Diversified Energy Company plc (LON:DEC) Chief Executive Officer Rusty Hutson caught up with DirectorsTalk for an exclusive interview to discuss consistent and reliable results, how smart asset management allows operational efficiency, advantages of having rating affirmed by Fitch, progress of the Tanos acquisition, ESG and the advantages to the additional listing on the NYSE.
Q1: Rusty, a trading update has now been published, your production continues to deliver consistent and reliable results, but could you just talk us through how you’re able to achieve those results?
A1: Well, it’s our portfolio of assets. It’s kind of what we’ve talked about with our investors over the last seven years is the assets that we’re acquiring typically are more mature so they have a lower decline profile, which gives us consistency in those production profiles.
This is extremely important to our model because we obviously like to hedge that production and have visibility into what it is on an ongoing basis so that we can hedge it and block those margins in.
So, it’s really about the type of assets we have and then our ground game as it relates to our smarter asset management programme of continuing to get enhanced results from those wells.
Q2: You highlighted your capital efficiency and how your corporate declines, how does your smart asset management allow you to achieve operational efficiency?
A2: It goes back to the ground, what we call our ground game and using baseball analogy, hitting singles and driving in runs but every well, when we acquire wells, we’re looking at ways to enhance production on those wells. We’re looking at ways to drive down costs across a large geographical footprint, looking for synergies and efficiencies across that portfolio.
Really, the smarter asset management programme that we deploy is what gives us the ability to do that. Every well has an assessment, every well we’re looking for projects that we can increase production, enhance production on those wells, and then we put it into the list of projects and we look at the return thresholds. The ones that have the highest returns are the ones we’ve put our time, attention and capital to.
Most of these projects are low dollar projects, going back to our capital efficiency, we have the best capital efficiency in the industry and in public companies here in the US, and so low dollar projects with high internal rate of returns is what we put most of our time and attention on.
Q3: Now, your ABS notes represent a relatively unique financing structure, which recently had the ratings affirmed by Fitch. Can you explain the advantages and why you can use them?
A3: Well, the reason why we can use them, and most people or most companies in our sector don’t have the ability to use them, is because of the type of assets we have.
That long life, low decline asset profile is perfect for these asset backed securitisation, similar to what you see with mortgage-backed securitisations and indirect lending securitisations. It’s a long life, low decline profile, consistency in production and cash flows, because you’re hedging it out over a longer period of time than you would normally and locking in those cash flows. It’s rated debt, which makes it very attractive to insurance companies and those that are just looking for yield.
It’s been perfect for us because it’s helped us to finance, garner liquidity so that we don’t have to hit the equity markets as much, it’s keeping our leverage within our revolver or RBL, which is a redetermined on a semi-annual basis and has that redetermination risk. It allows us to move that leverage off that RBL into fixed coupon amortizing notes that pay down over time, which is extremely important.
I’ve always said that if you’re going to use leverage to finance your business, you have to pay it back and the industry has kind of lost their way when it comes to that over the last several years.
Q4: How has the integration of your Tanos acquisition been progressing? You highlighted some incremental expense improvements in your Q3 trading update.
A4: So, that Tanos transaction, to 2021, we had acquired another asset, another Tanos asset at that time, so those were very close in proximity to each other, which allowed us to garner a lot of synergies between the two asset bases.
The other thing about the Tanos, it’s been very, very easily embedded into our existing operation but we also have four drilled, uncompleted wells that came along with that transaction that we’re planning on completing and fracking later in December, and then being able to produce that gas into a higher gas environment next year.
So all of those things are playing into the positives of what we saw with Tanos.
We still have a lot of undeveloped acreage there that we can look at from the Cotton Valley perspective, and a lot of projects that we feel like are in production-enhancing that we’ll look at laying into next year also.
Q5: ESG continues to be a focus for you, you’ve just won another award for your reporting. Can you tell us more about your strategy around ESG?
A5: Since our October Capital Markets Day two years ago, we’ve come out swinging as it relates to ESG, and really, it’s a broad process for us.
Obviously, emissions detection and reduction is top of the list, we continue to make extreme headways there in terms of emissions detection devices in the hands of our well tenders so they can identify and correct any at the wellhead. We do flyover LiDAR of all of our midstream assets because obviously we want to sell the gas, we don’t want it to be emitted in anyway. We also we have our own asset retirement company now that has paid big dividends, not only from the standpoint of being able to retire wells that we’ve committed to and obligated ourselves to with the states that we operate but also now we’ve taken that company that we use internally for our own asset retirement and we’ve been able to go out and retire wells for the states, for orphan wells that they have responsibility for, and working for third party operators.
So, all of these things together, we’ve hit the gold standard now for two years in a row on the OGMP, we’ve increased our profile with MSCI over the last three years to an AA standard rating now, AAA is the highest you can go, so we’ve increased our profile there.
You just mentioned our ESG award, reporting award, which we’re very, very proud of here at Diversified Energy Company.
So, we’ve done all the right things to make our company investable from the institutional investor side.
Q6: You also made a recent announcement regarding an additional listing on the New York Stock Exchange. Can you tell us a bit more about that and what advantages that you’re going to see going forward?
A6: We’re a US company and the London market has been so good to us over the last seven years, and we’ve been able to really grow the company substantially using the capital that we’ve been able to raise in the London markets along with our financings and stuff. We’ve grown the company substantially from an $84 million market cap company at the time of the IPO to just close to $1 billion now.
So, I think this does multiple things for us. Number one, it gives us a new investor, a US investor that can raise our profile here in the US, can hopefully help with additional liquidity, trading liquidity on a daily basis so investors that are in London can trade directly with investors in the US and vice versa.
We’ve seen a very illiquid London market here in the last year or so with a lot of outflows and such. This is going to give our UK investors another opportunity to trade with a larger pool of investors that haven’t been there because US investors don’t really do a lot of investing in the London market.
So, I think all of those are the main reasons why and just access to greater pools of investor base that we see here in the US.
