Diversified Energy’s Gameplan: Avoid Operational, Financial Risk

Diversified Energy is not a typical E&P, and not just for its broad footprint of midstream and upstream spaces. Diversified has long fixated on mature assets that other E&Ps would be inclined to put out to pasture.

The Alabama-based firm is a Top 25 U.S. gas marketer, transacting on roughly 1.5 Bcf/d and holding some 17,000 miles of gathering and takeaway facilities. Its upstream business is largely gas-weighted—97% of production is natural gas and NGL.

And Diversified is turning non-core assets divested from other E&Ps, into decades of future production adhering to its award-winning ESG standards.

Or, as Douglas Kris, senior vice president of Diversified Energy, said at Hart Energy’s DUG-Appalachia Conference on Nov. 29: “We have something that's a little bit differentiated from a number of the E&Ps from a business model perspective.”

Diversified operates mostly in Appalachia, Oklahoma, Texas and Louisiana where the firm is keenly interested in acquiring generally long-lived natural gas.

“We take those assets, we invest in them from an environmental and production standpoint to optimize them over time,” he said. “We're really focused on how that production looks long into the future, not just today, next year, or next month, but assets that have 50-plus years of life.”

Diversified employs a robust hedging strategy to provide a level of certainty to its cash flows. Roughly 85% of production is hedged in a typical year, Kris said.

“We are a reliable producer of onshore U.S. natural gas under a stewardship model,” he said.

A key component of Diversified’s model is vertical integration, he said.

“We own the value stream. In everything from production through the end of life of our assets, we provided durable shareholder returns,” Kris said.

The proof is in the profits

 During Diversified’s five-plus years of public trading, the appreciation of its stock coupled with dividends generated about a 150% return to its shareholders.

The firm’s next level of corporate strategy is integrating its asset-retirement business, which enables retiring assets to reach “their full potential,” he said. Today, Diversified produces about 1 Bcf/d.

But what has Diversified done to set itself apart from the pack of U.S. E&Ps as a sector?

“We've taken out the operational risk by not drilling any wells and operating mature production in an efficient manner,” Kris said. “We've taken out the financing risk. We've utilized the asset-backed securities market, which provides low cost of capital ... We've candidly taken a lot of the environmental risk out of the equation as well.”