Diversified Energy Company · NYSE:DEC
Diversified Energy — Diversified Gas & Oil — FY2019 Earnings Presentation
53 slides from Diversified Energy's earnings presentation, Mar 9, 2020
Slide 1: Full Year Results 2019
FULL YEAR RESULTS 2019 9 March 2020
Slide 2: Disclaimer
DISCLAIMER The information contained in this document (the "Presentation") has been prepared by Diversified Gas & Oil PLC (the "Company”). This Presentation is not to be copied, published, reproduced, distributed or passed in whole or in part to any other person or used for any other purpose. This P
Slide 3: Diversified Gas and Oil: 2019 Highlights
DIVERSIFIED GAS AND OIL BUILDING ON PRIOR YEAR SUCCESS, STRENGTHENING THE FOUNDATION FOR FUTURE GROWTH • Doubled average daily production Y/Y to 84.8 MBoepd • Legacy(a) production maintained ~70 MBoepd since 2H18(b) • Adj EBITDA(c) (i.e. cash operating) margin ~53% (hedged) • FY19 Dividend of 13.92¢
Slide 4: Overview & Full Year Highlights
OVERVIEW & FULL YEAR HIGHLIGHTS
Slide 5: What We Do: The DGO Business Model
WHAT WE DO: THE DGO BUSINESS MODEL ACQUIRE, OPTIMISE, PRODUCE Acquire Optimise + Produce • Target low-cost, long-life, low-decline production • Deploy rigorous field management programs • Focus on high-quality assets with synergistic • Optimise production and extend well life opportunities • Acquire
Slide 6: Fundamentally Committed to Value Creation
FUNDAMENTALLY COMMITTED TO VALUE CREATION FOCUS ON RETURNS UNDERPINS CORE BUSINESS STRATEGY SINCE INCEPTION CASH FLOW MODEL, ROLL‐UP STRATEGY COMMENCES 2001 Acquired first producing assets, located in West Virginia $50MM FLOAT ON LSE AIM (then the largest UK Oil & Gas IPO since April 2014) PDP Reser
Slide 7: DGO Emerging as a New Model for the E&P Market
DGO EMERGING AS A NEW MODEL FOR THE E&P MARKET STABLE PRODUCTION AND HEDGED CASH FLOW = ATTRACTIVE INVESTMENT OPPORTUNITY DGO Strategy … THEN Founded in 2001, DGO’s Strategy Remains Unchanged – DGO Strategy… NOW Focused on Cash Flow and Tangible Returns Traditional “New” Conventional Returns Shale B
Slide 8: Understanding the DGO Value Proposition
UNDERSTANDING THE DGO VALUE PROPOSITION OPTIMAL COMBINATION OF LOW‐COST AND HIGH‐CONTROL STRATEGY DGO Traditional Mineral E&P Models Companies(a) Margins(b) 50%+ PDP decline ~6% Asset Operational Control Development Risk Low Capex No rigs Cost Structure Low Opex Capital & Service Low Cost Intensity
Slide 9: Capital Allocation Focused on Stakeholders
CAPITAL ALLOCATION FOCUSED ON STAKEHOLDERS A HISTORY OF CONSISTENT RETURNS FOR INVESTORS High Margins and Consistent PDP Yields Sustain dividend feasibility and create potential for Free Cash Flow Allocation opportunistic share buybacks 40% Target of FCF Cash Interest Disciplined Paydown of Outstand
Slide 10: Built to Deliver Strong Margins at Low Prices
BUILT TO DELIVER STRONG MARGINS AT LOW PRICES EFFICIENT OPERATIONS, LOW FIXED COSTS PRIME DGO FOR SUCCESS IN CURRENT MARKET Net Realised Operating Fully‐Loaded Free Cash All‐In DGO Cash Costs Price per Mcfe Cash Margin Cash Margin Flow Yield(d) Cash OpEx(a) Cash G&A(a) $1.19/Mcfe $1.05 $0.14 Operati
Slide 11: Operations Overview
sd DIVERSIFIED GAS & OIL PL C OPERATIONS OVERVIEW
Slide 12: Smarter Well Management (SWM)
SMARTER WELL MANAGEMENT (“SWM”) (a) SWM ACTIVITIES OFFSET NATURAL DECLINES ON LEGACY ASSETS Illustrative Production Comparison of Legacy Assets(a), 2Q18 – 4Q19 Realised Production on Legacy Assets(b) Daily Production, MBoepd 70.6 70.8 70.0 70.0 70.0 69.7 $1.5M 69.0 70.0 69.1 $3.2M $2.6M $4.3M $5.2M
Slide 13: Resource Alignment Optimises Operational Focus
RESOURCE ALIGNMENT OPTIMISES OPERATIONAL FOCUS 2018 AND 2019 ACQUISITIONS DRIVE CHANGE IN STRUCTURE TO GENERATE EFFICIENCIES NE Northern Division Key Considerations Southern Division DGO Midstream Operations Generate efficiencies in workforce and contractor utilisation Simplify geographic and fu
Slide 14: Investment in DGO's Technology Platform Systems
INVESTMENT IN DGO’S TECHNOLOGY PLATFORM SYSTEMS CREATES INTEGRATED PROCESSES & DATA WITH IMPROVED INTERNAL CONTROL FRAMEWORK Cross‐Functional Teams Improved Systems Integrated ERP (Production, Revenue, Accounting, Land) Measurement Production Field Data Capture Accounting Data Warehouse PROJ
Slide 15: 2019 Accretive Acquisitions
2019 ACCRETIVE ACQUISITIONS COMPLEMENTARY ASSETS PRODUCE LOWER COSTS & HIGHER CASH MARGINS Upstream Assets Midstream Assets Purchased Purchased From: From: Benefits: Benefits: • No additional G&A • Additional 3rd party revenue • Low‐cost production • Improved realised pricing • Seamless integration
Slide 16: Upstream and Midstream: A Dynamic Combination
UPSTREAM AND MIDSTREAM: A DYNAMIC COMBINATION VERTICAL INTEGRATION PROMOTES WELLHEAD TO SALES POINT CONTROL Midstream Objectives Case Study ‐ Reroute Improve pipeline integrity and compliance Effective Optimise firm transportation 1 Dec 2019 Production (Mcfed, gross) 15,000 Gain expense effici
Slide 17: PDP Reserves
PDP RESERVES CONTINUED GROWTH THROUGH ACQUISITIONS Year‐End PDP Reserves, 2019 PDP Growth Since IPO NYMEX Reserve Pricing ($/MMBtu)(b) $3.40 87% $3.20 Significant shift downward in forward price curve >20x $3.00 563 $2.80 growth in MMBoe $2.60 PDP reserves since IPO 31‐Dec‐18 $2.40 31‐Dec‐19 1% 12%
Slide 18: Safely, Systematically Retire Wells
SAFELY, SYSTEMATICALLY RETIRE WELLS UPDATE OF DGO’S ASSET RETIREMENT PROGRAMME Bolstered Formal Plugging Continued Cost Control Annual Plugging Cost Commitments To States On a Well‐By‐Well Basis Minimal Cash Flow Impact Initiated 15yr agreement with PA Historical plugging 4% less than Cash costs rel
Slide 19: ESG: Sustainability Reporting
ESG: SUSTAINABILITY REPORTING DGO’S OPERATIONS MODEL REFLECTS ENVIRONMENTAL STEWARDSHIP & SUSTAINABILITY Inaugural Sustainability Report Highlights the environmental stewardship of our business practices Reflects the assimilation and integration of DGO’s significant acquisitions in 2017‐ 2019
Slide 20: A Complete, Sustainable Operational Model
A COMPLETE, SUSTAINABLE OPERATIONAL MODEL ALL GOALS ARE STRATEGICALLY IMPORTANT TO PROPER STEWARDSHIP OF CAPITAL Our Daily Operational Goals Translate to a fundamental stewardship philosophy for: the environment, our employees and our shareholders Environmental Every unit efficiently produced is …
Slide 21: Financial Overview
sd DIVERSIFIED GAS & OIL PL C FINANCIAL OVERVIEW
Slide 22: A Disciplined Strategy Delivering Value
A DISCIPLINED STRATEGY DELIVERING VALUE WITH A PROVEN, SUSTAINABLE BUSINESS MODEL Executing a strategy that includes… Total Revenue(a) Midstream Revenue $511.7MM $22.2MM +87% +205% FY2018: $274.1 FY2018: $7.3 Creating Total Cash Costs(b) Margin(d) Payments Dividend Long‐Term Shareholder $7.71/Boe 53
Slide 23: Production and Revenue
PRODUCTION AND REVENUE ACCRETIVE ACQUISITIONS, IMPROVED HEDGE BOOK BOLSTER REVENUE Fourth Quarter Calendar Year +38% 96.3 Prod. Growth +107% 84.8 MBoepd Prod. Growth 70.0 $487.7 MM $49.5 $122.8 MM $136.1 MM $15.76/Boe Unhedged Hedged $7.1 $15.36/Boe $20.5 $19.07/Boe $18.0 $2.63/Mcfe $33.7 $3.18/Mcfe
Slide 24: Consistently Generating Returns Since IPO
CONSISTENTLY GENERATING RETURNS SINCE IPO HEDGING STRATEGY UNDERPINS ABILITY TO RETURN CAPITAL TO SHAREHOLDERS Longer Portfolio Duration 43% Opportunistically utilise contracts to protect cash flows for periods up to 10 years Dynamic hedging program locks in value, protecting dividend potential Appl
Slide 25: Hedged Margin & Cash Expenses
HEDGED MARGIN & CASH EXPENSES LEVERAGING SCALE TO REDUCE UNIT COSTS & MAINTAIN CASH MARGINS Fourth Quarter Calendar Year Realised Price $19.95/Boe $15.91/Boe $18.33/Boe $16.54/Boe $3.33/Mcfe $2.65/Mcfe $3.06/Mcfe $2.76/Mcfe Unhedged Unhedged Unhedged Unhedged 57% 61% 55% 49% 53% 56% 53% 48% Margin $
Slide 26: Disciplined Capital Expenditures
DISCIPLINED CAPITAL EXPENDITURES LIMITED CAPITAL EXPENDITURES CONTRIBUTE TO CONSISTENT CASH FLOW Asset‐Related Expenditures ($MM) Acquisitions ($430) PDP FOCUS No mandatory drilling requirements Expenditures on O&G Properties and Equipment ($32) translates to lower risk profile Asset Retirement (Plu
Slide 27: Commitment to the Balance Sheet and Liquidity
COMMITMENT TO THE BALANCE SHEET AND LIQUIDITY RESULTS IN IMPROVED CREDIT FACILITY AND ONGOING LOW LEVERAGE $1,565MM Total Capitalisation Enlarged 17 bank syndicate enhances ABS $200 Balanced Capital Structure DGO’s total borrowing position 31 Dec 31 Dec 31 Dec (Currencies in Millions) 2019 2018 2017
Slide 28: 2020 Outlook & Investment Thesis
2020 OUTLOOK & INVESTMENT THESIS
Slide 29: Outlook 2020
OUTLOOK 2020 Focus on Margin‐Enhancing Growth and Efficiencies Opportunistically Hedge to Protect Cash Flows Strengthen Balance Sheet for Financial Flexibility 29
Slide 30: DGO: A Compelling Investment
DGO: A COMPELLING INVESTMENT $ Cash Flows Margins Dividends Leverage Low‐decline production Active Smarter Well Corporate policy targets Disciplined growth and and dynamic hedging Management and focus 40% of Free Cash Flow to prudent capital allocation strategy generate on operational efficiency ens
Slide 31: Diversified Brokers / Corporate
DIVERSIFIED BROKERS Corporate Mirabaud Stifel PO BOX 381087 MIRABAUD SECURITIES LIMITED STIFEL NICOLAUS EUROPE LTD BIRMINGHAM, ALABAMA 10 BRESSENDEN PLACE 1650 CHEAPSIDE 35238-1087 (USA) LONDON SW1E 5DH LONDON EC2V 6ET WWW.DGOC.COM TERESA ODOM PETER KRENS ASHTON CLANFIELD VP INVESTOR RELATIONS PETER
Slide 32: Appendix
sd DIVERSIFIED GAS & OIL PL C APPENDIX
Slide 33: 2019: A Year in Review
2019: A YEAR IN REVIEW Setting New 84.8 MBoepd $7.71 /Boe 13.92¢/shr >750 Corporate Daily Total operating Annual Wells returned Milestones production cash costs dividends(a) to production As the Result of Successful Operations Operational & Strategic: Operational & Strategic: • Execute PA P&A agreem
Slide 34: Cash Delivery Strategy Creates Shareholder Value
CASH DELIVERY STRATEGY CREATES SHAREHOLDER VALUE ~$396 MILLION SHAREHOLDER DISTRIBUTIONS & DEBT PAYMENTS SINCE FEB2017 IPO Committed to Strong B/S and Low Leverage Predictable PDP Declines Stabilise Cash Flow $163MM Principal reductions 1Q18 – 4Q19 $165MM(d) $68MM $233MM Dividends Share BuyBacks(e)
Slide 35: Focused on Value Creation from the Beginning
FOCUSED ON VALUE CREATION FROM THE BEGINNING DEMONSTRATED COMMITMENT TO STRATEGY AND RETURN ON EQUITY UNDERPIN BECOMING THE LARGEST PRODUCER ON AIM Home to >98% of DGOC wells Net Other Headquarters (Birmingham, AL) ~95,000 Boepd ‘19 Legend Net $225 MM Asset Acquisition ~70,000 Boepd IPO Equity Raise
Slide 36: Significant Acquisitions Since Feb 2017 IPO
SIGNIFICANT ACQUISITIONS SINCE FEB 2017 IPO ESTABLISH DGO AS A TOP PRODUCER IN APPALACHIA Acquisition Metrics(a) 2019 ~$1.5B Total Acquisitions Acquired Assets: HG Energy, EdgeMarc, Midstream Grow platform for shareholder returns Purchase Price: $430 Million PDP Reserves: 105.5 MMboe Production: 28.
Slide 37: The DGO Difference: Delivering Real Value
THE DGO DIFFERENCE: DELIVERING REAL VALUE “SOME COMPANIES ARE BUILT TO DRILL, AND SOME TO OPERATE. DIVERSIFIED IS BUILT TO OPERATE VERY EFFICIENTLY” – DGO INVESTOR PERCEPTION REALITY Cash wise Cash deficient Cash used to paydown LIBOR+ revolving credit facility rather with a limited cash position on
Slide 38: Understanding Our Unconventional Assets
UNDERSTANDING OUR UNCONVENTIONAL ASSETS IMPLEMENTING THE DGO STRATEGY ACROSS WELL TYPES 16,000 Developer / Seller Produces DGO Purchases + Efficiently Produces 12,000 Hyperbolic Declines Exponential / Terminal Declines = Volatile Production = Stable Production 8,000 Mcfpd 4,000 50+ years remaining l
Slide 39: Corporate Decline and Operating Costs
CORPORATE DECLINE AND OPERATING COSTS STEADY, STABLE PRODUCTION DECLINE YIELDS CONSISTENT CASH FLOW Low‐decline production results in steady unit‐cost increase 7% vs 54% 3‐year Projected Cost Increase $11.43 $12.97 $14.17 $9.19 Illustrative Production / Cost Profile $8.70 $8.88 $9.07 $8.52 ~5% 100%
Slide 40: Natural Gas Remains a Viable Long-Term Investment
NATURAL GAS REMAINS A VIABLE LONG‐TERM INVESTMENT EXTENDING THE INVESTMENT CASE FOR CLEANER FUELS BEYOND TODAY Dry Natural Gas Industrial And Consumer Natural Gas Share of Production Continues At Electric Persistently Electric Generation Historically High Levels Drive Demand Consistent in Long Term
Slide 41: Hedging Program Overview
HEDGING PROGRAM OVERVIEW (a) DESIGNED TO PROTECT CASH FLOW, DIVIDENDS, DEBT REPAYMENT & LIQUIDITY DGO leverages its unique asset base underpinned by long‐life, low‐decline production to tailor its mix of Portfolio Duration Preferred Structures derivatives to maximise prices and protect cash flows. O
Slide 42: Asset-Backed Securitisation Overview
ASSET-BACKED SECURITISATION OVERVIEW ENHANCES DGO’S CAPITAL STRUCTURE, SETS STAGE FOR GROWTH Leverage Liquidity transaction Optimised while Future Path and … Neutral Enhancing creates … Capital providing … to Bond Structure Markets Transaction Highlights Securitisation Benefits Collateralised by 2
Slide 43: Committed to Shareholder Returns
COMMITTED TO SHAREHOLDER RETURNS REGULAR AND INCREASING RETURNS TO SHAREHOLDERS ~14% Div Yield(a) $250 Dividend Paid $233 $0.16 $0.14 $0.14 $0.14 $0.14 Dividend Declared $0.13 $15 $0.14 Share Buybacks $200 $34 $68 $0.11 Dividends per Share $0.12 $23 $150 $0.10 $23 $46 $MM $0.07 $0.07 $0.07 $19 $0.08
Slide 44: Illustrative Run-Off Model of DGO's Existing Assets
ILLUSTRATIVE RUN-OFF MODEL OF DGO’S EXISTING ASSETS DGO’S ASSET PORTFOLIO SUPPORTS $3.3B OF CASH DISTRIBUTIONS OVER 75 YEARS Undiscounted $6.3B of net Field CF Years 1-43 Years 44-75 Major Assumptions: $2.7B Full cash run-off, no further growth 43% Greater of 40% of free cash flow or $31.3 MM pe
Slide 45: Valuing the Asset Retirement Programme
VALUING THE ASSET RETIREMENT PROGRAMME OVERVIEW OF DGO’S ASSET RETIREMENT OBLIGATIONS PV Analysis Bridging to the Balance Sheet ARO Rollforward Net Cash Flow (Field Level) Asset Retirement Obligation ~5:1 ($3) $6,300 $1,340 $2,000 $60 Undiscounted(a) PV10 Inputs Underlying Determinants DGO Value W
Slide 46: Appendix: Supplemental Schedules
APPENDIX Supplemental Schedules
Slide 47: Audited Financial Statements: Profit or Loss
AUDITED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Audited Audited Year ended Year ended 31‐Dec‐19 31‐Dec‐18 Revenue $ 462,256 $ 289,769 Operating expense (202,385) (107,793) Depreciation and depletion (98,139) (41,988) Gross profit $ 161,732 $ 139,
Slide 48: Audited Financial Statements: Assets
AUDITED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ‐ ASSETS Audited Audited 31‐Dec‐19 31‐Dec‐18 ASSETS Non‐current assets Oil and gas properties, net $ 1,490,905 $ 1,092,951 Property and equipment, net 341,846 327,749 Restricted cash 6,505 — Other non‐current assets 4,191 22,
Slide 49: Audited Financial Statements: Equity and Liabilities
AUDITED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF FINANCIAL POSITION – EQUITY AND LIABILITIES Audited Audited 31‐Dec‐19 31‐Dec‐18 EQUITY AND LIABILITIES Shareholders’ equity Share capital $ 8,800 $ 7,346 Share premium 760,543 491,955 Merger reserve (478) (478) Capital redemption reserve 518 —
Slide 50: Audited Financial Statements: Cash Flow
AUDITED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CASH FLOW Audited Audited Year ended Year ended 31‐Dec‐19 31‐Dec‐18 Cash flows from operating activities Income after taxation $ 99,400 $ 201,119 Cash flow from operations reconciliation: Depreciation and depletion 98,139 41,988 Accretion of as
Slide 51: Non-IFRS & Other Reconciliations: Revenue
NON-IFRS & OTHER RECONCILIATIONS REVENUE RECONCILIATION Per Unit 2018 2019 2018 2019 3Q18 4Q18 FY18 1Q19 2Q19 3Q19 4Q19 FY19 Unit 3Q18 4Q18 FY18 1Q19 2Q19 3Q19 4Q19 FY19 Natural Gas (MMcf) 25,973 33,096 79,051 32,596 40,601 45,091 48,089 166,377 Oil (MBbls) 85 107 308 82 107 103 115 407 NGL (MBbls)
Slide 52: Non-IFRS & Other Reconciliations: Expense
NON-IFRS & OTHER RECONCILIATIONS EXPENSE RECONCILIATION Amounts in thousands, unless otherwise noted Footnotes: Amounts in thousands, unless otherwise noted; (a) Certain expense reclassifications were made to conform previously reported results to current presentation 52
Slide 53: Non-IFRS & Other Reconciliations: Adjusted EBITDA
NON-IFRS & OTHER RECONCILIATIONS ADJUSTED EBITDA RECONCILIATION 2018 2019 3Q18 4Q18 FY18 1Q19 2Q19 3Q19 4Q19 FY19 Adjusted EBITDA (hedged) $ 49,765 $ 73,535 $ 146,172 $ 61,042 $ 70,238 $ 63,846 $ 78,140 $ 273,266 Depreciation and depletion (18,523) (15,111) (41,988) (20,641) (24,701) (26,499) (26,29