Diversified Energy Company plc (LON:DEC) Chief Executive Officer Rusty Hutson caught up with DirectorsTalk for an exclusive interview to discuss the supply agreement, the company’s hedging philosophy, natural gas outlook, and how the US elections will affect the current export permit pause.
Q1: Rusty, this LNG agreement, could you give us an overview of the agreement and outline the strategic importance of having it in place?
A1: It’s something that we’ve been discussing with our investors and over the last couple of years in terms of the LNG export market was going to become a larger and larger demand for natural gas, especially along the Gulf Coast. With us expanding our operations there, now representing about 50% of our total production, this was a big step for us and being able to sign up this agreement that gives us a guaranteed contract, guaranteed demand for our gas and so we can supply to that facility.
It’s just a guaranteed market as we look out over the next three years. It’s just a big step for us.
Q2: You also added some additional hedge protection. Could you walk us through Diversified Energy’s hedging philosophy and why you think the approach is right for this market environment?
A2: We’ve been watching prices, most of these hedges were entered into in the last month, especially as we saw an uptick in the forward strip over the last month or so. We just decided to take advantage of it.
We know what our costs are, we know what our fixed costs are to operate the business and what price we need as a company to be successful in hitting those 50% margins that we talk about all the time.
So, when we get those prices, we just take that price risk off the table and so we were able to enter into some additional hedging out from ‘25 to ‘27 to just really solidify the price, take away some of the price risk and make sure that we have the price that’s necessary to be successful.
Q3: Could you provide some thoughts on the natural gas outlook and any thoughts on oil?
A3: Natural gas has been a very volatile period of time here in the US and I talked about this several months ago. When you have as much production as Diversified Energy have now, about 100 BCF a day of production, and you have about 12 BCF a day of capacity on the LNG export facilities down on the Gulf Coast, but your underground storage hasn’t changed over the last decade or so. So, you really have to store that gas.
It’s been a very volatile market as you know, winters haven’t been that dynamic and cold and so we’re just dealing with a lot of underground storage that we’re having to work through.
I think if we get a winter this year of any significance, it will help tremendously to put a floor on the price around $3, for us, $3 to $4 prices is pretty good, and we can manage that very effectively. It’s just when it drops down to $2, it gets very difficult to plan and manage your business but I think the market is set up for a future uptick in price. A lot of the LNG export facilities that are already permitted in process, those are expected to come on late ’25 and that will help.
So, when you double the capacity of the LNG export facilities from 12 to 25 to 30 BCF, along with a winter of any kind, we’re probably sitting on a more positive outlook on natural gas than negative.
Oil, I think it’s just going to stay in the same range, $70 to $80. The Middle East continues to be a factor that weighs on price and people don’t know what’s going on there yet. The talk of peak oil and the demand for oil going down, it’s just rhetoric. It’s not going to happen anytime soon and we just need to get used to that fact.
Q4: Just turning back to the LNG and the current export permit pause, how do you view the upcoming election having an effect? Do you have any predictions on that?
A4: I think that as it relates to the presidential election, I think either president is going to have very little impact on the overall dynamics of supply and demand.
The worst part is, if Harris wins, there’s a lot of regulations that we have to pilfer through. I think if Trump wins, and I think that that’s becoming more and more likely as we sit here today, the regulations will be relaxed. There’ll be more ease of potentially building pipelines and getting the gas production, especially, to markets that need it the most.
These LNG export permit pauses are just ridiculous and need to be removed as soon as possible and I think if Trump gets in, that will happen very, very rapidly.
I think overall the election, I think we’re sitting in a place where it’s looking more likely that the Republicans will win the presidency. It’s going to be tight, but I think it will happen. I think the Senate is probably then going to flip over to the Republicans, the House is going to be up in the air and all bets are off there.
