Diversified Energy Company · NYSE:DEC
Diversified Energy — Diversified Gas & Oil — Investor Presentation (July 2019)
50 slides from Diversified Energy's investor presentation, July 2019
Slide 1: Investor Presentation July 2019
INVESTOR PRESENTATION JULY 2019
Slide 2: Disclaimer
DISCLAIMER The information contained in this confidential document ("Presentation") has been prepared by Diversified Gas & Oil PLC (the "Company"). This Presentation has not been approved by an authorised person in accordance with Section 21 of the Financial Services and Markets Act 2000 ("FSMA") an
Slide 3: Diversified Gas and Oil Overview
DIVERSIFIED GAS AND OIL AIM: DGOC Overview Founded 2001 with IPO in February 2017 A top Appalachian gas producer; largest on AIM Mature, PDP w/ low declines of ~5% per year Focused on safety and environmental stewardship Adj. EBITDA (cash) margins 50-60% Company Dividend target of 40% of
Slide 4: 1H19 and Recent Highlights
1H19 AND RECENT HIGHLIGHTS CONTINUED OPERATIONAL EXCELLENCE THROUGH COMMODITY VOLATILITY OPERATING HIGHLIGHTS FINANCIAL HIGHLIGHTS 1H19 net production averaged 76 Mboepd(a), up ~295% compared 1H19 adjusted EBITDA of $131 million(a)(b) to 1H18 (19 MBoepd) and up ~22% compared to 2H18 (62 MBoepd)
Slide 5: Company Overview
& DIVERSIFIED GAS & OIL PL c¢c COMPANY OVERVIEW
Slide 6: Becoming the Largest Producer on AIM
BECOMING THE LARGEST PRODUCER ON AIM NEARLY 20 YEARS IN THE MAKING >90,000Boe/d Net ~70,000 Boe/d Net ‘19 ‘18 Raised net equity proceeds Net Raised net equity of $180 MM to fully fund ~10,400 Boe/d Alliance & CNX acquisitions proceeds of $225 MM to fund first pure non- conventional ‘17 Acquired Alli
Slide 7: Business Model
BUSINESS MODEL ACQUIRE, PRODUCE & PLUG, DRILL Acquire and manage producing natural gas and oil properties to generate cash flows, providing stability and growth for our stakeholders Initiate Ongoing Potential Result Maximise Execute Create Production; Target PDP Low Risk, Shareholder Safely & Acquis
Slide 8: The Diversified Difference
THE DIVERSIFIED DIFFERENCE DGO STANDS OUT AMONGST ITS PEERS IN THE INDUSTRY US Unconventional Key Attributes DGO E&P Corporate decline rates Low High Character Asset Large inventory of undeveloped resources Yes Yes Capital intensity Low High Harvest mature production efficiently Yes No Low Low Unit
Slide 9: Older Wells Exhibit Lower Declines
OLDER WELLS EXHIBIT LOWER DECLINES DGO ACQUIRES WHEN AVERAGE WELL AGE IS PAST STEEPEST PORTION OF DECLINE CURVE COMMENTARY ILLUSTRATIVE HORIZONTAL WELL TYPE CURVE The illustrated type curve presented on the right is Seller representative of a horizontal 800 Owned Owned type curve. Conventional wel
Slide 10: The DGO Difference
THE DGO DIFFERENCE DGO’S BASE DECLINE IS MATERIALLY LOWER THAN TARGETS ANNOUNCED BY APPALACHIAN PEERS ILLUSTRATIVE NORMALISED PRODUCTION % of Base Year Production Remaining 5% 100% after 3 Years 6% 5% DGO Difference 85% 75% Peers DGO’s blended base ~34% decline outperforms Appalachian peers Peers 50
Slide 11: Continued Commitment to Our Strategy
CONTINUED COMMITMENT TO OUR STRATEGY A DISCIPLINED APPROACH TO CREATING LONG-TERM VALUE Pay Dividends at 40% of Free Acquire Grow the Cash Flow Complementary Organic Upstream and Opportunity Set Midstream Assets Relentlessly Safeguard the Focus on Margin Balance Sheet Enhancement and Liquidity Optim
Slide 12: Enhancing the Foundation; Expanding Targets
ENHANCING THE FOUNDATION; EXPANDING TARGETS Basin Agnostic External Initiatives Replicate DGO model across scalable, under appreciated assets marked by underinvestment Consistent Complementary Asset Profile Midstream Long-life, Reduce costs, enhance low-decline flow control to expand production prof
Slide 13: Outlook: 2019 & Beyond
OUTLOOK: 2019 & BEYOND OUR DIFFERENTIATED BUSINESS MODEL DRIVES CASH FLOW GENERATION AND SHAREHOLDER RETURNS A Vast Opportunity set coupled with… …is driving our Capital Allocation framework Organic Cash Acquisitions in 1 Flow Projects: Market: DGO’s Smarter Well Management programme Public E&P’s Se
Slide 14: The DGO Difference
THE DGO DIFFERENCE ‘Some companies are built to drill and some to operate. Diversified is built to operate very efficiently.’ - DGO Investor
Slide 15: Our People Drive Results
OUR PEOPLE DRIVE RESULTS UNMATCHED EXPERIENCE IN THE APPALACHIAN BASIN ADDITIONS OF EXPERIENCED TEAMS SOUTHERN DIVISION LEADERSHIP TEAM IN THE LAST 18 MONTHS: 120 Employees DGO LEGACY +335 Employees NORTHERN OPERATIONS +495 Employees SOUTHERN OPERATIONS … Opportunistically hiring exceptional talent
Slide 16: Optimising Well Life
OUR APPROACH TO WELL OPERATIONS VALUE CAPTURED: ACQUISITION & OPTIMISATION TO ASSET RETIREMENT OPTIMISING WELL LIFE Operating Initiatives Increase production, extend well-life & reactivate inactive wells Leverage expansive Planning Initiatives midstream assets to optimise end markets Proactive
Slide 17: Smarter Well Management Programme
“SMARTER WELL MANAGEMENT” PROGRAMME IMPROVING PRODUCTION TO GENERATE INCREMENTAL CASH FLOW Simple Objectives Improve Return inactive production on wells to active wells production 6 1 Pumpjack Installation 4 Plunger Lift Setup Minimise casing pressure to Decrease fluid load to allow increased maximi
Slide 18: Financial Overview
& DIVERSIFIED GAS & OIL PL c¢c FINANCIAL OVERVIEW
Slide 19: Accretive Growth Producing Significant Cash
ACCRETIVE GROWTH PRODUCING SIGNIFICANT CASH Per Share PRODUCTION: EXIT RATES (Mboepd) ADJ. EBITDA (HEDGED, $MM)(b) ADJ. EBITDA MARGINS (HEDGED) NGL Oil Gas $160 $0.38 60% 100 $140 50% $120 80 40% $100 60 $80 30% $0.15 $146 53% 54% $60 40 90 20% 40% 70 $40 20 10% $20 $18 10 $0 0 0% 2017 2018 June 201
Slide 20: Hedged Margin & Cash Expenses
HEDGED MARGIN & CASH EXPENSES LEVERAGING SCALE TO REDUCE UNIT COSTS AND ENHANCE CASH MARGINS Realised Price - Hedged Cash Margin General & Administrative Realised Price Gathering & Compression - Owned $19.95 (Mcfe: $3.33) Gathering & Transportation - 3rd Party $20 Production Taxes Realised Price Bas
Slide 21: Exceptional Free Cash Flow Generation
EXCEPTIONAL FREE CASH FLOW GENERATION ADJUSTED EBITDA AND CAPITAL USES(a) 1H19 ADJ. EBITDA-TO-CASH RECONCILIATION(a) $350 $160 $107 $ 107 Debt + Distributions $2 ARO Costs $1 $ 7 Non-Recurring Items $300 $16 Other Sources(b) $140 $12 $ 114 87% Adj. EBITDA $25 Recur. CapEx $14 Non-Recur. CapEx $36 $2
Slide 22: Smarter Cash Management and Lower Pricing Grid
SMARTER CASH MANAGEMENT AND LOWER PRICING GRID REDUCES CASH INTEREST COSTS BY ~$1.5 MM PER YEAR REDUCED LIBOR SPREAD SMARTER CASH MANAGEMENT 2019 Estimated Interest Savings $1,000,000(a) ~$1.5 MM 2019 Estimated Interest Savings $500,000 Lower Cash Interest Annualised ILLUSTRATIVE ONE-MONTH SWINGLINE
Slide 23: Hedged to Protect Cash Flow, Dividends & Leverage
HEDGED TO PROTECT CASH FLOW, DIVIDENDS & LEVERAGE OUTER-MONTH TARGET LEVELS ALLOW FOR MANAGING THROUGH ILLIQUID / INEFFICIENT MARKETS Target Months Target Months Levels : 1 - 18 Levels : 19 - 36 Unhedged Unhedged Discretionary Hedging 76-90% Discretionary Hedging 51-90% Portfolio Duration Preferred
Slide 24: Credit Facility Highlights
CREDIT FACILITY HIGHLIGHTS GENERATING SIGNIFICANT LIQUIDITY Facility $500MM $1.0B $1.5B Size(a) Committed to maintaining low leverage $1,000 $950 $950 Target 2x or less Net Debt / Adj. EBITDA ~5x Increase Provides cost effective means to fund acquisitions without additional equity dilution $800
Slide 25: Value-Focused Management of Free Cash Flow Since IPO
VALUE-FOCUSED MANAGEMENT OF FREE CASH FLOW SINCE IPO LOW CAPEX INTENSITY OF DGO’S LONG-LIFE, LOW-DECLINE ASSETS GENERATES SIGNIFICANT FREE CASH FLOW 40% Target of FCF Dividends $96 Paid and Declared(a) $59 $32 Share Buyback $32 Since programme 2019 IPO CapEx YTD (Feb 2017) Cash Interest Income Taxes
Slide 26: Committed to Shareholder Returns
COMMITTED TO SHAREHOLDER RETURNS REGULAR AND INCREASING RETURNS TO SHAREHOLDERS $140 Dividend Paid $0.16 Dividend Declared $0.14 $0.14 $128 $0.13 $13 $0.14 $120 Share Buybacks $0.11 $32 $19 $0.12 Dividends per Share $100 $23 $23 $0.10 $80 $MM $0.07 $0.07 $0.07 $0.08 $60 $19 $0.06 $0.04 $0.04 $18 $40
Slide 27: Total Shareholder Return Since IPO
TOTAL SHAREHOLDER RETURN SINCE IPO(a) SHARE PRICE PERFORMANCE REACTS TO THE DIVERSIFIED DIFFERENCE 300 250 Share Price Growth 73% Dividend Return 30% 200 Total Shareholder Return 103% 203.32 167.75 International Producers (b) 150 US Yield-Focus 118.85 Producers (c) 112.53 FTSE 350 100 97.28 S&P 500
Slide 28: Illustrative Run-Off Model of DGO's Existing Assets
ILLUSTRATIVE RUN-OFF MODEL OF DGO’S EXISTING ASSETS DGO’S ASSET PORTFOLIO SUPPORTS $3.5B OF CASH DISTRIBUTIONS OVER 75 YEARS Undiscounted $6.2B of net Field CF Years 1-38 Years 39-75 Major Assumptions: Full cash run-off, no further growth $2.9B Greater of 40% of free cash flow or $43 MM per year
Slide 29: Appendix
& DIVERSIFIED GAS & OIL PL c¢c APPENDIX
Slide 30: Transformative Acquisitions Since IPO
TRANSFORMATIVE ACQUISITIONS SINCE IPO 6.8 MBoepd 8.8 MBoepd Current DGO Production(a) > 90 MBoepd 35 MMboe 49 MMboe PDP Reserves PDP Reserves 0.5 Million Acres 1.5 Million Acres TITAN $84 MM APC $95 MM 9.0 MBoepd 32.0 MBoepd 69 MMboe 230 MMboe PDP Reserves PDP Reserves 0.9 Million Acres 2.5 Million
Slide 31: Share Buyback Programme
SHARE BUYBACK PROGRAMME THE BUYBACK PROGRAMME COMPLEMENTS DGO’S STATED DIVIDEND POLICY AS A MEANS TO RETURN VALUE TO SHAREHOLDERS, AND IS UTILISED WHEN PURCHASES ARE ACCRETIVE ACROSS KEY VALUE METRICS, INCLUDING FREE CASH FLOW AND NET ASSET VALUE PROGRAMME STRUCTURE PROGRAMME STATISTICS Regulatory
Slide 32: Appendix: Hedging
& DIVERSIFIED GAS & OIL PL c¢c APPENDIX: HEDGING
Slide 33: Hedge Portfolio Summary
HEDGE PORTFOLIO SUMMARY UPDATED AS OF 19 JULY 2019 Gas Oil NGL Volumes Hedge Type 2Q 3Q 4Q FY FY 1Q 2Q 3Q 4Q FY FY 1Q 2Q 3Q 4Q FY FY 1Q Period 19 19 19 20 21 22 19 19 19 20 21 22 19 19 19 20 21 22 Swaps $2.81 $2.80 $2.79 $2.80 $3.01 $58.55 $56.65 $56.52 $56.25 $55.47 $55.61 $36.38 $36.25 $36.76 $35.
Slide 34: Hedge Detail: Natural Gas
HEDGE DETAIL: NATURAL GAS UPDATED AS OF 19 JULY 2019 FINANCIAL HEDGES Natural Gas (MMBtu, $/MMBtu) 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 1Q22 NYMEX NG Swaps 15,179,600 17,639,049 16,146,581 15,559,644 8,982,891 6,086,872 6,257,326 7,484,549 50,000 - - - Swap Price $2.81 $2.80 $2.79
Slide 35: Hedge Detail: NGL / Oil
HEDGE DETAIL: NGL / OIL UPDATED AS OF 19 JULY 2019 FINANCIAL HEDGES - NGLS NGL (bbl, $/bbl) 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 1Q22 Propane Swaps 354,491 350,196 346,068 341,779 346,469 120,478 12,795 12,569 12,342 4,064 - - Swap Price $36.38 $36.25 $36.76 $37.17 $34.98 $35.47 $3
Slide 36: Appendix: Asset Retirement Obligation
APPENDIX: ASSET RETIREMENT OBLIGATION
Slide 37: Planning Safe & Efficient Operations
PLANNING SAFE & EFFICIENT OPERATIONS PROACTIVELY MANAGING WELLS AND PLANNING OUT ASSET RETIREMENT DGO ASSET RETIREMENT DECISION TREE Does it present any Is the well threat to the NO economic or STEP environment? STEP not? 1 2 YES YES NO Continue Plug Producing Will it be economic if ... and mitigate
Slide 38: DGO's Safe & Systematic Asset Retirement
DGO’S SAFE & SYSTEMATIC ASSET RETIREMENT OUR PROACTIVE INITIATIVE FOR LONG-TERM ENVIRONMENTAL AND ECONOMIC SUSTAINABILITY DGO’s Safe & Systematic Asset Retirement The DGO Way The Wrong Way Programme reflects DGO’s solid commitment to: Conform plans & Accept standardised materials to safely plugging
Slide 39: Safely, Systematically Retire Wells
SAFELY, SYSTEMATICALLY RETIRE WELLS OVERVIEW OF DGO’S ASSET RETIREMENT OBLIGATIONS PV10 TO UNDISCOUNTED COMPARISON ($MM) FORECASTING WELL RETIREMENT PROGRAMME $60 Cost: Actual experience 70,000 Net Cash Flow (Field Level) Cumulative PV10 of Liability & market data 60,000 Cumulative Well Count (#) $5
Slide 40: Calculating the Asset Retirement Obligation
CALCULATING THE ASSET RETIREMENT OBLIGATION “ARO” Input Underlying Determinants DGO Value Well Life is a primary determinant I Timing of Cash Outlay Smarter Well Management impactful to well life Range: Wtd Avg: 1-75 years 50 years Long-term agreements with states provide visibility Well Dyn
Slide 41: Appalachian Basin Has Demonstrated Long Well Life
APPALACHIAN BASIN HAS DEOMNSTRATED LONG WELL LIFE … WITH 160 YEARS OF PRODUCTION HISTORY I Indicative wells from the basin demonstrate productive lives ranging from 64 - 93 years with declines of ~3% Exponential decline Total life ≈93 years Exponential decline Total life ≈64 years 15 years to date 1
Slide 42: Appalachian Basin Wells Have Demonstrated Low Declines
APPALACHIAN BASIN WELLS HAVE DEMONSTRATED LOW DECLINES SAMPLE SIZE OF NEARLY 20,000 WELLS I The typical well has reached an exponential declination rate of < 6% per annum; Smarter Well Management programme focused on further reducing declines Prior to DGO’s ~75% with Declines of <6% Annually Smarter
Slide 43: Long-Term Agreements with States
LONG-TERM AGREEMENTS WITH STATES … PROVIDE VISIBILITY TO CASH SPEND, OUR COMMITMENT TO LOCAL COMMUNITIES, AND BUILDS TRUST WITH REGULATORS II DGO proactively engaged key states and successfully negotiated long-term agreements with these states, covering >98% of portfolio Well Agreement Detail Minimu
Slide 44: Long Well Life Underpins Extended Plugging Programme
LONG WELL LIFE UNDERPINS EXTENDED PLUGGING PROGRAMME II Model assumes 75-year plugging programme horizon though engineering data shows >7,000 wells (~12%) continue to produce at that time. COMMENTARY CUMULATIVE PV10 GRAPH Agreements cover > 98% of DGO’s wells 75-year Plugging $60 70,000 DGO has
Slide 45: ARO Cost Estimates
ARO COST ESTIMATES BASED ON DGO’S ACTUAL EXPERIENCE AND MARKET DATA II DGO reviewed the plugging parameters relevant to each state and the nature of its wells to determine its estimated cost to plug each well; over 87% of DGO’s well portfolio will cost ≤ $25,000 per well to plug Legend COMMENTARY Ho
Slide 46: DGO Determined Plugging Costs at the Well Level
DGO DETERMINED PLUGGING COSTS AT THE WELL LEVEL II II DGO’s plugging programme scale provides the opportunity to further reduce current costs, as vendors give lower pricing for blocks of work; experience over a growing body of work will likely lead to greater efficiency & lower costs ILLUSTRATIVE AF
Slide 47: Scaling and Efficiencies Drive Down Per-Well Costs
SCALING AND EFFICIENCIES DRIVE DOWN PER-WELL COSTS II II Actual Kentucky well plugging is illustrative of DGO’s success in reducing plugging costs by diligent job management Ex: Actual Kentucky P&A Cost Reduction Since gaining operatorship of this asset in mid-July 2018, DGO has implemented several
Slide 48: Interest Rate Inputs
INTEREST RATE INPUTS III ARO liability must be risked and discounted using a credit-adjusted risk-free rate, as per ASC 410-20 / IAS 37 Discount rate must reflect risks specific to the liability Discount Rate 8.0% Discount rate is calculated using observable rates of interest of other similar li
Slide 49: Accounting for the Decommissioning Liability
ACCOUNTING FOR THE DECOMMISSIONING LIABILITY CALCULATING THE IMPACT OF THE FOUR INPUTS TO ARO Commentary Balance Sheet Entry Composition ($MM) DGOs plugging programme used in the reserve report was adjusted for the balance sheet, as recommended $57 $143 in accounting guidance ASC 410-20 & IAS 37.
Slide 50: Diversified Brokers and Corporate Contacts
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
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