Diversified Energy Company PLC (DEC) Q3 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call presents strong financial performance with record EBITDA and revenue, disciplined debt reduction, and significant shareholder returns. Despite some uncertainties in management responses, the company's strategic focus on asset growth, acquisitions, and operational synergies, along with a partnership with Carlyle, are positive indicators. The Q&A session highlights potential for further growth through portfolio optimization and strategic acquisitions. Overall, the company's strong financial metrics and optimistic guidance, particularly in asset management and shareholder returns, suggest a positive stock price movement.

Key Financial Performance

Debt Principal Reduction Reduced by approximately $203 million year-to-date, representing disciplined capital allocation.

Shareholder Returns Returned approximately $146 million to shareholders through dividends and share repurchases, representing approximately 15% of current market capitalization.

Adjusted EBITDA $286 million for the third quarter, a record for the company, with an EBITDA margin of 66%. This reflects the impact of acquisitions and operational efficiencies.

Free Cash Flow $144 million for the quarter, burdened by approximately $9 million of nonrecurring and transaction costs.

Net Debt Approximately $2.5 billion for the quarter, with a 20% improvement in overall leverage since year-end 2024, achieving a leverage ratio within the target level of 2x to 2.5x net debt to EBITDA.

Portfolio Optimization Proceeds Generated approximately $74 million in additional cash proceeds during the third quarter.

Revenue Approximately $500 million for the third quarter, driven by growth in low-decline resilient production base and strategic acquisitions.

Production Daily production exit rate for September was approximately 1.14 Bcf per day, with quarterly production averaging over 1.13 Bcf per day. Approximately 65% of produced volumes were generated in the Central region.

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Operating Highlights

Acquisition of Maverick Natural Resources and Canvas Energy: Diversified Energy significantly transformed and strengthened its company in 2025 with these acquisitions, which are expected to unlock operational leverage and robust cash flows.

Fallowfield Compressor Station Optimization: The Appalachian team optimized this asset, eliminating compression fees, improving production volume, adding third-party volumes, and increasing revenue.

Primary Equity Listing on NYSE: Diversified Energy is moving its primary equity listing to the New York Stock Exchange, which is expected to enhance trading liquidity, increase exposure to U.S. investors, and facilitate passive investment.

Partnership with West Virginia: Launched a public-private partnership to fund the retirement of Diversified wells in West Virginia, with a $70 million investment projected to grow to $650 million over 20 years.

Debt Reduction and Shareholder Returns: Reduced debt principal by $203 million and returned $146 million to shareholders in the first three quarters of 2025.

Portfolio Optimization: Generated $143 million in divestment proceeds year-to-date, reallocating cash for share repurchases and acquisitions.

Strategic Capital Allocation: Focused on systematic debt reduction, dividend distributions, share repurchases, and acquiring cash-generating assets.

Redomiciling to U.S. Entity: Transitioning to a U.S. corporate entity to align with its NYSE listing and enhance capital market benefits.

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Risk or Challenges

Market Conditions: The market for oil and natural gas producers has remained dynamic throughout 2025, presenting challenges and opportunities. Macro headwinds, including allocation of investment funds to high-valued companies, have impacted share price and valuation.

Regulatory Hurdles: The company is transitioning to a primary equity listing on the New York Stock Exchange and redomiciling to a U.S. corporate entity, which involves compliance with SEC and GAAP reporting. This transition may pose regulatory and operational challenges.

Debt and Leverage: Despite reducing debt principal by $203 million in 2025, the company still has a net debt of approximately $2.5 billion, which could pose financial risks if market conditions worsen or cash flow generation declines.

Acquisition Risks: The acquisition-driven growth strategy, including recent acquisitions of Maverick Natural Resources and Canvas Energy, carries risks related to integration, synergy realization, and potential overvaluation of assets.

Commodity Price Volatility: The company is exposed to fluctuations in oil and natural gas prices, which could impact revenue and cash flow generation.

Operational Risks: The integration of acquired assets and optimization of operations require significant effort and resources. Any delays or inefficiencies could impact financial performance.

Environmental and Well Retirement Liabilities: The company has a $70 million investment over 20 years to fund the retirement of wells in West Virginia. This represents a long-term liability and requires effective management to avoid financial strain.

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Guidance & Outlook

Revenue and EBITDA Projections: The company anticipates generating between $900 million to $925 million in adjusted EBITDA and more than $440 million in adjusted free cash flow for 2025. Pro forma for the full year of Maverick, the company would have delivered over $1 billion of adjusted EBITDA.

Capital Allocation Strategy: The company plans to continue systematic debt reduction, return of capital through dividend distributions and share repurchases, and growth of its portfolio of cash-generating assets through accretive strategic acquisitions.

Market Positioning and Listing Changes: The company is moving its primary equity listing to the New York Stock Exchange, redomiciling to a U.S. corporate entity, and changing its financial reporting to SEC and GAAP compliant filings. This is expected to enhance trading liquidity, increase exposure to U.S. investors, and facilitate new passive investment through indexation and ETF ownership.

Acquisition Strategy: The company is focused on disciplined acquisitions, such as the recent Canvas Energy acquisition, which is expected to close before December 2025. This acquisition is anticipated to provide multiple avenues for upside, including monetizing undeveloped acreage, implementing synergies, and exploring joint development agreements.

Operational and Financial Synergies: The company expects to maintain historical cash margins of approximately 50% and achieve additional synergies following the integration of Canvas Energy. The Maverick acquisition has already created multiple drivers of cash flow generation and growth.

Market Trends and Demand: The company is positioned to benefit from LNG exports, data center energy demand, and growing demand for its products while continuing to supply energy to local communities and commercial customers.

Shareholder Returns: The company has returned approximately $2.2 billion in shareholder returns and debt payments since its IPO. It plans to continue strategic share repurchases and dividend distributions, emphasizing that its shares remain undervalued.

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Shareholder Return Plan

Dividend Distributions: Returned approximately $146 million to shareholders through dividends in the first three quarters of 2025, representing about 15% of the company's current market capitalization.

Historical Dividend Returns: Since the IPO in 2017, the company has returned approximately $2.2 billion in shareholder returns and debt principal repayments.

Dividend Yield: The company offers an attractive current dividend yield of approximately 9%.

Share Repurchases: Engaged in strategic share repurchases as part of the $146 million returned to shareholders in the first three quarters of 2025.

Share Valuation: Believes shares remain undervalued and plans to opportunistically repurchase shares to take advantage of the current market cycle and dislocation.

Historical Shareholder Returns: Since the IPO, the company has returned approximately $2.2 billion in shareholder returns and debt payments, which includes share repurchases.

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Key Q&A

Q:What are the company's plans for the use of free cash flow?

A:The company is focused on the best use of cash at the appropriate time. Currently, they have $400+ million in liquidity and consider their shares significantly undervalued, making share repurchases a likely option. They are also considering growth opportunities and transactions, including the Canvas Energy acquisition.

Q:What is the significance of the Mountain State Plugging Fund and its potential replication?

A:The Mountain State Plugging Fund is seen as a practical solution for well retirement obligations in West Virginia. It covers 30% of the company's asset retirement obligation in one transaction. The company hopes to replicate this model in other states, particularly in Appalachia, as it is a win-win for both the industry and regulatory agencies.

Q:What is the current state of the ABS market and its relevance to the company?

A:The ABS market has high appetite and is a low-cost capital option for the company. It aligns well with their long-life, low-decline assets. The company has been a leader in this market since 2019, and private debt capital remains deep, with insurance companies being key investors.

Q:What updates are there on the joint development agreements (JDAs) in the Western Anadarko assets?

A:The joint development in the Cherokee Basin, Oklahoma, has been yielding strong returns with IRRs averaging 35%. The company is evaluating its acreage for potential new JDAs, particularly in the Permian and Oklahoma areas, while being selective to maximize shareholder value.

Q:Will there be adjustments to the asset retirement obligation (ARO) figure due to the West Virginia Plugging Fund?

A:Under current accounting guidance, there will be no adjustment to the discounted ARO on the balance sheet. However, an asset will be added as the $70 million fund grows over time, addressing 25%-30% of the liability.

Q:What is the expected revenue from portfolio optimization efforts?

A:The company expects $40-$50 million in annual revenue from portfolio optimization efforts for the foreseeable future. This cash provides flexibility for share repurchases, growth, and reducing leverage.

Q:Are acquisitions like the Appalachian Compressor Station one-off events?

A:No, such acquisitions are part of the company's ongoing Smarter Asset Management program. They continuously look for opportunities to acquire assets that are more valuable to them than to others, leveraging significant returns.

Q:What are the plans for next year's workover count?

A:The company will provide guidance in Q1 after completing the Canvas Energy acquisition. Teams have already high-graded projects, and commodity prices will influence the final plan.

Q:How does the company manage integration and synergies from acquisitions?

A:The company has a strong team and processes in place to integrate acquisitions efficiently. For example, the Maverick acquisition was fully integrated within 5-6 months, allowing for faster realization of synergies.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the timing and scale of future JDAs, the exact adjustments to the ARO figure, and the precise workover count for next year. They also used general language when discussing the flexibility provided by portfolio optimization and the potential for future acquisitions.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

DEC Transcript

Diversified Energy Company PLC (DEC) Q3 2025 Earnings Call Transcript

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The earnings call summary presents a strong financial performance with high revenue, EBITDA margins, and free cash flow. The company's strategic acquisitions, such as Maverick, are yielding significant synergies. The Q&A reveals positive sentiment about future opportunities, particularly in acquisitions and AI-driven demand. Despite some lack of guidance, the overall outlook is optimistic. The market strategy and shareholder returns are promising, and the company's liquidity and debt reduction efforts contribute to a positive sentiment. Given these factors, the stock price is likely to see a positive movement of 2% to 8%.

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The company's earnings call highlights strong financial metrics, including increased revenue and EBITDA margins, alongside positive guidance for 2025. The Maverick acquisition is expected to drive significant free cash flow and operational synergies. Despite risks like market volatility and regulatory challenges, the active share repurchase program and debt reduction efforts bolster investor confidence. The Q&A section suggests stable operations despite market conditions, with a focus on strategic growth opportunities. These factors collectively suggest a positive stock price movement in the near term.

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