Diversified Energy Company PLC (LON: DEC) 

Diversified Energy Company PLC (LON: DEC) is an FTSE 250 Index listed independent energy company. The Company is engaged in the production, marketing, and transportation of natural gas with onshore upstream and midstream assets. DEC owns and operates natural gas and oil wells in Appalachian Basin in the United States.

Recent trend of dividend payments: DEC will pay a quarterly interim dividend of 4.25 US cents per share on 28 March 2022, while the ex-dividend date was 03 March 2022, representing a growth of around 13% when compared with an equivalent period of the prior year.

(Source: LSE website; Analysis done by Kalkine Group)

Growth Prospects (also covers trading statement released on 28 October 2021)

• Collaboration with Oaktree: DEC has made third co-investment with Oaktree since May 2021. DEC has entered into an agreement to acquire certain upstream assets, field infrastructure, equipment and facilities from Tapstone Energy Holdings, LLC. This acquisition is going to strengthen the portfolio with additional high-quality assets and added scale to drive synergies.
• Record Average Net Daily Production: The average daily net production rose by around 20% from 107 Mboepd for Q3 FY20 to 128 Mboepd during Q3 FY21.
• Encouraging Drilling Activities: DEC has Retired ~115 Appalachian wells year-to-date at an average cost of around USD 22 thousand per well.

Key Risks

• Federal Reserve Meeting Minutes: The recent Federal Reserve meeting minutes indicated an earlier and faster rate hike. Thus, it could adversely impact the global Equities.
• Omicron Variant: The Government-led restrictions under Plan B because of an increasing number of Covid-19 cases in the UK may adversely impact the UK Equities.
• UK GDP: The UK economy witnessed a slowdown as the GDP grew quarter-on-quarter by around 1.1% during Q3 FY21, which remained merely lower-than-expected growth of around 1.30%.
• Turnaround into Net Loss: DEC had reported a significant net loss during H1 FY21. In comparison, it had reported a net profit for H1 FY20.

Now, we will analyse the Key Fundamental Statistics & Shareholding Pattern of Diversified Energy Company PLC.

Aberdeen Standard Investments (Edinburgh) is the most significant shareholder as it holds nearly 57.15 million shares as of 31 December 2021. 

H1 FY21 Financial Highlights (for the six months ended 30 June 2021, as of 05 August 2021)

(Source: Company result)

• Top-Line Business: The Company’s top-line revenue had shown a jump of around 75%, driven by a 63% increase in the average realised sales price and 10% higher production.
• Balance Sheet: The Company had strengthened its balance sheet with borrowings on the low-cost Credit Facility and proceeds from a successful placing of 141.5 million new shares, generating gross proceeds of around USD 225 million.
• Exit Rate: The exit rate remained 116 MBoepd for H1 FY21.

Financial Ratios (H1 FY21)

 Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 12 January 2022, at 08:05 AM GMT, DEC’s shares were trading at GBX 108.60, up by around 0.56% from the previous day closing price. Stock 52-week High and Low were 131.00 and GBX 94.24, respectively.

From a technical perspective, the stock price is hovering above the 20-days exponential moving average of GBX 105.70, indicating an upside potential in the stock price. Moreover, the MACD line remained above the signal line. Hence, there could be an uptick in the stock price.

Over the last three months, DEC’s stock price has delivered a positive return of ~8.20%, and it has outperformed the FTSE All-Share Oil, Gas & Coal index (benchmark sector) with a return of around 1.89% and FTSE 250 index (benchmark index) with a return of approximately 2.79%. 

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Business Outlook

The strong cash margins and higher production from the recently acquired assets had enabled DEC to show a strong operational performance during Q3 FY21.  DEC remained on track to deliver full year FY21 cash margins of 50% or greater, illustrating favourable realisations within the Central Region and continued cost discipline. Meanwhile, the Company aimed to accelerate on a path to a net zero carbon position by 2050 or sooner. DEC may show sizeable correction because of several factors such as rising inflation, increasing bond yields and record Covid-19 cases in the UK. Thus, it would be advisable for the clients to take a reasonable position on this Company as per their risk appetite.

Considering the solid operational progress, robust top-line business during H1 FY21, strong dividend yield, increased production prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Diversified Energy Company PLC at the current market price of GBX 108.60 (as on 12 January 2022 at 08:05 AM GMT), with lower-double digit upside potential based on 7.66x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Disclaimer

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