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 180.00 price target.

DEC’s share price has been hit hard during the recent period of market volatility. Yesterday morning management commented that they are unaware of any operational or company-specific reason for the share price decline. In particular, we gather that UK-based income-focused funds are experiencing increased redemptions in this higher interest rate environment, which is causing them to sell shares, including those of DEC. Meanwhile DEC’s business continues to perform well. Q3/23 production is expected in the range of 134kboepd – 138kboepd, which is in line with our forecast and reflects the sale of non-operated assets during Q2/23. DEC also noted the recent USD50m increase in its revolving credit facility to USD425m (announced 26 September) resulting in current liquidity of ca. USD120m with 100% approval from the 14-bank lending syndicate. The end H1/23 proforma net debt/adjusted EBITDA ratio of 2.4x was within the 2.0x to 2.5x range targeted by the company and 80% of debt is fixed rate. The current average cost of debt is 6.2%. Meanwhile, the H1/23 adjusted EBITDA margin of 52.2% suggests that the company is well on track to report a full-year hedged adjusted EBITDA margin of 50% for the sixth year in a row. As we have pointed out in recent updates, DEC looks set to be a prime beneficiary of multi-year growth in US LNG exports. LNG export growth is the main reason for the current upward slope in the gas futures curve to an average of USD3.88/MMBtu over the five year period January 2024 to December 2028. The futures strip indicates an average gas price of USD2.80/MMBtu for 2023 while 85% of DEC’s gas production for this year is hedged at USD3.54/MMBtu. Given that 2023 will be another very successful year for DEC, and that the outlook is for rising gas prices, we see the current yield of 20.1% and upside potential to our unchanged share price target of GBp180 as very attractive. We maintain our Buy recommendation.