First Berlin – Diversified Energy PLC Research Update (24/11/2021)

First Berlin Equity Research has published a research update on Diversified Energy PLC (ISIN: GB00BYX7JT74). Analyst Simon Scholes reiterated his BUY rating and maintained his GBp 150.00 price target.

At its Capital Markets Day on 17 November, DEC announced additional investments in methane reduction initiatives and equipment. By 2026, DEC aims to reduce scope 1 methane emissions (direct emissions from company-owned and controlled resources) by 30% versus 2020 levels and aims for a 50% reduction by 2030. The Global Methane Pledge launched by the US and EU at COP26, which targets a 30% reduction between 2020 and 2030, is less ambitious than this. The company is also developing longer term plans to accelerate its commitment to achieve scope 1 carbon neutrality by 2040 - a decade earlier than its previously stated 2050 commitment. The Financial Stability Board's Task Force on Climate-Related Financial Disclosures (TCFD) was set up in 2015 ?to make recommendations for consistent company disclosures that will help financial market participants understand their climate-related risks.? Among a group of nine peers, DEC ranked seventh in terms of alignment with TCFD-related disclosures at the end of 2020, but has improved this position to fourth currently. We expect DEC to be among the top three by the end of 2022. With a view to improving the transparency of its emissions data, DEC will appoint an independent expert to verify its 2021 and future years' reported greenhouse gas emissions (GHG). The additional investments announced at the Capital Markets Day are expected to amount to USD15m in 2022, equivalent to 3% of our hedged adjusted EBITDA forecast for that year. Management plans to raise the number of wells plugged annually from ca. 140 this year to over 200 in 2023 - equivalent to 250% of the number required under current state asset retirement agreements. The announced measures should move DEC ahead of the environmental regulation curve and suggest that the company's intent is to stay there. We note that executive compensation at DEC is already linked to the achievement of ESG targets. In the future we expect the share price to be less vulnerable to periods of volatility such as those recently triggered by the Bloomberg articles and COP26. We maintain our Buy recommendation and GBp150 price target. (p.t.o.)