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 3600.00 price target.
Production from DEC’s existing wells declines at 10% annually. DEC makes acquisitions to replace declining production as drilling wells is not part of its business model. Interest rate volatility has hampered acquisition activity since February this year. The hiatus in acquisitions, coupled with the 13% lower average hedge price for DEC’s natural gas in 2024 vs 2023 has prompted concerns that the company’s dividend (currently equating to a 21% yield) is under threat. We think these worries are exaggerated. As acquisitions are an indispensable part of DEC’s business model, we expect one or more transactions over the next twelve months, especially as the interest rate environment appears to be becoming more benign. However, our 2024 forecast does not include acquisitions. We forecast 2024 hedged adjusted EBITDA of USD365m (in line with consensus) before asset disposals, which becomes free cashflow of ca. USD320m after interest, tax and CAPEX. In every reporting period to date, acquisition-related debt financing has meant that new debt has exceeded debt repayments. This will not be the case in 2024 under a no-acquisition scenario. Scheduled 2024 debt repayments are USD200m, we expect interest costs of USD120m, and holding the current dividend will cost USD168m. These numbers imply a financing requirement of ca. USD170m if the dividend is held. We do not expect an equity raise at the current low share price. DEC could raise the USD170m from existing liquidity (USD135m as of mid-November), the disposal of undeveloped/partially developed acreage worth >USD200m, and liquidity release through further refinancing of the reserve-based credit facility with asset-backed securitised lending. Furthermore, following the U.S. Environmental Protection Agency’s recently announced final rule on methane emissions reduction, we note that with its commitment to Scope 1 and 2 net zero greenhouse gas emissions by 2040, DEC is still ahead of the regulatory curve. We think DEC will hold its dividend and that the share price will appreciate once concerns in this regard subside. We maintain our Buy recommendation and price target of GBp3,600.