Diversified Energy remains a strong income stock

Making your way through the thicket of gains and adjustments in Diversified Energy’s (DEC) results for the first half of 2023, the key conclusion is that it was a period of consistent earnings despite lower gas prices. There was a 26 per cent increase in adjusted cash profit to $283mn (£223mn), off the back of slightly higher production (up 4 per cent) and a 10 per cent rise in realised prices through hedging, to $20 per barrel of oil equivalent. 

Total revenue, which includes hedging impacts, was up 17 per cent on last year. Diversified pays dividends quarterly, and has kept the payout flat at 4.375¢ for the June quarter. 

The company has a portfolio of around 90,000 wells across the central region in Texas and Oklahoma and the Appalachian basin stretching between Tennessee and Pennsylvania in the US, and has consistently added to output through acquisitions. Production rose 4 per cent in the first half to 142,000 barrels of oil equivalent per day, 86 per cent of which was gas.

As noted earlier this year, the Tanos II acquisition in the period (financed largely through a $157mn equity raise) has added some pre-production options. Management flagged yet more buying: “Although market volatility can complicate the ability to agree on commercial terms… we believe we can achieve our goals to scale our business.” 

This should trigger some unease from shareholders, as the company is already sitting on $1.56bn in borrowings, and its pro-forma net debt-to-adjusted earnings before interest, tax, depreciation and amortisation (Ebitda) formula (which includes annualised Ebitda from new assets) was up to 2.4 times, just behind the 2.5 times cap of its target range. 

Despite a weaker year for energy prices, this remains a strong income stock. Buy. 

Last IC View: Buy, 90p, 30 Mar 2023