry in terms of how they're approaching this on a going forward basis. What I would tell you is there's no slowdown on our part. We believe that it's the right thing to do. We've always thought since we announced our program and what we were going to do back in 2022 that this was going to be a big part of our business going forward and honestly, reducing emissions is good business for us. We're selling more gas because of it. So it's not become less of a situation for us. Brad, go ahead and you want to add something to that?

Bradley Gray: Yes. I mean, it's a comprehensive approach that we're taking and that comprehensive approach starts in our boardroom and it goes all the way out through our organization. And our employees have really embraced all of the efforts and programs that we've done and it's showing up in our results. So we're at the, we're boots on the ground, at the ground level with the mesh detection devices and we're really sticking to the philosophy we've had since we listed the company back in 2017. And it's very simple. If we find a leak, we repair it. And with the 98% leak free rate on our wells, we're proud of that. But it's showing the fact that all the efforts we're doing are producing some very good results. And we're going to continue on that path. We're still committed this year with our pipeline flyover program. The other thing I will tell you too is this part of our Focus 5 where we talk about sustainability innovation. We're working with some technology partners to deliver solutions. And these technology partners, they all want to work with us. One, because we've got some very good resources and leadership in the space of our team. Two, we've got a large set of assets that we can work with. And then three, we're showing the fact that we're open to and making tangible investments into this space. So we think that there's going to be a lot of innovation occurring in admissions mitigation and we're going to be right there on the forefront to continue to improve our results.

Noel Parks: Great. Thanks. That's really interesting. And you did mention that you foresaw just more things to do as far as cost optimization heading into next year. And you mentioned that some of that was definitely going to be technology driven. And any other things sort of operationally that you kind of have on your radar for making improvements?

Robert Hutson: Well, we're constantly reviewing the cost in our business, whether that's field cost through our smarter asset management program where we're looking to eliminate unnecessary compression, consolidate pipelines, improve route efficiency. And technology is one area that we're looking to do that and really understanding what well route district profitability is to recall across all of our different assets. We've developed some new tools here recently where we can deploy to our field teams on their phones, on their tablets, on their PCs. And they've got immediate visibility into all the profitability and production characteristics of the businesses that they're operating. I mentioned it earlier where we've got one source of trusted information that we all, whether it's in my chair or a gun or truck, we're all looking at the same information that allows us to make some good business decisions. So we're constantly looking at field cost optimization. We're also looking at our G&A cost as well. This Oaktree acquisition is going to give us some great cost efficiencies by bringing in a lot of volume, a lot of revenue, and we're adding zero expense or additional costs to our G&A structure. And then we're continually looking at our G&A structure where we can drop technology in that area as well to make our processes more efficient. So it's a continual project that we have going on. And it's an area that I'm really focused on bringing a very disciplined and targeted approach to reviewing our costs.

Noel Parks: Great. Thanks a lot.

Operator: Thank you. Our next question is from the line of Alex Smith with Investec. Please go ahead.

Alex Smith: Yes, morning guys. Thanks for the call. Just a question really on the strategy of following the Oaktree deal and given current liquidity and the dividend cut and the focus on debt reduction and just the timing of a $400 million acquisition against that backdrop. Was it more this deal was too good to pass up and there was a timing element there? And the focus is now on what diversified was two or three years ago where you can maybe be a bit aggressive on the M&A front. Just trying to understand because it gets that backdrop of focusing on debt reduction but then leveraging up for a deal. We'd be good to hear a bit more color on that, please.

Robert Hutson: Yes. Well, we don't do deals just to be doing them. We don't look for a window to do them. This is a deal that's been kind of out there for several months. We've been working it hard over the last several months. Deals are never easy. They don't just materialize overnight. You have to work them. You have to massage them. You have to be, on the calls and really trying to garner leverage and relationship. So this deal has been out there for a while. And I've been talking about it for several months. It's not like it's something that just popped up all of a sudden. The timing of it, I think was pertinent because obviously going into 2024, I didn't want gas prices to rock it up late in the year and the next year. And then we just asked, it becomes that much more expensive. And so this was the prime time to do that. But the recalibration to dividend and the abolition has nothing to do with each other. They just happen to happen at the same time, but they have nothing to do with each other. This was something we were going to do regardless because we're trying to set the business up for long-term success and long-term value creation. And this was the time to do it. And so we're taking our strategy across more shareholder return pillars versus just focusing on one thing all the time, which was dividend. We now have an opportunity to go into 2024-25. We know now that we have our production declines covered. We know that we have the ability to be more focused on growth in the business going forward. And we have the ability to buy back shares if the intrinsic value of shares is not where it needs to be. We have more options now than we had previously. And this just gives us the ability to go out and be more aggressive on all those fronts.

Bradley Gray: Alex, I'll also add that with our relationship and all the back office administration support that we were providing to Oaktree, we had good visibility into their hedge book and into how they've protected the cash flows. And they've got, as we've shown, they've got a very attractive hedge price that we're going to be able to benefit from in 2024. But also, they do not have hedges in place for 2025 and 2026. And so that's a great opportunity for us as the contango and the curve is providing some much stronger prices than what we're seeing here in the back half of 2024. That we have the opportunity to leg into higher prices. So, for all the strategic elements we talked about, higher volumes, Gulf Coast access, the financial attributes were good as well. And so those were other reasons that we felt like this was a great opportunity to do this transaction.

Douglas Kris: One other thing, Alex, I would just add to this to maybe put a bow on Brad and Rusty's commentary is really the fact that as we've demonstrated and as everyone has seen from the results that we posted today, we continue to provide reliable production and consistent in cash flows. And so when you look at the acquisition that we added to our portfolio today, it was really a win for diversified at the end of the day to bring in an acquisition that has the efficiencies that we're going to be able to generate.

Alex Smith: Very clear. Thank you, guys. Just a quick last one. Just on you mentioned non-core assets there was potentially, could you highlight a bit more color on what they could be or is it still kind of in the early days there?

Robert Hutson: No, I don't know if I would say non-core. I would just say that we would potentially look at an asset sale if it fits the criteria that we saw with the one we did in December, where we're selling an asset for way more than we would be able to sell it to a third-party operator, under an institutional type sale and structure where liquidity has significantly enhanced and where we can reinvest it in a much lower rate of return or lower multiple asset when we're acquiring it. So I think that's all I meant.

Alex Smith: Okay, so if you could sell it at 6x but reinvest it to 3x again, then that's an opportunity for you.

Robert Hutson: Absolutely. And look, it wasn't, the asset sale that we did in December at six times, keep in mind we were talking to Oaktree about this asset purchase at the same time. So it just wasn't because we sold it just to be selling it. We knew that we had an opportunity here to buy at a much, smaller multiple than what we're selling these other assets at.

Alex Smith: Got it. Thank you very much.

Operator: Thank you. Our next question comes from the line of Mark Wilson with Jefferies. Please go ahead.

Mark Wilson: Hi, thanks. Good morning, gents. Looking at your results this morning, you give a very clear three-year set of annual numbers in the press release, and it's quite clear to see EBITDA, very constant, and getting up towards 553 cashflow around the $220 million and leverage within that target range of 2.5. And so an investor looking at that could be forgiven for saying, well, what's changed and led to the reset of the capital allocation. If I go back to COVID times, you've seen volatile gas prices before during COVID, you didn't blink with the dividend and that continued. So you could reflect on that and say, and ask, what has changed? Is it the commodity price? Is it the cost of debt? Is it you speak to 200 million of maturities to pay off and you speak to maintaining the leverage level which you actually have maintained? So could you speak to what has changed, please? Thank you.

Robert Hutson: Well, Mark, I don't think what's changed is what we plan on doing for the future. Look, we're sitting here today training at a 30% dividend yield. I can't get institutions to discuss future investments with us because they don't even want to take the calls when they're sitting here at 30%. Obviously, analysts and institutional investors weren't willing to say, look, the dividend obviously is that we're getting doesn't need to have a higher share price. And so it wasn't being factored into the share price. But more importantly for us, I don't even really care about that. At the end of the day, we want the ability to grow the business Mark, long-term. We're paying out a level of cash that was restricting our ability to grow the business on a long-term basis. And this is not a business where you just sit there and run it off. You'd have to grow it over a period of time or sell it. That's your two options. And so, we pay, you can still sell it, but now we're going to be selling it out in a place of strength going forward, having the ability to have options and be able to buy back shares, Mark, when it makes sense. When you're at a 30% dividend yield buying back shares looks pretty dang attractive. And so it wasn't anything to do with, can you sustain it or whatever. We could have sustained it. We could have done another year or two probably, but we would have had to sell assets and create liquidity in other ways to do that. But that to me was just not the right way to operate the business. Let's make the decision that makes the most sense, strengthens the balance sheet, strengthens our cash flows to have options and ways to return capital to shareholders other than just a pure dividend. And I think as we, especially as we go into the U.S. and get more and more shareholders in the U.S., that's going to become very, very important. A 30% dividend yield wasn't giving us an audience with U.S. institutional investors.

Mark Wilson: Okay, that's clear. Thank you very much. And could you give us a note there on where, if there indeed is anything to say with the congressional letter situation?

Robert Hutson: Yes, so the congressional letter, we responded to it back in January. I don't believe it was, first, second week of January. We were very descriptive in what we do. We've had a couple of calls with them. We're actually, I think, correct me if I'm wrong, we're going to even provide them a lot of the data with things that we've done. And so that's become, less and less of an issue. And I don't foresee us really having any other type of inquiries. And let me make this very clear because people use the wrong wording. There was people use the word investigation, inquiry. It was none of that. It was purely a letter asking for information. And there was no, honestly we didn't even have to respond. There was no requirement. So we knew we had a positive message and that we were doing the right things. So we're going to respond. And we're not trying to hide anything. We do all the right things and we had no problem in letting them know the things that we did.

Bradley Gray: We're really still going to have an opportunity to engage with that committee. They've been very appreciative of our approach and we're appreciative of the education that we provide to them. And so it's been a positive engagement.

Mark Wilson: Thank you. Very clear. Thank you.

Operator: Thank you. Ladies and gentlemen, as there are no further questions, I would now hand the conference over to Rushdie Hutson, CEO for his closing comments.

Robert Hutson: Yes, thank you all for coming today. I would just like to add on the way out that we are very proud of the year that we had in 2023. I think it was strong of an operational performance and really want to just give accolades to our employees that are on the ground every day operating these assets. They did a tremendous job in a very low-priced environment. We tell them, don't worry about prices you operate the wells and get the production. We'll worry about how we manage pricing and be able to get the revenues that's necessary using our hedging strategies. They did a fantastic job. 2024 is going to be really, really good year for Diversified. This asset acquisition adds a lot of scale, adds a lot of revenue, adds a lot of free cash flow. The recalibration gives us a lot of options that would have been more difficult without it. We will buy back shares. We will have a sustainable dividend over the next three years or at least the next three years as we stated. We will pay down debt. So we're going to do all the things that people think that we can't do. We're doing them. We will do them. And I'm very excited about the options in the U.S. I think that the Russell 2000 Indexation that's out there in June will be a big catalyst for the company in the stock. So we appreciate the support of our investors and appreciate your time today on the call.

Operator: Thank you. The conference of Diversified Energy has now concluded. Thank you for your participation. You may now disconnect your lines.