Diversified Energy Company has made a significant move by acquiring additional natural gas properties in East Texas, marking its second acquisition of Proved Developed Producing (PDP) assets in the region this year. The company has agreed to purchase these assets for approximately $68 million, with the net purchase price expected to be around $64 million after adjustments.
This acquisition strengthens Diversified’s existing operations, adding 21 MMcfepd of production and 70 Bcfe of PDP reserves. The assets are projected to contribute around $19 million in EBITDA over the next twelve months, representing a 3.5x purchase multiple based on the gross purchase price. In addition, a third-party development company will acquire undeveloped acreage valued at $19 million, with Diversified retaining a 5% interest for $1 million, bringing the total transaction value to approximately $87 million.
To finance this acquisition, Diversified will issue around $35 million in new U.S. dollar-denominated ordinary shares directly to the seller, complemented by additional liquidity supported by the increased collateral from the acquired assets. CEO Rusty Hutson, Jr. emphasised the strategic advantages of this acquisition, noting that it enhances the company’s scale and margins in East Texas while showcasing Diversified’s ability to execute value-adding transactions.
The acquired assets include 331 net PDP wells, which are expected to integrate seamlessly with Diversified’s current portfolio, offering potential cost efficiencies and aligning with the company’s Smarter Asset Management programme. With low annual production declines of about 15% anticipated over the next twelve months, these assets align well with Diversified’s operational strategy. The acquisition is expected to close in the fourth quarter of 2024, with a break fee in place if the transaction does not proceed.
In other developments, Diversified Energy declared an interim dividend of $0.29 per share for the second quarter of 2024 and received a price target increase from Truist Securities to $20, maintaining a Buy rating. The company also made another strategic acquisition, purchasing natural gas properties from Crescent Pass Energy for $106 million, expected to add 38 million cubic feet equivalent per day of production. This acquisition is also funded through new U.S. dollar-denominated ordinary shares and a senior secured bank facility. Additionally, Diversified Energy is set to join the Russell 2000 Index, enhancing its visibility among U.S. investors.
Diversified Energy’s financial metrics highlight its attractiveness to value investors, with a P/E Ratio of 4.45, suggesting the stock may be undervalued relative to its earnings potential. The company’s dividend yield stands at a robust 6.1%, reflecting its commitment to returning value to shareholders. However, investors should note a 50.1% decline in revenue over the past twelve months, which could be a concern for those seeking stable or growing revenue streams.
With the expected contribution of $19 million in EBITDA from the new acquisition, it will be important to consider how this aligns with the company’s current operating income margin of 31.23%. This margin is a key indicator of the company’s efficiency in converting revenue into operating income, a critical factor in evaluating the profitability of recent and future acquisitions.
Diversified Energy Company plc (LON:DEC) is an independent energy company engaged in the production, marketing, transportation and retirement of primarily natural gas and natural gas liquids related to its U.S. onshore upstream and midstream assets.
