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 looks set to be a prime beneficiary of a multi-year LNG-driven gas price rally, which is currently in its early stages, but will likely be sustained for the rest of this decade and beyond. In its Annual Energy Outlook published in March, the U.S. Energy Information Administration forecast U.S. dry gas production to move ahead 2% by 2030 and 15% by 2050 with the LNG export sector the fastest growing part of the market. As an established industry consolidator, and by virtue of its extensive and growing footprint in the ?Central Region? in proximity to the Gulf Coast LNG terminals, we expect DEC to clearly outperform these growth rates. Natural gas pricing has been rising in recent weeks as increased demand for gas in electricity generation and flattening production growth due to reduced drilling have pared swollen spring inventories. Q2/23 was the weakest quarter for NYMEX gas pricing (average of USD2.10/MMBtu) since the pandemic-hit Q2/20, but the NYMEX futures strip shows pricing rallying to an average of USD2.92/MMBtu in H2/23. Growing demand from LNG exporters (incremental capacity of 3.36 bcf/d in 2024 (+23%) and 2.74 bcf/d in 2025 (+15%)) is likely to tighten the market further. The NYMEX futures strip shows pricing of USD3.54/MMBtu and USD3.95/MMBtu in 2024 and 2025 respectively. 85% of DEC’s 2023 gas production is hedged at USD3.54/MMBtu (2022: 90% at USD3.24/MMBtu). DEC thus looks set to achieve an adjusted EBITDA margin of =50% for the sixth year in a row in 2023. The stock’s current yield of 15.7% is very attractive, as is the upside potential to our price target of GBp180.