Diversified Energy Company (DEC) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to the 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.

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.

Thank you, Doug. 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 '23. 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 and start there. Just want to say that we're pretty proud of our year in the 2023, the strategic successes that we had. It was a great year for Diversified in 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, a very good year. You can see here on Page 3, some of the highlights that I'd bring to note. Key being the production was strong through '23, 821,000 -- 821 million a day natural gas production on average. We continue to see a very resilient decline rates as we held it under 10% again for -- 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 2.3x, again, within the margin of the 2 to 2.5x that we talk about from -- with our investors. Cash margin is strong at 52%. That has been a staple 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 dividend and the other portion in share repurchases. In December, we publicly listed on the New York Stock Exchange, which was something that we had been striving for, for about 1.5 years prior to that. Very important factor for us as we move forward in 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 LVL 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 4. Delivering our derisked model and really results in derisking 4 things: commodity price risk, which we do to our hedging program, our operational risk, which we do through our Smarter Asset Management and our ground game 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, 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. Flipping over to Page 5, again, a very peer-leading decline rate in 2023. 10% or less, which is what we strive for on an annual basis. And that is including the whole portfolio. And you can see across all of our peers that, that is a peer-leading decline rate, but more importantly, a very peer-leading capital intensity rate, that the $0.25 per Mcf compared to all of our other peers, and these are U.S. peers, by the way. It just shows how little cash flow that we have to reinvest to keep our decline rates where they are. So we have superior capital intensity, which enhances our free cash flow, which creates greater value for their shareholders and returns over a period of time. Flipping to Page 6, real quick. Hedging strategy. '23 was 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 $3.09, about 85% of our production hedged through the remainder of this year. The remainder of '24 strip prices of $2.45. So it's a pretty robust hedging price above and beyond the current strip. And you can see our program, we're 85% hedged in '24. We -- probably around 70% or a little less maybe in '25 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 '24 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 time -- as '24 goes on. On Page 7, 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 a 5.7x EBITDA multiple in December. We had a liquidity impact or uplift, I should say, of $90 million, and we delever the business with this structure. We remained at -- 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 '24.

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 6-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 reengage 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 9. 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 of 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 6 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 per Mcfe, and our operating cost improved from 2022 to $1.69 per 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 Appalachia 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 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 7 years early. Moving on to Page 12 -- Page 11, excuse me. Our disciplined 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 '24 with primarily swap contracts. NGLs and oils were hedged around 50% to 60%. Moving on to Page 12. This provide -- this page provides some additional insight into our low decline production, our effective hedge program and our efficient vertically integrated cost 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 '22. This result is really a testament to our low decline assets and our thoughtful hedging program. From a cost perspective, our price-linked expenses declined in 2023, while our field teams continue to utilize our Smarter Asset Management program to deliver cost savings and efficient operations, all of 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 a 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've built a 100% cloud-based technology platform, and we're also committed to running our company on consistent single software applications. This commitment as 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've 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 produced some great results with numerous projects in '23, and here on Page 14, we've 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 7 years earlier than our established target year. Our Board and leadership team established numerous climate-focused targets back in fourth quarter of '21. Over the last 2 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 asset retirement programs. We made intentional investments during 2022 to expand our internal retirement assets and our capacity. We combined 4 different plugging companies during 2022, and we created our Next LVL Energy Company. 2023 represented our first full year of operation for Next LVL. And just to remind everyone, Next LVL is a full-service retirement company, which -- what does that mean? That means that it includes service rigs, cement trucks, wireline trucks, transportation and construction equipment. We've also -- we've also built into our Next LVL 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 well plugs in -- wells plugged in Appalachia and a total of 404 wells plugged overall. Our Next LVL entity team -- or excuse me, our Next LVL 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.

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. What the Oaktree working interest participation in our partnership with them has been a great partnership. It helped us to accomplish what we really set out to do 3.5 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 represents about a 3.1x multiple. And if you remember back in December, we talked about the asset sale we did at almost a 6x multiple and being able to take some of that liquidity and reinvest it back into an asset at 3x is a great trade-off for us. And so we created liquidity at 6x and we're reinvesting at 3x, 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 out for 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 -- of the acquisition. We're adding about 122 million a day of natural gas production. That's very, very relevant from the standpoint that, that is essentially covering decline rates into '25. 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. PV10 on these assets was $462 million. Again, we bought these at 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 don't want to wait until -- in '25 and '26, 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 are a benefit -- 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 we -- 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, our natural gas assets with some natural gas liquids, they 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 0 risk. We essentially will do nothing more than flip the working interest in our accounting system from Oaktree to Diversified. 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 on to Diversified's working interest. On Page 21, this is a very important factor. We -- as part of this transaction, we're novating their 20 -- 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 in our company represents approximately $60 million to $70 million of value in 2024. It will increase our average floor price 25% from the $3.09, provided a $0.10 uplift to our pro forma average price for 2024. And more importantly, there's no hedges on in '25 and '26, which gives us some optionality. I truly believe that '25 and '26 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 as that does, it gives us some optionality. We will hedge some of that '25 and '26 exposure, but we will definitely leave some upside for -- to lay into as the prices, we believe, come rebound next year. And then to just derisk our acquisition multiple by having these -- the hedge book that we're bringing in from a novated perspective from their working interest percentage. So all in all, this -- in the money hedged 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 Gulf Coast pricing, I do believe that the price of natural gas in the U.S. is going to be highly fragmented between basins. In this basin, the Gulf Coast is going to have the best -- or have the ability to have the best pricing because of its exposure to these natural gas export facilities. You can see on the map there, the ones that already do exist and then the ones that are coming online in the next 1 year, 1.5 years. By the end of '26, we could see 20% to 25% of our current U.S. production being exported, which is significant, and I believe will underpin the gas price for a long-term -- long time into the future. We have all the takeaway we need. We are 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 or 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 -- or the natural gas liquid export facilities and gives us a chance to leg into some much higher prices over the long haul. And then on Page 23, I want to bring 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 6 months to 12 months. I don't think this is by accident. We're seeing a lot of -- 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, is going to expand and go to each company having a more -- being more exposed to different basins than just the 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 even some -- 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. We know there's a backlog of mergers out there that will be coming to light over the next several months, and we -- we'll look to that as a 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 E&P sector, the U.K. year-to-date approximately down 19%. The U.S. is up 3%. There's a dislocation between the 2 markets in terms of value being attributed to public E&Ps. 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 1990s. What I really like about it is, 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 and we 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 Diversified being involved in something like this in the future as we go forward, looking for merger partners that can grow and scale the business up over a period of time. With that, let's turn to '24 and talk about '24 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 7 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 hedging -- hedge book and our hedge strategies, growing through accretive growth and driving scale to the operation, which again has impacts on our margins, on 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 and 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 have a -- we're going into '24 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 cost. 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 it our Focus Five. This is the way 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 a slide at the beginning. The last 7 years, we've paid 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 -- 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 payouts 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, who we've been extremely grateful for and continue to hold in high steam, 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 3 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 the -- at least the next 3 years. Somebody asked me, well, what about years 4 and 5? We really focused on the next 3 years, that's how we focus our business. That's how we forecast our business. A lot can happen in 3 years, but that is a sustainable dividend that is achievable for at least the next 3 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 restricted periods. And here's the guidelines, here's the framework, go buy the loans, 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 3 years to 4 years, I believe, and 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 at current price. So turning to Page 27, and I'll just -- I'll 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 ABS structure from Oaktree, which will add about $120 million along with the deferred payment of $90 million will put us -- that will be -- but a lot of that $90 million 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 set this morning is sustainable over the next 2 years or 3 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 in 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 it makes -- until the value of the shares doesn't make sense to buy anymore. 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 '25. 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 '24 action plan. We will pay down debt. We will pay our fixed dividend for the next 3 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.

Yes, operator, if you could open the lines up for Q&A, please?

[Operator Instructions] Our first question is from the line of David Round with Stifel.

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?

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-4 payback period. So again, for all the strategic requirement -- for all the strategic elements of the transaction, the financial ones are equally as compelling.

Okay. Great. And the follow-up, just a separate sort of separate area. I mean, 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?

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 -- we needed to create value to get the share price where we believe it needs to be. So 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 we bought -- that we entered the agreement, I knew it was an inventory of assets for us to acquire back. So yes, the distraction is over. We've done extremely well for our shareholders and -- 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 -- this is -- when we look back a year from now, I think we'll see a lot of potential upside 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.

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.

Our next question comes from the line of Matt Cooper with Peel Hunt.

Thanks for the presentation. So first question is, post the closure of the Oaktree deal, are you able to give a bit more color 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?

Yes. So obviously, with $110 million of 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 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, it won't be any less than 3%, let's just say that. Now it will 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 it back. But with 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. It won't be tender offers and this kind of thing. But 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 a 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 advisers and those kind 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. I would -- 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 prices -- I've said all along, if I could sell the whole company at 6x, I would. So it's not a situation where that -- to us, that's just a great asset sale when you could sell something for 6x. So all of those things are really playing into my mind. But that $110 million will be focused on shareholder return.

Got it. That makes sense. 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 and quality of opportunities? And also, actually, does the Oaktree acquisition also come with some undeveloped reserves?

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 1 or 2 things. If prices rebound, and when I say rebound is probably above [ 350 ], there are opportunities for us in that acreage position to leg into some upside, okay? Whether it be through JVs, drilling ventures, whatever, we have the ability to -- 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 -- 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 4 years or 5 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 base, but also investor shareholder base is going to help us to take advantage of that as we move forward.

Our next question comes from the line of Tim Hurst-Brown with Tennyson Securities.

Gents, thanks for the call. Very useful. So just to add 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 kind of index trackers become involved here in the States. How do you see that kind of playing out?

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, 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, 2,000 companies in it, but a lot of trackers involved in that. Doug, I don't know if you want to add anything to that?

Yes. Just 2 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 generalist 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.

That's great. And 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 -- what are the kind of ideal characteristics of a merger partner?

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 it -- for us, it would have to meet the criteria, it has to be accretive, it would have to improve our business and improve our -- but more importantly, and I think this is the most important thing, our free cash flow profile. We want to -- anything we do that 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 4 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 accretive to our shareholders, then we'll look at it.

And Tim, other benefits from a merger transaction is scale. And with scale comes access to capital, larger pools of capital, different types of capital that to date, we have not been able to access as easily maybe in some of our larger peers. So that's a big opportunity for us as well, just from gaining scale.

Our next question is from the line of Simon Scholes with First Berlin.

Yes. Thanks for the very informative presentation. 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 5 years or 6 years or so. I mean my understanding is that there isn't really much uncertainty over the next 3 years because you're talking about projects that have already been financed. It seems to me that most of the uncertainty sort of kicks in around '28, '29. And surely, a lot of that relates to the outcome of the next U.S. election. So I'd be interested on 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.

Yes. 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, represent 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 one after that -- what I would say is yesterday, there's a thing going on at CERA, in Houston CERAWeek, 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 probably is into it as anybody.

Well, there's also John Podesta, who's really probably making the call.

Correct. And so I think we'll see that open back up, Simon, and then the floodgates 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 is that Senator from West Virginia, Joe Manchin made a comment at CERA 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. If liquidity -- if we did one, it would be liquidity enhancing. It's been a very active market in the U.S. here in the last year with 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, then we would inform the market of it and make sure, but it was -- it's just an option along with asset sales and other things.

Our next question comes from the line of Noel Parks with Tuohy Brothers.

I just had a couple. I did 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?

Yes. Well, I'll just say this. There has been -- 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 of what we were going to do back in 2022 that this was going to be a big part of our business going forward. 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 if you want to add something to that?

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 up through our organization. And our employees have really embraced all 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 emission 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 is 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 would tell you, too, is as part of our Focus Five, 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 emissions mitigation, and we're going to be right there on the forefront to continue to improve our results.

Great. 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. Any other things sort of operationally that you kind of have on your radar for making improvements?

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 will route district profitability is 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 guy in a 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. And we're also looking at our G&A costs 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 0 expense or additional cost to our G&A structure. And then we're continually looking at our G&A structure where we can drive 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.

Our next question is from the line of Alex Smith with Investec.

Yes. Just a question really on the strategy following the Oaktree deal. And given the current liquidity and the dividend cut and the focus on debt reduction and just the timing of a $400 million acquisition against that backdrop or 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 2 years or 3 years ago where you can maybe be a bit aggressive on the M&A front? Just trying to understand against that backdrop of focusing on debt reduction, but then leveraging up for a deal. Would be good to kind of hear a bit more color on that, please.

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 at 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 rocket up late in the year into next year and then with this asset becomes that much more expensive. And so this was the prime time to do that. But the recalibration of the dividend and evolution 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 -- the 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 '24, '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 shares aren't -- the intrinsic value of the 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.

Alex, I'll also add that with our relationship and all the backhaul office administration support that we were providing to Oaktree and do provide to Oaktree, we have 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 '24. But also, they do not have hedges in place for '25 and '26. And so that's a great opportunity for us as the contango in the curve is providing some much stronger prices than what we're seeing here in the back half of '24 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.

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 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.

Got it. No, very clear. Just a quick last one just on, you mentioned noncore asset sales potentially. Could you highlight a bit more color on what they could be or is it still kind of in the early days there?

No. When I -- I don't know if I was saying noncore, I would just say that would -- if 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 been significantly enhanced and where the -- 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.

Okay. So if you could sell it at 6x, but reinvest it at 3x again, then that's an opportunity for you?

Absolutely. And look, it wasn't -- the asset sales that we did in December at 6x, 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 a much smaller multiple than what we're selling these other assets at.

Our next question comes from the line of Mark Wilson with Jefferies.

Looking at your results this morning, you gave a very clear 3-year set of annual numbers in the press release. And it's quite clear to see EBITDA very constant getting up towards $550 million, free cash flow around the $220 million and leverage within that target range of 2. (sic) [ 2 ] to 2.5x. 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 crisis before during COVID, you didn't blink with the dividend and that continued. So could we reflect on that and say -- and ask what has changed? Is it the commodity price? Is it the cost of debt? Is that 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 we just speak to what has changed, please?

Well, Mark, I don't think it's -- what's changed is what we plan on doing for the future. Look, we're sitting here today trading 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 we'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 2 options. And so we -- hey, you can still sell it. But now we're going to be selling it out of 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 d*** 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 2 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.

Okay. That's clear. And could you give us an update on where we're at, if there indeed is anything to say with the congressional letter situation?

Yes. So the congressional letter, we responded to it back in January, I believe it was first week or second week of January. We were very descriptive in our -- 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 wasn't -- 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. But we knew we had a positive message and that we were doing the right things. So heck, yes, 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 do.

Yes. We really took it as an opportunity to engage with that committee. They've been very appreciative of our approach, and we're appreciative of the education that we provided to them. And so it's been a positive engagement.

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

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 price environment. We tell them, don't worry about price as you operate the wells and get to 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. '24 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 3 years or at least the next 3 years as we stated, and 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 and the stock. So we appreciate the support of our investors and appreciate your time today on the call.

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