Diversified Energy hedges hit profits

As expected for a low-cost gas producer, Diversified Energy (DEC) had a much-improved year in 2021. The company holds tens of thousands of mature gas and oil wells in the United States, across the Appalachian basin, and had production of 119,000 barrels of oil equivalent per day (boepd), driven up 19 per cent by continual acquisitions. 

Diversified’s preferred profit metric, hedged adjusted Ebitda, was 14 per cent ahead of last year at $343mn (£260mn), though it also registered a pre-tax loss because of a $975mn impairment based on its hedging contracts. This price insurance also knocked off its average realised gas price from $3.49 per thousand cubic feet (mcf) to $2.36/mcf in the year, a reversal of 2020 when hedging supported sales. Diversified chief executive Rusty Hutson told Investors' Chronicle he would stick to the hedge-heavy strategy as its pitch to shareholders was to avoid "price risk", prioritising dividends, production and balance sheet management. 

A major investigation by Bloomberg into well leaks has driven high scrutiny of the company's operations. Diversified has since upped its well-plugging capacity though the acquisition of a well-plugging company called Next LVL Energy based in Pennsylvania last month. The Bloomberg report alleged the company had been unaware of the scale methane leaks from its wells, although management strongly denied being a lax owner, and this week added that monitoring of leaks actually resulted in a downward revision of 62 per cent in emissions intensity for 2020.  

Diversified noted the changed operating environment for gas producers, as the world rapidly needs new supply. For broker Peel Hunt this means higher cash profits this year, at $486mn. Longstanding questions about accounting – including gains on bargain purchases and decommissioning liabilities that assume the old wells will last until 2095 – still remain, but the company's model remains in fine form and the consistent cash flow and dividends show this. Buy. 

Last IC View: Buy, 99.5p, 13 Aug 2020