Diversified Energy to lose London yield crown

A dividend yield approaching 30 per cent starts to trigger alarm bells. Diversified Energy (DEC) saw this measure climb in the past year as its share price dropped, but even before the 50 per cent sell-off, the company already had a striking yield thanks to its high recent payouts. 

The creaking balance sheet has now taken precedence, however, and the company has cut its quarterly dividend from 87.5¢ (69p) a share to 29¢. 

If maintained, this will still result in a 10 per cent yield while saving $110mn a year, as per broker Peel Hunt’s forecasts. 

Adjusted cash profits for 2023 were $543mn, up 8 per cent from the year before. As is usual for Diversified, the statutory numbers were warped by financial instruments – once hedges were in place, revenue was actually flat year on year. The reported profit numbers were also boosted by a non-cash $906mn gain on its hedging contracts. 

Diversified’s business is running mature US onshore oil and gas wells until they’re empty. Its valuation has slid as gas prices have fallen and because of continued questions over how the company can monitor as many as 90,000 wells across multiple states. A key focus in the results for investors will be the debt levels. The company reported net debt of $1.3bn as of 31 December 2023, down from $1.4bn the year before. 

Alongside the dividend cut, Diversified also spun off assets to a special purpose vehicle earlier this year, bringing in $200mn that paid off some debt. But spending continues: alongside the results, Diversified also announced a $410mn acquisition of more central region wells, upping output by 15 per cent. This will be paid for with “expanded liquidity”, or new debt, or a private placement engineered to not expand the share count, according to Peel Hunt. 

Diversified’s weak share price and financial manoeuvring have made us look closely at the buy rating. But it remains a consistent earner and the heavy hedging plan means it is unlikely to be sunk by the debt load. Buy.

Last IC View: Buy, 1,762p, 1 Sep 2023*

*The company completed a 20-for-1 reverse stock split in December, so the interim results show a buy rating at 92p.