For a while, Diversified Energy Company (LSE: DEC) seemed like a stable bet for investors. Its journey – from an AIM-listed minnow in 2017 to a FTSE 250 stock with a dividend yield of 10-12% by 2020 – was spectacular.
However, of late, things have become muddled. Diversified Energy’s share price has steadily declined, media headlines have been unkind, and its business is being questioned by Democrats on the US Congress’ Energy and Commerce Committee.
That business is one of buying ageing natural gas and oil wells with a low-decline profile. Diversified Energy follows this by hedging their expected production for several years out and keeping shareholders happy with high-yield quarterly dividends.
Yield up, stock down!
Holdings of over 65,000 wells have made it the fourth-largest methane emitter among US oil and gas producers. Therefore, regulatory and media scrutiny is inevitable.
But under the weight of it, the stock has tanked by over 60% in 12 months, pushing its yield above 30%. Such a high yield and cheap share price is more concerning than exciting.
The price slump is also in step with a revenue decline of 10%, albeit after three years of growth. With pressures on its balance sheet, Diversified Energy’s dividend would have had to come down in the absence of an asset sale. Cue its promptly announced January sale of $200m in assets!
So, does this indicate Diversified Energy is on borrowed time before an imminent dividend cut and price correction? Not quite, as I believe an improvement in wider metrics is on the horizon.
New York calling
That sale – of producing assets in Appalachia – is a deft spin-off arrangement designed for breathing room. Or as Diversified Energy says: “to unlock additional value from our assets, reduce outstanding debt, and enhance liquidity.” It has retained a minority stake and will continue to operate the assets.
The proceeds may bring a headline debt reduction of 12% with a repayment of outstanding borrowings under its sustainability-linked revolving credit facility. And the move follows an earlier event of much greater significance – Diversified Energy’s December listing on the New York Stock Exchange, and a 1-for-20 share consolidation in the UK (with adjusted declared dividends).
According to CEO Rusty Hutson, this will further its ambitions of accessing US funds and high net-worth American equity investors. It may also bring a turnaround in perception and better capitalisation.
Where from here?
Of course, caveats apply. Diversified Energy operates in a cyclical market. If energy prices slump, such overtures and hedging can only protect revenue to an extent. It has a large debt pile. Ongoing political issues may remain a turn-off for some.
But it has won awards from two independent emissions monitoring programmes for the transparency of its reporting. I also doubt posturing from Democrats on a Republican-led congressional committee can cause Diversified Energy any lasting reputational damage.
Additionally, squaring Diversified Energy’s end-of-life well closure programme against costs suggests it may be debt-free within 10 years. That’s significantly short of the average life of its viable wells of 50 years, some of which I have visited with Hutson.
So, whilst not increasing my holdings for now, I am not heading for the exit door either. Diversified Energy is not on borrowed time but borrowed patience from investors. A rejigging of finances in 2024 with a US listing may reverse its share-price performance.
