Greetings, and welcome to the Diversified Energy 2024 Interim Results Conference Call. At this time, all participants are on a listen-only mode. A brief question-and-answer session will follow a formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Douglas Kris, Senior Vice President, Investor Relations and Corporate Communications. Thank you. Please go ahead.

Good morning, and welcome to our interim results conference call. Joining me here today are Rusty Hutson, our CEO; and Brad Gray, our CFO. For reference, we will make notes and comments around certain non-GAAP and non-IFRS financial measures. All of our disclosures around those are found in our earnings materials or in our earnings release on our website and also issued via the RNS service. I'll now turn the call over to Rusty Hutson, our CEO. Rusty, please go ahead.

Thank you, Doug. Thank you, moderator, and thank you for everyone that's on the phone today. We're going to go through several slides here, talk a little bit about the first half of the year, talk a little more granularity around a few of those key metrics, and then I'll turn it over to Brad to talk about a few slides on the financial side and I'll come back and wrap it up. And I'll start here on Slide 3. And really just kind of focus a little bit on some of those metrics that I was referencing in terms of the first half results. Before I do that, I do want to recognize our employees that may be on the phone with us today or will listen to this later and really just recognize them for their outstanding contributions and their achievements in coming up with these numbers and really just what they do for us on a day to day basis. We always talk about them, that without them, we don't have a company and they have truly outperformed, not only in this first half of the year, but over the years. And it shows in these results. Those results of their hard work are highlighted here. A few of those highlights the free cash flow generation of the business is $121 million, 38% free cash flow yield. That kind of pairs with the 50% cash margins, which we'll talk about in a minute. We continue to see $108 million of debt principal payments made in our amortizing ABS notes, which is crucial to our overall strategy long term. We are focused on shareholder returns. We've paid around $65 million in dividends and share repurchases through the first half of the year and I will get into a…

Okay. Thank you, Rusty. As you stated earlier, we are very pleased with our mid-year results and I also appreciate the hard work and efforts of our diversified team members as they continue to perform at high levels during some candidly challenging markets. So, on Slide 11, we're highlighting the favorable impacts of our consistent and disciplined hedging strategy. Hedging the prices of our commodities is a fundamental part of our business model as we are committed to protect the robust cash flows of our assets that produces for our shareholders. And as seen on this page, our average floor price for the second half of 2024 is $3.34 per MMBtu, which represents a 40% improvement over the corresponding period strip price. And this margin will allow us to continue to deliver almost 50% cash margins that Rusty mentioned earlier. Additionally, as noted in our mid-year results, our hedging program provided $78 million of realized gains during the first six months of 2024. And as we look ahead, we are well positioned, especially compared to our natural gas peers, to protect our cash flows while also having some exposure to the opportunity for higher prices in all three of our product streams, which are natural gas, oil, and NGLs. Moving to Slide 12. Excuse me. I've had the privilege of working directly with our information technology teams since 2018, and our technology teams, just like our field teams, are focused on optimization and efficiency. And with our strategy of growing primarily through acquisition, it is imperative that we have the ability to integrate new assets and processes with speed and efficiency and we take a very data-driven approach using modern technology tools to manage our assets. This process includes that we require common systems. We standardize our data. We provide business intelligence tools to all of our teams and we are a 100% cloud-based company with no physical servers in our IT or our OT environments. Our systems provide our operators with time series visualization tools that help us quickly see trends and find opportunities for improvements. The systems that we have built also allow our teams to efficiently and cost-effectively manage our assets. Our systems, importantly, are scalable, repeatable, and very cost-effective, which gives us great confidence as we continue to execute on our growth strategy. On Slide 13, as Rusty discussed earlier, we are committed to a balanced approach to capital allocation. The strong free cash flow that our assets and our teams produce allow us to create shareholder value through growing our production base with either accretive optimization projects or from new asset acquisitions. Additionally, systematic and significant debt reduction through our ABS structures and returning capital to our shareholders via our fixed quarterly dividend of $0.29 per share along with share repurchases. This balanced approach provides us with flexibility to allocate our cash flows to the highest and best uses. Back to you, Rusty.

Thanks, Brad. And I think just finishing up and I really want to allow more time for questions here, but building a strategic, resilient energy producer, we really pride ourselves in a differentiated model. One that gives investors the ability to invest in something that's not drill-bit focused, with less risk, more price protection and production that's more predictable. So we believe that we are building that business model that's giving people a differentiated look at the energy space. We feel that there's still a lot of opportunity in the market. There's a significant amount of M&A activity that we're seeing on a day-to-day basis. And we believe that we're in a good position to be -- to take advantage of that on a going-forward basis. We continue to focus on our delivering for our shareholders and we talked about those four pillars and leveraging our reliable production and our hedging and our vertical integration to continue to provide meaningful cash flow, to provide to those capital allocation pillars that we can then generate returns for our shareholders. Brad talked about our technology and our ability to really modernize our field management. We continue to put great efforts into that, capital into that because we believe at the end of the day that that's what's going to drive our synergies and our long-term efficiencies in the business that we can take advantage of and continue to expand the margins. And doing all of this without relenting on our emissions reductions and our technology that we're putting there and our well retirement processes. All of these things makes Diversified the right company at the right time and we'll continue to execute on this business model on a going-forward basis and we believe being highly successful over the long sustainable period. With that, I will stop our comments and I will open it up for questions from anyone that has any.

Thank you. The floor is now open for questions. [Operator Instructions] Today's first question is coming from Bert Donnes of Truist Securities. Please go ahead.

Hey. Good morning, Rusty, Brad, and the team. Thank you for the update.

Thanks.

Thanks, Bert.

Good to see you, Bert.

Good morning.

Good morning. And on the first question, just the Crescent Pass acquisition screened pretty well on our estimates. Could you maybe talk about the depth of opportunities that you have that maybe have similar attributes? Has the volatility in the gas space helped, or like, are more companies looking to unload assets to improve their balance sheets, or is this maybe the bid-ask spread has widened due to the sharp moves in the strip?

Well, I think that last comment that you just made regarding the strip, the strip we're in a slightly, I would say contango. I wouldn't call it extreme contango, which we've seen in the past. But obviously the first 12 months, the price is the lowest that you see in the forward curve. So I would say that the multiples on just a pure natural gas deal look a little higher, but that's only because for the next 12 months are your lowest prices. And what's really interesting to me, Bert, is as you look at these deals, you may pay a 3.5 multiple, but your net cash back to the demand would be 4.5 because the price gets higher as you go out and brings more cash flow in. So it's really the opposite of oil. Oil has the higher prices in the front 12 months and the lower prices in the back. But we're seeing, I think that there's going to be significant asset movement over the next several months and quarters. We've seen some of the big mergers take place. I think there'll be assets generated or divestments generated out of those as the FTC makes rulings and comes down as to their thoughts around some of these deals. We're seeing a lot of activity. We've got, obviously, we like the Gulf Coast. We believe that that's an area that we can be successful in at the LNG export capacity that we like and gives us a lot of variability there to move gas. But at the end of the day, I think that the valuations are still pretty, pretty good from our perspective. We feel like we can get some pretty decent deals out of it.

Perfect. That's a great update. And then on the, well retirements, it looked like you had a higher percentage of non-op activity in the last quarter. Is that indicative of more demand for next-level services, or am I looking into that too much, and maybe it's just a 1 time data point? And then just, any thoughts on the cost of retirements or any profit margins for the third-party work? Thanks.

Yeah, Bert. So, actually, the difference between this year and last year's performance in our next level, we're ahead of schedule on plugging diversified wells. The pace of bids or packages coming out with the federal money has changed to the back end of 2024, whereas the majority of our work in 2023 was on the -- I think you called it non-op, or we'll call it third party. So we've just -- because of the pace of those federal contracts coming out, we have focused more on our internal plugging, and we're well ahead of that. We're almost completed for the year on our consent agreement requirements. So we're in a good position there, and we're well positioned for the second half of the year to plug for third parties. We have had a fair amount of activity with third-party operators and with all of our assets, which includes our wireline, our construction, our cementing assets, in addition to, well plugging. We've been working closely with some storage companies, coal companies, and so that's been some good revenue generation for us there. But we're in a good spot for the year on activity. And from a cost perspective, we haven't -- we really haven't had any significant adjustments up or down, that have changed on a year-over-year basis.

That's great. Thanks, team.

Thank you.

Thank you. The next question is coming from Tim Hurst-Brown of Tennyson Securities. Please go ahead.

Good afternoon, or morning, gents. Thanks for the call. Just got a quick question around the underlying production. So, since Q4 last year, excluding acquisitions, production has been broadly flat versus the sort of 8% to 10% depletion rate that you had in 2023. Just wondering whether there are any sort of one-off factors in there that explain why it's flat and what you expect production to do on an underlying basis, sort of through the second half of this year, i.e., will it be broadly flat or are we going to get back to the sort of 8% to 10% decline that you've had historically?

Tim, we've had good production results in both Appalachian and our Central Region. We've had -- it's been -- we've had some opportunities for some Marcellus production to come back online that had been impacted from some other operators has been helpful. And overall, the optimization projects that our teams in the field work on every day, we had good results from those. So I think that those will continue for the remainder of the year. I do think, though, that you'll see us trend back more towards our engineered declines in that high single digit for the second half of the year. It's in a portfolio of ours to have any quarter-over-quarter flat is impressive, but to put three together in a row here is a great testament to our team.

And Tim, just to add one thing there. We did focus a heavy amount of our time and our capital late last year and early this year into oilier projects and field projects, so obviously that was because of price. And so we've seen some decent and oil uplift and NGL uplift from some of those projects that in addition to some of the stuff that Brad was talking about. So it's really, to Brad's point, a testament to build ops in the way that they're approaching the day-to-day operations of the wells, obviously focusing on those things that have the best payback, but also improving the production as we move forward on some of this stuff that -- that's helped to kind of stave off declines.

That's great. Thanks, guys.

Thanks.

Thank you. The next question is coming from David Round of Stifel. Please go ahead.

Thanks. Thanks for the presentation, guys. The hedging strategy that continues to work pretty well for you. I'm just wondering, though, how do you maintain the right level of hedging when you're acquiring businesses that may or may not come with a hedge book? I mean, Crescent Pass, for example, I don't -- correct me if I'm wrong, I don't think that did. So are you able to layer on, and do you want to layer on hedges in advance just to make sure you're positioned for when that deal completes?

Absolutely. So we've got some provisions in our existing RBL that allows us to utilize and put on some hedges on acquisitions that have been announced or whatever. And so we're able to kind of hedge that prior to closing and lock in some of those prices that we've kind of factored and valued business on. So we do that consistently. So, for example, on the Crescent Pass deal, I would say that we're not even closed yet, but there are probably already hedge is on to kind of lock in the value that we strive to the business. So it's something that we've been doing for a long period of time. We don't want to take a lot of price risk. We always talk about that. We don't want to be at the mercy of prices. Thank God we haven't been over the last four or five years, especially as prices have been extremely volatile. So, yes, we do have abilities to lock in gas on these acquisitions prior to closing them.

Okay. Brilliant. Appreciate it. Thanks, guys.

Sure.

Thank you. The next question is coming from Simon Scholes of First Berlin. Please go ahead.

Yes. Hello. Thanks for taking my questions. I've got two. Just on the subject of undeveloped acreage. So you've raised $15 million in Oklahoma in the first half. I was just wondering if there's any prospect of you accelerating the disposal rate going forward? And what the average tax burden on your remaining portfolio is? And then second, just on the full year volume outcome. I mean, if we assume that you go back to the previous decline rate in the second half, am I right in thinking that after the Oaktree and Crescent Pass acquisitions, average volume in '24 is like, to be slightly below '23, assuming no further acquisitions?

Let me go to the first question, which I think was related to the, I'm sorry, acreage sales. Yes. So accelerating those, we will absolutely when we have acreage positions that others are interested in, and that seems, especially in Oklahoma, that's been a really hotbed of activity there. We obviously will accelerate those and try to get as many of them as we possibly can. We obviously have a lot of levers to pull there. And so it does take some time to work through those. You've got land investigations and title searches and all those things that the buyer has to go through. So they can't -- they typically go a little bit at the buyer's pace, but we have a very, very good team on our side that's working those deals and have been highly successful through the first half. We could see some big ones over a course of time. And so that's always, for us, that's always a big opportunity set. And if you can generate a $15 million to $20 million to $30 million acreage sale. That's a lot of value for us. And so definitely are working those every day. We would love to accelerate them, and there's always the opportunity set. There's always the opportunity that that could happen. Related to the -- go ahead on that one.

Yeah. So, Simon, I believe your question is related to gross volumes for the end of the year. If you layer in the -- Oaktree transaction, which, as you know, closed in early June, that adds about a 15% uplift in production. And then you layer on the Crescent Pass will be additional to that. So we believe that that's going to effectively offset overall declines for a period of about 18 months. So we should be higher at the end of '24 versus '23 volume.

Okay. So above 820 per day.

Did you say above or at? I didn't hear. I'm sorry.

Well, yeah, I mean, I think the figure for last year was 821 million cubic feet per day.

You think we exited the second quarter at…

855 (ph).

855 (ph) and Crescent Pass will add to that. So, yes, we should be above that 820 mark.

Okay. Great. Thanks. And how about the tax burden on the undeveloped acreage?

Well, from the tax burden on generating capital gains by selling those, I don't think look, we have a -- we've got a pretty advantaged tax position with our federal tax rates and the marginal tax credits. So we don't anticipate any significant cash tax burden, even in light of additional land sales that will likely occur.

Okay. Thanks. It's very helpful.

[Operator Instructions] The next question is coming from Malcolm Graham-Wood of Hydrocarbon Capital. Please go ahead.

Rusty and the team, good afternoon. How are you doing?

Hey, there. How are you?

I am very well, thanks. I'm better off having seen a great presentation. Well done. And my question is also about Slide 9, the undeveloped acreage. And to be honest, you have answered a fair bit of my question. But my question was originally. I mean, it is a, I've always said, ever since you started, that this company could go on for 10 years and more without doing any on the basis of what you have in your portfolio, which is what this. I'm so pleased to see this chart. What I would ask you is, what do you think the value, I mean, certainly, you asked it about the tax. What's the value of that slide that you can see with regard to all your acquisitions? So if you compare it with what you're paying for acquisitions that you're doing at the moment?

Yeah. That's a great question. I can't put a dollar amount on it, Malcolm, but I can say that we know there's value across the portfolio. More importantly, that value is going to continue to materialize in all areas of the portfolio as time goes by, because the inventory of drilling opportunities over time will continue to deplete. So companies are going to need additional acreage. They're going to need additional opportunities. And I think, more importantly, there could be new formations and new opportunities set underneath the acreage we have that somebody's not even really focused on now. For example, in Oklahoma, we've been selling acreage to some of the producers out there that have been drilling a new formation called the Cherokee that was never even really that thought of two years ago. But now it seems to be a pretty hot and heavy formation that's being drilled. So there's always new things that come available. And when you have acreage in these areas, it becomes a valuable proposition for some of these producers. I will say this, we have, over time, accumulated a lot of acreage. We've never, and we've been very clear in this, we don't pay for it. We don't pay for that upside. And so for us to continue to be able to lay into that value, that's value that we didn't pay for. And it's just bonus for not only for diversified, but for our shareholders.

Thank you. At this time, I would like to turn the floor back over to Mr. Hutson for closing comments.

Thank you all for joining us today. I would just end the call with very pleased with the first half of the year, we feel like that we're setting ourselves up for some great success moving forward with our capital allocation strategy, the operations being strong, we'll continue to drive free cash flow and results that will make our shareholders happy over the long haul. So, thank you all for joining, and see you soon.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines and log off the webcast at this time and enjoy the rest of your day.