Greetings. Welcome to the Diversified Energy 2023 Interim Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to hand the call over to Douglas Kris, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Darryl, and good afternoon to our stakeholders in the U.K., and welcome to the Diversified Energy 2023 Interim Results Conference Call. Today, we'll discuss our recent financial and operational highlights and our focus on delivering reliable results, executing on strategic objectives and creating value through stewardship. We will begin our remarks from our President and CEO, Rusty Hutson. Also joining us today are Brad Gray, our Executive Vice President and Chief Operations Officer; and Wren Smith, our Senior Manager of Investor Relations. Before we get started, I will remind everyone that the remarks we make today reflect the operational outlook as of today's date, September 1, 2023. We have published our interim report in our earnings presentation, which we'll review today on the Investor Relations section of our website at div.energy. Our remarks today also include certain non-GAAP financial measures. You can find reconciliations of these in our earnings release and our corporate presentation, which are both available online. I'll now turn the call over to Rusty.

Thank you, Doug, and good morning or good afternoon, depending on where you're at today as you call in for our results presentation. Today, I'm going to walk through several slides, and we're really going to focus -- touch on the results a little bit on the first half but also discuss our corporate strategy and how Diversified is well positioned for long-term success. And I really want to spend as much time as possible on that because I think it's important for our shareholders as we move forward here to hear from us as it relates to that. So we'll start through the presentation, I'll start here on Slide 3. And really, our long-term strategy continues to drive reliable and measurable results. You can see some of the highlights here from the first half. A couple that I'll point out, the -- obviously, the production 863 MMcf equivalency per day, about 144,000 barrels of oil equivalency, as I believe, a record for our overall production. Another important metric here that I was going to point out is our 50% cash margin. That continues to be very consistent over the years. And even with prices coming down, $2 to $3 natural gas price, we've seen our margins continue to improve and stay relatively robust. These are the outcomes, both the production and the margins, our outcomes, the hard work of our 1,600-plus strong team at DEC. They're incredible employees, hard-working and for all our employees that are listening in today, and I know there are several, I want to recognize the outstanding performance that you continue to achieve for Diversified. Also on this slide, it's important to note that we have consistently delivered a return of capital to shareholders since the IPO back in 2017, having returned over $760 million…

[Operator Instructions] Our first questions come from the line of David Round with Stifel.

I'm going to start with the obvious question around M&A, please, and just ask for your thoughts on the outlook there. Should we be expecting to see further deals this year? Or how is that panning out? And actually, I also wanted to ask about the asset retirement business, please, particularly the third-party retirement part. Interested also in how that business is evolving versus your expectations and where you think you could get to? I mean if I look at your revenue breakdown, I mean it looks like that could soon overtake the midstream business. Am I right in thinking that? Or is there something else in the other income line?

Yes. So let me address the acquisition question first. What we're seeing right now in the acquisition market, there's a lot of deals. I think that what I am seeing is that there's still a lot of -- some of the sellers that are still not understanding to some degree that there is a cost of capital change that has occurred for all companies. Debt costs are higher and so there needs to be some adjustment in the sellers' expectations. We believe some of our best opportunities though are out there that are coming. We'd like to get a little more liquids exposure, especially on the LNG side. We think that our -- NGL side, I'm sorry. We think that there's some opportunities to beef that up a little bit further, especially in that Central Region. The acquisition market will come to us at some point. We're being very patient. I don't want to overpay. I don't want to pay. What I'm seeing in our market over here is we're seeing some consolidation with some of the public, which I think are needed, especially in the Permian Basin, but what we don't want to do and what's very, very important is overpay for anything. And so it's more important for me to stay focused on good deals at the right value, but I do believe that those deals are coming, and we'll have an opportunity to take advantage of them here in the near term. It's just we want to make sure we're paying the right price for them. Outside of that, on the asset retirement business, that continues to be very, very important for us for a few reasons, obviously: number one, to control the costs and make sure that we're able to retire our own wells in a very efficient manner. As it relates to the rest of the business, Brad can come and bring the speed on some of the other stuff that you asked about.

Good morning, David. As it relates to expectation on the business, the results of our business thus far here in '23 are pretty much right in line with our expectation. We've plugged a lot of wells. We'll plug probably almost an equal amount or maybe slightly less than that for the remainder of the year. And the revenue is picking up with the work that we're doing, more of the Appalachia States, specifically for the State of West Virginia, where we won several large contracts. So that is picking up. What we're trying to do is really to offset the cost of our plugging of the wells that we own with the additional revenue gross profit that we're earning off of plugging for third parties. So it's in line with our expectations. This business is based upon having good equipment and good people. And so if we want to continue to grow this business, it will require more of both of those, which there's opportunity for do that. The business is really evolving here in the United States for the last 30, 40 years. Plugging wells has been an afterthought or been looked at as an area that has not been a focus. It clearly has come into focus, and we're in a great position to benefit from that. Not only do we think that we could add some additional capacity, but also, there's a lot of work going on here in the United States related to innovation and new ways to plug wells more efficiently, and so that's going to -- with those efficiencies, whether it's new materials or new processes or a combination thereof, that's going to allow the country and us to be able to plug more wells, lower cost, just across the board. So we're in line with what we thought, and there's still opportunity there for us.

Our next questions come from the line of Mark Wilson with Jefferies.

I'd like to ask about given what you said there, Rusty, regarding patience needed on deals, even though they're out there, and given your relatively robust realized price year-on-year, yours is going up, Henry Hub is going down. How do you see the profile of the dividend moving forward? And can I also ask regarding the share buyback that you authorized in the middle of the year, do you see your own shares as being something you could buy in lieu of external M&A?

Yes. Great question, Mark. I appreciate it. Yes, as it relates to the acquisition market, we've always said, look, the growth of this business is through acquisitions, okay? And when back in 2021, I believe it was, we did 4 acquisitions. Last year, we essentially did 1 for the most part. And you don't want to be in a position, I would rather be very focused or very strategic and be careful about what we're paying, then I will to overpay just to do a deal. And so we've been very focused on that. And so obviously, and I've said this a lot, if you don't grow the business over time, your dividend will be adjusted to reflect no growth in the business over a period of time. But we'll manage through that, and we'll take a look and decide as time goes by, we're not there. I mean, obviously, we've just released our second quarter dividend this morning also. So we'll -- but I will tell you, we will find growth is coming. We've looked at several deals. We've got a lot of them out there, they're just kind of waiting for -- we're waiting for them to make a decision on what they want to do. Because right now, Mark, we're not really competing that much with other companies as much. You're really competing at the end of the day with the whole case of these companies. If they hold it, they can -- in their minds anyway, they can make X -- if they sell what they can make X. And so that's kind of where we're at on that. And the natural gas deals are a little bit harder because as the strip prices come down, the PV values -- a PV17 for example, PV18 value, just PDP could represent a 5x multiple in the next 12 months because the strip price is so low. And so all that's just kind of a balancing act, but we'll find some growth here in the near term. I'm very confident that we'll execute on 1 or 2 here in the near term. What the second question related to? I'm sorry, Mark -- what was the other question?

No. I understand that. I hear from that as the dividend can grow as you grow and deals are needed to grow. So the second question would be just -- are you expecting to execute your share buyback?

Yes. That's -- I'm sorry, I lost track of that one. We've got a -- the share buyback is there, and we can obviously implement it. We've been obviously in a kind of a restricted period as we were moving in towards earnings, so we couldn't do anything as it relates to that. We know kind of what the price of the shares that we want to -- if it gets to a certain level, that's where we'll be taking advantage of it. But we -- unfortunately, in the markets over there, we can only do so much volume on a daily basis, and it represents about 10% of the average 3 days' volume. And so that's about 150,000 shares a day at max that we could even acquire. And so it's -- unless you go out and do a tender offer or something like that, you're really in a mode of very little shares that you can buy back on a daily basis because our liquidity has been so low in the trade volume. So it's definitely on the table. We have a price that we will do it. And so yes, it's out there, we will do it when the price is right.

Understood. That's very clear. I just wanted to cover up on a couple of other things. It was interesting talking to deferring some operations because of the low gas price and I just want to put it to you because of your hedging and therefore, your relative strength in lower gas price markets, why you would have to defer? Arguably, you can move forward as others don't. That's the first point. And then the second is, Rusty, just let us know -- where do we stand on the -- I haven't heard of it for a long time, the Oaktree co-investment setup?

Yes. Well, on the 4 drilled uncompleted wells, keep in mind, our hedge portfolio is related to existing production. You can't hedge production you don't have. So that production would -- that you bring online would all be unhedged. And as we were looking between February and today, when you factor in the Henry Hub price, and the basis differentials, which have been a little bit wider in that Central Region over that period of time than typical just because of the high storage levels that we saw coming out of the winter last year. That's just not a price we would want to take good flush gas off new wells and drill into. It's just not a good return on our investment. So now what I would say if we get into the end of the year, prices have started to pick back up, that's an opportunity for us to complete those wells and be able to realize that as we go into 2024. So that's how I would look at it. Obviously, we'll do something with those 4 drilled uncompleted wells right toward the end of the year and have that production kind of producing into first part of next year. And then the second question was what?

Just give us an update on the Oaktree co-investment.

Oh, yes, Oaktree. Sorry. Oaktree, yes, so their -- believe it or not, their agreement expires on October 1. So our 3-year agreement with them is coming to an end on October 1. Oaktree has spent probably the last 12 months exiting a significant amount of their oil and gas assets here in the U.S. Some of them, they've been in for a good while. They're prepared to stay in this one and just ride it out. I think there could be an opportunity there, Mark, for us to buy that asset back from them and as we enter -- as we exit this agreement because I don't think they're really interested in acquiring new assets as we sit here today. So anyway, I think that's an opportunity for us. But the actual agreement with them to co-invest expires on October 1, then they just retain the assets that they've invested in at this point. But I see it as an opportunity for us to look at other partnerships as we move forward. So it's been a great partnership. Oaktree has been a great partner. We've done -- I think they've done about $500 million of total investment with us and helped us to grow this business pretty substantially over the last couple of years, but that's coming to an end in terms of the agreement, and we'll look to other partners or other ideas to help fund the growth going forward. But it could be an opportunity for us. As I have stated now for 3 years, it's kind of an asset which is kind of on the shelf just waiting for us to acquire it at some point in the future.

Our next questions come from the line of Matt Cooper with Peel Hunt.

And congratulations on a strong set of results. You mentioned on Slide 9 that you've executed some JV agreements with regards to undeveloped acreage. So if you're able to give any more details on this? And also on the likely shape of potential DrillCo partnerships?

Yes. No, the sales that we've done have just been purely sales of undeveloped acreage to other companies. So no JV there at all. It was pretty much just selling an undeveloped acreage where it was an area that we felt was even for us as future value wouldn't be areas that we would look at to take advantage of ourselves. Now we have, as you guys know, we did the acquisition of Tanos II back in February. As part of that deal, we retained the Tanos II team on a retainer by the consultant to do a couple of things: number one is to take all of our East Texas, Louisiana acreage and do an evaluation of it in terms of undeveloped opportunity and drilling opportunities within that area. But also for them, to -- as they had some acreage that we acquired and for them to help us to potentially drill some of that in the future. And so they're there. It's a great team. They're probably one of the best Cotton Valley drillers in the region. They're on -- they're with us as consultants, and they are evaluating all of our acreage. And I think as we get late in this year and start into next year with price getting better, that's an opportunity for us to take advantage of.

And Matt, let me just add one point to that. Just on the joint venture specifically. This year -- to Rusty's point, this year, we haven't executed any of those. But in the past, if you recall, we made the EdgeMarc acquisition in Appalachia, and we basically had an agreement where there was a number of drilled and uncompleted wells there. We partnered with another company, completed those wells. We actually operate the acreage and where those wells were so that -- there was a partnership there that we struck with another entity to kind of complete those wells. They pay for the cost. And we just get the operatorship of that at the end of the day. So that's kind of an example of something that we've done in the past. We've done it at other times with the folks at Comstock where we've kind of flipped out some acreage to them and had them develop it. So there's in the past, contracts where we have done that. Just in the calendar year 2023, we haven't executed any of those yet.

Yes. Hard to get people -- hard to get too many people interested in drilling very many wells in a $2 to $3 gas environment, and that's really -- and honestly, we wouldn't want to.

Okay. Got you. Yes, that makes sense. And you mentioned Tapstone II, your most recent acquisition. I don't know if you can give a bit of an update on the progress here and integrating that into your portfolio and opportunities that you've seen to reduce cost and maximize production there?

Matt, this is Brad. Yes. So we're fully integrated with the Tanos II, not Tapstone II. The Tanos II assets -- yes, we're fully integrating with them, both from a systems perspective, a marketing perspective and operational perspective as well. So -- and we're currently in the process of looking at the scale that we've built in that market, in that East Texas, West Louisiana area, Northwest Louisiana, where we are leveraging pipelines. We're leveraging processing plants. We're leveraging personnel and management. So what we've done in Appalachia is as we look to export that same model to the Central Region, that is in full force. So -- and we've generally been pleased with the production from those wells. We're building a strong relationship with the Tanos team that we do have under retainer, as Rusty just mentioned. They're going to bring some great value to us in that marketplace. It's kind of a -- not only do they have the technical expertise and the engineering and the development expertise, but we also have a little, I would call it, many business development team in that marketplace that's got their ears to the ground and look for opportunities where we can continue to grow scale there. So at this point, positive results from the Tanos II integration.

And just finally, with regard to U.S. listing, your latest thoughts there.

Yes, Matt, we continue to keep our numbers updated. It's interesting. We've been doing a lot of marketing in the U.S., talking to a lot of U.S. investors. The U.S. investors are very, very supportive and encouraging us to do that. They really believe that it's something that we -- number one, it's going to be highly popular and that the investors here in the U.S. will like. We definitely think that it will help our trading liquidity, which is been extremely low in the markets in London, especially over the last 6 months. And honestly, we're keeping the numbers up. We're keeping our SEC filings updated and making sure that we're prepared to go. The volatility index here, which is really the biggest gauge, I would say, of market availability to get something done has continued to be below the levels that it needs to be. So it's a very, very right market to get something done. I think after Labor Day, there's going to be some raises in the U.S. in our sector. So we're staying ready, and we believe that that's an opportunity for us that should -- that we need to execute on imminently.

Our next questions come from the line of Brendan D'Souza with Allenby Capital.

Congrats on a solid set of numbers. Just another boring question on M&A. I'm just wondering, are you currently seeing any distressed sellers at the current prolonged sub-$3 gas price, perhaps companies that are leveraged and need to sell? Or is this something you think will start to happen as the year drags on and we get into 2024 and prices stay at these levels?

Yes. We're seeing fewer of those. And I'll tell you why. There's been several things that have reduced the number of these distressed companies: number one, we -- gas price -- I've said this high prices hide a lot of sins. And so what happened last year, people were able to recognize pretty the high gas prices and oil prices. We're able to -- some companies did some of the ABSs. They've done some things to clean up their balance sheets. And so not a lot of what I would call stressed out there, but I do see a lot of private equity sellers in the market right now trying to -- probably trying to determine whether they want to sell or not sell essentially. But I don't think -- and then the other thing that I believe has reduced the number of those, it's just been the overall consolidation in the markets over the last 12 months, especially in the Permian, we've seen a significant number of Permian-based consolidators and consolidation M&A. And so as we sit here today, I would say that there's not a significant number of distressed companies. Now look, what I think could push people towards this distressed level or at least push them towards needing to do something even if they're not distressed, is a reduction in capital availability. There's just not a significant amount of capital available to some of the -- especially some of the smaller companies. If you don't have access to capital markets, if you don't have robust hedging capabilities, it's going to get tougher and tougher as you move forward. And so one of the reasons why I've been so adamant on the U.S. markets is to make sure that we have as much capital availability as possible as we move forward. So I think that some of the banks -- the number of banks that are participating in OBLs have come down quite a bit in the last 12 months. And it's just going to make it harder for companies to survive -- these smaller private equity-backed companies or even some of the smaller small-cap companies even on the public side, it's going to get tougher and tougher to survive with the reduced amount of capital available in the market.

[Operator Instructions] Our next questions come from the line of Simon Scholes with First Berlin.

I've got 2. The first is on basis differentials. My sense is that basis differentials in Appalachia have widened quite significantly over the next -- over the last couple of years. I was just wondering if you could share your thoughts on how they might develop going forward. And then the second one is just going back to the ARO business. I mean as the previous caller pointed out, I mean, the growth looks pretty impressive. And I was just wondering if you could give us any indication of what we should model for this next year. I mean are you going to add another $15 million? Or could it do better than that? Or might it slow down next year?

Yes. Simon, thanks for the questions there. On the basis diff, I'll answer that first. There's been no doubt that we've seen an expansion of basis diffs in Appalachia. Obviously, there's been a -- it's been a difficult decade, I would call it, in terms of being able to get infrastructure in place to remove some of the gas that's being produced in these very, very prolific shale plays, the Marcellus Utica. We've seen the battle that took place with the Mountain Valley Pipeline, which I'm sure everybody is fully aware of, that went on for 5 or 6 years. And finally had to take Supreme Court approval to get it to a point where we could -- where that could be finished and completed. I spoke with the CEO of Equitrans yesterday or the day before, and he's still feeling very good and comfortable with a year-end completion date for that pipeline. But that's 2 things called these basis blowouts that we've seen here in the last 6 months: one being just no winter. The winter last year, it was very mild. So we had a storage surplus for sure. And then number two is the lack of infrastructure. So what I'm thinking is going to happen is as we go into 2024, is we'll see some contraction in that -- in those bases. I think we'll probably see ones like Dom South, which is one that we have about 30-some percent of our gas tied to, come down to probably in the $0.90 range negative. And then a couple of the others like TECO in that $0.70 range and $0.65 range somewhere there. And then -- I think the data people don't realize and 1 thing that we've been pretty successful doing is we've been able to reroute…

I'll add comments. Thanks for your question. So really from a revenue growth perspective, there's -- we see 3 areas that can make that possible. One is just adding capacity, and I spoke about that earlier. Two, we can raise our prices, which we typically in these federal and state bid processes, it is a competitive process. So there's some limitation on that. And the third is the area that we're really interested in, and that is to be able to put more wells with the same equipment via innovation. And so that's going to require us to be engaged with regulators, to be engaged with innovators. And as I mentioned earlier to Matt's question, we're in a position to do that. So -- but absent innovation and regulatory change, the way to grow this business is adding capacity. And so that's possible. I think we can marginally do some of that as we progress here, but we're primarily focused on being able to plug more wells in a shorter period of time with the same equipment that we have.

There are no further questions at this time. I would like to turn the floor back over to Rusty Hutson for any closing remarks.

Yes. Thank you all for attending today. Obviously, Wren and Doug will be available over the next week or so to answer any other questions that you may have, and we'll be prepared to answer anything you might have. Thank you very much for attending.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.