Diversified Energy has acquired several upstream assets and associated infrastructure in East Texas from a private seller announced the company on Tuesday.
The news of Diversified Energy’s acquisition has helped increase its share price by 1.4% to 115p on Tuesday.
The acquisition builds on Diversified’s plans to enter the Central Region in 2021 and accelerates its efforts to replicate the company’s successful business model of high-margin, low-decline production close to its current assets.
Under the previously announced Strategic Participation Agreement, Oaktree Capital Management’s funds will invest a non-operated working interest in the purchase, and Oaktree will promote Diversified with a 5% stake in the acquisition.
Diversified will receive a 52.5% working interest in the transaction in exchange for providing 50% of the purchase price, or $50m, before typical purchase price modifications.
Diversified Energy Acquisition Trade-offs
Diversified Energy’s revolving credit line and cash on hand were used to cover the $50m cash consideration.
Based on the net Purchase Price and $35m in expected Adjusted EBITDA for the following twelve months before any synergies, which means this represents a 1.4x multiple and around 10% are accretive to the company’s Hedged Adjusted EBITDA in 2021.
With net Proved Developed Producing reserves of 18 MMBoe and PV10 of $102m as of the effective date and based on 19 April 2022 NYMEX strip prices, the Net Purchase Price approximates a >PV40 valuation at the effective date of 1 April 2022.
With an anticipated engineered NTM PDP decline rate of 7%, current output (100% natural gas) is 3.7 MBoepd from 691 gross (346 net) operational PDP wells.
High cash margins of around 60% reflect favourably realised hedged pricing and a cost structure that is competitive for Diversified Energy.
Diversified Energy’s Portfolio
Diversified’s Central Region footprint gains scale, which opens up more synergy potential.
This is Diversified’s fifth acquisition in the Central Region in the last twelve months, demonstrating the company’s competence in locating high-quality, reasonably-priced opportunities that fit its asset profile.
Geographic closeness to previously acquired assets from Tanos Energy Holdings III and Indigo Minerals in East Texas and Northwest Louisiana improves asset density within the operating zone and raises the opportunity for developing operating efficiencies.
The company’s Smarter Asset Management initiative will be implemented to improve well performance, minimise labour and vendor costs, return wells to production, optimise artificial lift systems, and reduce overheads.
Diversified has the option to retain experienced staff from the seller during a usual transition service term to compliment the seller’s continuity and consistency of operations and to enable the execution of Smarter Asset Management prospects.
In conjunction with the transaction, Stifel served as Diversified’s exclusive financial advisor.
“With a compelling purchase multiple of 1.4 times net cash flow, this acquisition represents another accretive, fully cash and debt-financed acquisition that further demonstrates our status as a capable consolidator of low-decline producing assets within the Central Region,” said Rusty Hutson Jr., Chief Executive Officer, Diversified Energy.
“Our enlarged regional footprint complements our portfolio of high-quality assets and provides additional scale from which we can derive operational synergies as we optimise asset performance and the associated costs.”
“We are pleased to once again partner with Oaktree to acquire assets with material upside potential available through Smarter Asset Management.”
“Having emerged as a significant operator in the Central Region with a proven track record of execution in Appalachia and a strong balance sheet, we are well positioned to capitalise on additional opportunities.”