Diversified Energy Company PLC (DEC) Q3 2026 Earnings Report, Transcript and Summary

Greetings. Welcome to Diversified Energy's Third Quarter 2026 Earnings Call. [Operator Instructions]. Please note, this conference is being recorded. I'll now turn the conference over to Douglas Kris, Senior Vice President, Investor Relations and Corporate Communications. Thank you. You may now begin.

Good morning, and thank you all for joining us today and welcome to our third quarter 2026 earnings conference call. With me today are Diversified's Chairman and Chief Executive Officer, Rusty Hutson; President and Chief Financial Officer, Brad Gray; and Executive Vice President and Chief Operating Officer, Rick Gideon. Before we get started, I will remind everyone that the remarks on this call reflect the financial and operational outlook as of today, November 5, 2026. Certain statements made on today's call are forward-looking and may be subject to risks and uncertainties related to future events and the future financial performance of the company. Actual results could differ materially from those anticipated. The risk factors that may affect the results are detailed in the company's public filings with the SEC, including the annual report on Form 10-K for the fiscal year ended December 31, 2025, and subsequent filings with the SEC. During this call, we will also reference certain non-GAAP financial measures. Our disclosures regarding those items are found in our earnings materials, on our website and in our regulatory filings. I'll now turn the call over to Rusty.

Thank you, Doug, and thank you all for joining the call today. For those of you following along with our results slide deck, which we posted on our website last night, I plan to cover a few slides focusing on the overall results we announced, the strategy that fuels the cash flow engine and the opportunity set ahead with our Birch Resources acquisition. I will then turn the call over to Rick to provide some greater detail on the day-to-day blocking and tackling of our Smarter Asset Management operational program, and Brad will provide a look at the financials and 2026 guidance. After Brad's remarks, I will provide some closing thoughts before opening the call for your questions. Before we get into the quarter, I want to spend a minute on the market we're all operating in because it helps frame everything you'll hear from us today. 2026 has been one of the most volatile years for energy in a long time. The conflict in the Middle East and the disruption in the Strait of Hormuz have kept crude on a hair trigger. Oil spiked in the spring, gave much of it -- gave much off back over the summer and has moved sharply again this month amid renewed supply fears. WTI has been trading around $90 or higher. Even as recently as this week, we have seen material movements in oil prices. That's real money moving on headlines sometimes in a single session. Natural gas tells a different story. Overseas, gas prices jumped as LNG supply was disrupted. Here at home, Henry Hub has been stuck near $3 or lower and hit some of the lowest in-basin prices in Appalachia in years. Record U.S. production, a lot of it associated gas from the Permian and storage heading into winter near record levels, have kept a lid on domestic natural gas prices. So we have a global energy security premium in Europe and Asia, while conversely a well-supplied U.S., market. Looking out, the long-term demand story for U.S. gas is as strong as it has ever been with more LNG export capacity coming online and rising power demand, including from data centers in the Northeast. But the forecasters don't agree on the back half of 2027 or full year 2028 yet. Some see a tighter market, while others see new Permian pipeline capacity bringing more supply. Honestly, nobody knows, and that's the point. Our answer is the business model that we have created. Diversified turned 25 this year. Since 2001, we have operated through every kind of cycle, price collapses, price spikes, credit crunches and a pandemic. What we learned is that you can't control the commodity price, so you build a business that doesn't depend on guessing it right. We've hedged 2027 at approximately $4.40 per Mcfe and against the natural gas strip of approximately $3.45. That's the model doing its job. We continue to maintain a strategy that allows you to manage through cycles. That's what our model does. We buy producing assets at a discounted value. We hedge to protect the returns we underwrite. We finance with investment-grade ABS debt that amortizes in line with the cash flows of those assets. We operate them with greater focus than the people we bought them from. We create upside and additional cash flow through portfolio optimization, and we consistently return the cash to shareholders. That discipline is why we can say we're operating from the strongest financial position in our history. It's also why when others pull back in volatile markets, we can lean in as we did with Birch. Starting on Slide 3. So let me start where we always do, how Diversified Energy allocates capital that is generated from our cash engine. Our capital allocation framework has 4 parts and year-to-date in 2026, we've delivered on every one of them. Our model continues to generate durable free cash flow from a low-decline asset base, along with continued cash generation from portfolio optimization of noncore assets that we can deploy to our 4 key priorities for capital allocation, which are as follows: systematic debt reduction, return of capital through dividend distributions and share repurchases and growing our portfolio of cash-generating assets through accretive strategic acquisitions. I'm extremely proud of our team for delivering outstanding results. As you can see on this page, we reinforced our proven track record across all our shareholder priorities throughout 2026. Through the third quarter of 2026, we repaid approximately $313 million in debt principal. This is not just financial housekeeping, it's highly strategic. Every dollar of debt we retire strengthens our balance sheet, reduces our cost of capital and creates long-term value for our shareholders. With approximately $506 million in liquidity at the end of the quarter, we are continuing to operate from a position of strength. We returned approximately $157 million to shareholders through dividends and strategic share repurchases. At current levels, that is an approximate 17% shareholder return on capital yield. We are confident in our durable cash generation abilities, and we were pleased to provide our shareholders with this level of return thus far this year. Worth noting, we have demonstrated a consistent track record of robust and disciplined capital allocation with approximately $2.5 billion in shareholder returns and debt principal repayments since our IPO in 2017. Together, these actions demonstrate the power of our disciplined yet flexible capital allocation priorities and the quality and consistency of the cash generation capabilities of our portfolio's assets. And as a result, our free cash flow engine is expected to generate approximately $440 million this year. Turning to Slide 4. Now to our Birch acquisition, which we announced in September and is on track to close prior to the end of the fourth quarter. Birch gives us an anchor position in the Permian Basin. It's turnkey PDP production from 500 gross operated wells with infrastructure already built, including 12 central production facilities, gathering lines and a valuable water disposal system. Importantly, Birch is 70% liquids that materially rebalances our commodity mix and adds a larger oil wedge of liquid-based revenue to our cash flow. It sits adjacent to our existing Texas operations, so there are opportunities for near-term synergies and longer term a platform to bolt-on accretive acquisitions in a maturing developed basin. The financing for this acquisition is our business model at work. ABS funding facilitated by Carlyle covers the producing assets and Diversified will own 100% of the Birch PDP, along with additional undeveloped acreage and infrastructure assets. The scale is significant and a step change in our Permian Basin position. Birch brings about 68,000 barrels of oil equivalent per day, about $548 million of next 12-month EBITDA and $455 million of free cash flow. It is 70% liquids, which balances our gas-weighted base. Pro forma, that means production is up an estimated 35%, EBITDA more than 55%, and free cash flow more than doubling. Turning to Slide 5. I just wanted to briefly touch on the potential investment opportunity ahead with the closing of our acquisition of Birch, which we believe is yet to be recognized by the market. Pro forma for Birch, we will become a Top 15 U.S., publicly listed producer with approximately $1.5 billion of EBITDA and nearly $900 million of free cash flow. That puts us within the ZIP code of household names and materially above the middle of a natural gas peer group that trades at an average of 5 to 6x EBITDA. We currently trade at approximately 3.9. On a pro forma free cash flow basis, we ranked fifth in this peer set and ahead of several companies valued at much higher multiples. We don't control our multiple. What we control is the operations, the cash generation and the track record. Birch is a step change in all 3, and we believe the public market should take notice. Now I'll hand it over to Rick.

Thank you, Rusty. Turning to Slide 6. Here, we outlined some specifics of our strategy Rusty has recently discussed with a focus on our Smarter Asset Management, which drives cost reduction, synergy capture and enhanced margins. It's how we turn acquired assets into more cash than the previous owner could deliver, ultimately adding to the underlying rate of return from an acquisition. On this page, we are highlighting 4 specific opportunities that are part of our playbook, but I wanted to stress that this is not the full scope of our capabilities, rather it is a small sample set that reflects the operational excellence and corporate culture ingrained within our organization. Small daily wins add-up to long-term durable gains. First, workovers. Given the size of our operational footprint in Oklahoma, we're running 3 workover rigs. The results to date across 263 jobs have restored about 6,700 barrels of oil equivalents per day with an average payback of under 4.5 months. Second, supply chain. We cut our Mid-Con chemical suppliers from 5 to 3 through a competitive process, resulting in approximately $2.5 million of annual savings, rightsizing compression, while driving competitive opportunities should add about another $2 million more. Third, infrastructure. We tied into infrastructure we already owned and cut our water hauling costs by 58%, about $22,000 of capital or roughly $100,000 a year in savings, which results in under a 3-month payback. And then fourth, synergy capture. In Oklahoma and East Texas, we put existing Diversified operators on acquired assets. By utilizing our own operational team, we cut our support costs by approximately 17% on Canvas and Camino and approximately 44% on Sheridan, while holding production flat. Importantly, none of these are headlines on their own. Together, they're the playbook we'll bring to Birch on day 1 to help exploit an identified opportunity set for the company's largest acquisition to date. I would like to turn to the operated Oklahoma development plan. We have approximately 20 gross, 17 net high working interest wells in Phase 1 of our program that are highly economic at $65 oil and $3.25 natural gas. The program is underway, and we have completed the drilling of 4 wells to date with execution on time and on budget. We have begun completion operations on our first pad and construction of the on-pad production facilities on our second pad is nearly complete. This phase of the program is intended to run through December of 2027, and we look forward to sharing additional results in the coming quarters. With that, I will turn the call over to Brad.

Thank you, Rick, and I'll start on Slide 7. Our teams continued to deliver consistent and strong results in the third quarter of 2026, starting with production. Daily production averaged approximately 1.2 Bcfe per day, and our low decline, predictable base is the foundation of everything else on this page. Total commodity revenue was $470 million, equating to approximately $4.29 per Mcfe, and our adjusted EBITDA was $256 million for the quarter with a margin of 56%. Notably, our portfolio optimization processes or better known as our POP program, allowed us to generate approximately $149 million in additional cash proceeds through the 3 quarters of 2026. That POP program is the ongoing effort to monetize noncore acreage and surface assets, which contributes to our robust cash generation. As the largest well owner and the third largest leaseholder in the Lower 48, these noncore assets are something that we are continuously evaluating, and we anticipate having additional opportunities to high-grade our portfolio in the future. Our adjusted free cash flow for the quarter was $153 million. On the balance sheet, we closed the quarter with $506 million of liquidity as of the end of the quarter. Subsequent to the end of the quarter, during the fall borrowing base redetermination process, we were very pleased to receive an upsize on our credit facility to $1 billion, up from $900 million. Notably, this upsize is not the reported liquidity figure and this will further enhance the strength of our financial position. In addition, approximately 72% of our outstanding debt is nonrecourse investment-grade rated ABS. The achievement of investment-grade rating of our ABS notes is important and should not be overlooked. This rating indicates security and confidence in the future cash flows of the assets. And this rating tells investors that the leverage on the assets has been stress tested and the cash flow risks are mitigated. Through 3 quarters this year, we have used the designed amortization in the ABS notes to pay down approximately $313 million in principal, which represents over 11% of our outstanding debt. Our efficient and very shareholder-friendly financing strategy is fundamental to how we finance PDP assets. And in an rate environment like this one, it truly matters. The table on the right frames the trailing 12-month picture, 1.2 Bcf (sic) [ Bcfe ] per day of production, approximately $2 billion in commodity revenue, approximately $1 billion in adjusted EBITDA and $560 million in adjusted free cash flow. Those results show the run rate cash engine of this business and why our business model has been proven for 25 years. In summary, our team's strong execution of our strategy to acquire and optimize stable, consistent cash-generating energy assets enabled strong free cash flow generation and allowed us to continue to prioritize returning capital to shareholders and paying down debt. This is what operational innovation looks like in the real world, a relentless, systematic compounding improvement in everything that we do, and our financial results reflect it. I'll now turn to Slide 8. We are reiterating our full year 2026 guidance today. This guidance encompasses the closed acquisitions of Sheridan from the second quarter, Camino, which closed during the third quarter and the Barnett divestment as well as capital spending associated with our 2026 Operated Development Program. Notably, this guidance does not include the Birch acquisition, which is anticipated to close before the end of the fourth quarter and could provide some upside bias to these metrics. We expect total production of 1.2 Bcfe per day with commodity mix of approximately 29% liquids and 71% natural gas. Adjusted EBITDA guidance is approximately $1 billion with adjusted free cash flow of approximately $440 million. Total capital expenditures are expected in a range of $225 million to $255 million. The headline here is capital allocation flexibility. Approximately $440 million in free cash flow after spending between $225 million to $255 million in our capital program means we retain the flexibility to allocate capital to the best uses rather than being forced into any one of them. I would also like to provide some detail on the included line item, income from equity affiliates, to account for the minority ownership of our Camino special purpose vehicle, which sits off balance sheet. The cash flows received as part of our 40% ownership in the producing assets totaled $8.6 million for the quarter. Distributions to Diversified included approximately $6.6 million from distributions from equity affiliates, representing the residual operating cash flows and approximately $2 million in management fees, which is included as a reduction of general and administrative expense in the income statement. Further information related to our Camino SPV accounting process is provided in our 10-Q. With that, I'll now turn the call back over to Rusty.

Thanks, Brad. Before we take questions, I want to step back for a moment to share some final thoughts on our investment thesis and our strategic outlook. On Slide 9, I want to spend a moment on what underlies the results we have presented. It's the machine we have built to deliver on our long-term goals. Given the scale of the opportunity set and our ambitions, building this machine is a continuous effort and our execution is the driver of our growth. That machine has 3 high-level components: acquire; operate; and optimize. Scale, technology and focus are the tools that enable us to enhance margins and increase cash flow. We buy the value targeting mid-teens returns. We finance with investment-grade ABS at a mid-single-digit cost, generally lower than the seller's cost of capital, and we keep the spread. Hedging within that structure locked in what we underwrote. We then optimize our portfolio, which has allowed us to monetize more than $450 million of assets since 2023, materially increasing the underwritten return. And then we consistently and simply return the cash to shareholders. Year-to-date, dividends and buybacks have delivered a 17% shareholder return of capital yield. That compares with our full year 2025 shareholder return of capital yield of 18%. Buy, finance, optimize, return, then do it again. Our 25th anniversary seal this year reads "Built by the Proven", and it describes how we got here, proven strategy, proven assets, proven cash flow, proven people, proven results. To sum it up, in one of the most volatile years for commodity prices we've seen, Diversified delivered steady production, increased cash flow and achieved the strongest balance sheet we have ever had. We returned capital, paid down debt principal and announced the largest acquisition in our history. 25 years in, the model is proven, and we think the best is still ahead. With that, I'd like to turn it over to the operator for the Q&A portion of today's call.

[Operator Instructions]. And our first question is from the line of Charles Meade with Johnson Rice.

Rick, perhaps this question is for you. I'd like to ask about your operated drilling program. You gave us the update you've got 4 wells out of about 20 gross that you plan for the Mid-Con. Can you share with us just a few more details, what county, what zone you're targeting there? And if you're willing to -- the way that I perceive these wells is they're about not eliminating but mitigating what your PDP decline is. And of course, your PDP decline is going to be a little different in '27 once you close Birch. And so I wonder if you could just calibrate our expectations on what you -- the contribution of this operated drilling program to the overall '27 production profile and net decline for the company?

Yes. Let's -- great questions. And I'll tell you, I want to brag the drilling program is going exceptionally well. Everything is on cost, everything is on schedule. We have drilled our first 4 wells. These have been 1.5-mile and 2-mile laterals. We're going to continue to extend that into 3-mile laterals where we can. We're targeting the Meramec for the most part on these first wells. Obviously, there's other horizons that are very prolific in the basin that we'll continue to target. We are certain our first completions. And post that, we'll give more details after we get a good production profile. So it's going very well. As far as decline, we're going to target to overcome that with the highest return wells we have. And that exact number, I don't know that we've put out quite yet, but we'll be talking about that as we get into Q1.

Charles, I would just say real quick that we're going to be looking at year-end numbers. We're going to be putting out some new guidance, and we're going to be talking about a lot of this stuff. So more to come on all that, and it will -- I'm sure everybody will be happy with it.

So good question, just a little ahead of the curve. And Rusty, for the follow-up, we go back -- I was thinking back to the event you guys hosted in April of this year, and you made the comment that you thought there was a lot of opportunity in the acquisition market. And sure enough, that's borne out with the deals that you've announced this year. And I'm curious if you could offer maybe an updated view on what the acquisition opportunity set is like? I mean we've had a lot of changes. You talked a lot about the commodity volatility, but also part of that is that the '27 gas strip is -- has had a kind of a tough move down. So with everything that's happened in the last 6 or 7 months, I wonder if you could just update us on your outlook for the acquisition opportunity set?

Yes, I mean it continues to be relatively robust. I was -- I'm kind of surprised by it, to be honest. I figured the volatility in oil prices would slow that market down some, really hasn't. I would love to buy natural gas at 2027 strip right now. I just feel like it's a significant discount to what the true value is long-term. We would love to buy more natural gas at this gas strip. But that -- I will say the natural -- and you can imagine with prices down that natural gas opportunities seem to be fewer than on the oil side. So the market is still robust. I would say it's selective. You've got to -- we've got the -- it's after Birch, I mean, our financial position in our next 4 or 5 years looks so good. We don't have to do anything, but we're going to be strategic and we're going to be selective in what we want to do. And so we'll continue to be on the look. And right now, I would call the market still relatively robust.

The next questions are from the line of Bert Donnes with William Blair.

Just following up on M&A. Rusty, I think you put it pretty well when you described the awkward situation, just tough right now, maybe a little next year, but then fundamentals say everything looks great in '28 and beyond. How do you approach it from a debt-to-equity mix when you're looking at future acquisitions? If you see another Birch, I'm sure you want to kind of roll that in. But do you lean less or more on equity? I'm guessing you look at an optimistic 2028 outlook and that gives you some more confidence to add debt, but maybe you have -- maybe you're forced to kind of focus on the lower current pricing and use more equity. Just how do you balance those 2?

Well, I mean, it's all dependent on the deal. If it's a significant sized deal, you have to look at things a little differently than you do bolt-ons or strategic adds. Obviously, natural gas, as we said, is the one that's the most difficult right now. This -- The curve is -- 2027 is pretty low, but it does recover pretty well, '28 moving forward. And if we can buy gas at the current strip, we would love to do it. But look, it's all -- everything is opportunistic for us. And so we'll just look at each deal separately. But at the end of the day, we're paying down significant debt every year through our ABS structures. And so it's creating equity value by just paying down debt. And so being able to refinance and do things from that perspective to create cash for deals. So yes, I think it's a deal-by-deal basis, and we'll look at everything just depending upon the size of the deal and where it's at and the value. Go ahead Brad.

Just real quick, I would just add. We've got access to capital. And so that gives us some flexibility. We've got great liquidity on our RBL. We've got a strong supportive bank group. We've got, obviously, the relationship with Carlyle that we've utilized here over the last 1.5 years. And then we know we've got the public markets available to us as well, just the way we're structured. So we take a very thoughtful approach, and we look to take care of our shareholders as well in a transaction.

Well said, Brad. And then moving to the Camino asset, given the unique ownership, we really appreciate the color you gave on the quarter. But maybe if you could talk about, is that a good run rate going forward? Or maybe like behind the curtain, or were there any moving parts in the quarter? Like was there a larger debt repayment coming out before the 40% was calculated? Any onetime items? Or should we look at the amount you put this quarter as kind of the run rate if -- assuming production and pricing stay flat?

Yes. We'll come out with guidance with our year-end results for '27 on this asset specifically. But it's a -- the decline rate there in Oklahoma is kind of that low-double-digits. And -- so it should be relatively consistent. The residual cash flows and the P&I on the amortization of the ABS notes are structured, aligned. So it will be a consistent movement. As it relates to onetime or unusual activities in the numbers, there were none. We were pretty much right on our forecast out of the gate. Rick and his team are doing a great job of integrating those assets. We've already achieved, as he highlighted, a fair amount of synergies that will accrue to that SPV. So I think we're moving in the direction that we anticipated with that asset, and we'll have more guidance at the end of the year.

Our next questions are from the line of Jarrod Giroue New with Stephens.

So my first one is on Slide 5. So here, you highlight the opportunity for a valuation re-rating following Birch. Beyond the increase in scale and cash flow, what do you believe are the most important milestones needed to close the valuation gap with peers?

Well, that's a great question. I wish I knew, we'd already have all those levers pulled. But no, I'm just giving you hard time. But no, it's one of those things where you know what -- we believe cash flow is king. And ultimately, cash flow gets rewarded once it's determined that it's real and it's sustainable, and we want to be able to show and we will show that is real and is sustainable on the back end of Birch. And so we think that, that's probably the biggest lever at the end of the day. We'll continue to manage all the other things that people will look at. But growth, cash flow, those kind of things are what people will reward, and that's where we want to show people that we can do it long-term.

And Jarrod, I'll just add a couple of things, too, is, as Rusty said, the robust nature of the cash flow that the business is generating, you layer in Birch and the very healthy dividend coverage that we have in -- that we will have in place is, like I said, very healthy. We think that's important, and we'll be communicating that with confidence as we go into '27. And then the ABS debt, we've talked about the merits of that. It's investment-grade rating, it's stress tested, risks are mitigated. It's shareholder friendly. It reduces the equity required for us to acquire assets. And we believe that as we've grown scale and have exceeded $1 billion in EBITDA now and roughly a 50% conversion down to our free cash flow, that the public investors will gain confidence in that scale and that amount of cash flow.

That's perfect. Yes, that all makes sense. And then yes, one quick one on Birch. So on Slide 4, you highlight roughly $455 million of incremental free cash flow from Birch. I was just hoping you could help us understand if there's -- what the underlying CapEx assumption is supporting that? And how much of that cash flow is sustainable from the existing PDP versus having to do some additional development on that acreage?

This is Rick. I'll take that. The only capital associated, this is a PDP asset as we purchased it. That is based on PDP cash flows. The only capital on this would be from a workover standpoint or just a maintenance standpoint. So the reality is there is no additional drilling on this at this point that we have forecast. So we haven't given guidance yet on any of those, but the capital would just be associated with maintaining the profile of the curves that are on the current PDP asset.

And as Rick mentioned in his comments earlier, the Smarter Asset Management program and the culture that we have that Rick's team will take into managing these assets to lower expense and optimize production, will absolutely also occur and as he just indicated, to help us stay on those declines or not, if not improve them.

The next questions are from the line of Paul Diamond with Citi.

I just want to touch quickly on the Smarter Asset Management program. You also highlighted several levers that have already been pulled. I guess, can you talk about the low-hanging fruit, like what's next on the merry-go-round? Like what do you see as the next easiest opportunity in that program?

That's a great question. And we're really proud of that program, as we've indicated. We have the right culture internally. We have the right capabilities in order to continue this program. I think there's a lot of optimization. As we continue to grow our scale, provides us the capability for cost reductions across our portfolio. And so, as we continue to grow, we don't treat this as independent companies. We are one large optimized organization. So we utilize that scale to reduce cost, to increase efficiency. And as we bring on new assets, we utilize the skill sets and knowledge that they have to help make us better as well. So as we continue to grow, Birch is a great example. We'll pull that into the same umbrella that we're already in. We'll optimize around the larger spends to start with, the compression, the water hauling, the chemicals. And so we'll go through that line item by line item across the entire organization to optimize cash flow and enhance margins.

Got it. Understood. And then since on the cost side, we've seen kind of persistent pressure on both labor and services. Guys can you talk about any impact you guys are seeing on the inflation side, whether it's into '27 or beyond?

When we take a look at inflation as we go into '27 and we can talk about a volatile commodity market. We've had a pretty stable service side market overall. I'd say the biggest change we've seen in '26 and going into '27 is fuel cost. And so we manage that, but I think across the industry, diesel cost, fuel cost is going to be the biggest change you see. We've been watching that. We've been optimizing around that. But the other service costs are staying in line. And we've got great relationships. We work on long-term contracts. We utilize our scale to maintain those costs at a reasonable spend.

At this time, I'll turn the floor back to Mr. Hutson for closing comments.

Thank you all for attending today. I appreciate your time and questions. And if you have any further comments or any other questions, please feel free to reach out to Doug and his team for further comments. Thank you all for attending.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.