EX-99.2
Published on August 15, 2024
Exhibit 99.2
Diversified Energy Company PLC
2024 Interim Report
For the Six Months Ended June 30, 2024
Table of Contents
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We have prepared our Interim Condensed Consolidated Financial Statements and the notes thereto in accordance with the UK-adopted International Accounting Standard 34,
‘Interim Financial Reporting’ and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom’s Financial Conduct Authority. To provide metrics that we
believe enhance the comparability of our results to similar companies, throughout this Interim Report, we refer to Alternative Performance Measures (“APMs”), that are
intended to be used in addition to, and not as an alternative for the financial information within the Interim Condensed Consolidated Financial Statements, nor as a substitute
for IFRS. Within the APMs section in this Interim Report, we define, provide calculations and reconcile each APM to its nearest IFRS measure. These APMs include “adjusted
EBITDA,” “net debt,” “net debt-to-adjusted EBITDA,” total revenue, inclusive of settled hedges,” “adjusted EBITDA margin,” “free cash flow,” “adjusted operating cost per
Mcfe,” and “Employees, administrative costs and professional services.”
Forward-Looking Statements
This Interim Report contains forward-looking statements that can be identified by the following terminology, including the terms “may,” “might,” “will,”
“could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “seek,” “believe,” “estimate,” “predict,” “potential,” “continue,” “contemplate,”
“possible,” or the negative of these terms or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future
events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout
this Interim Report and include, but are not limited to, statements regarding our intentions, beliefs or current expectations concerning, among other
things, our results of operations, financial positions, liquidity, prospects, growth, strategies and the natural gas and oil industry. By their nature,
forward-looking statements involve risk and uncertainty because they relate to future events and circumstances.
Forward-looking statements are not guarantees of future performance and the actual results of our operations, financial position and liquidity, and the
development of the markets and the industry in which we operate, may differ materially from those described in, or suggested by, the forward-looking
statements contained in this Interim Report. In addition, even if the results of operations, financial position and liquidity, and the development of the
markets and the industry in which we operate are consistent with the forward-looking statements contained in this Interim Report, those results or
developments may not be indicative of results or developments in subsequent periods. A number of factors could cause results and developments to
differ materially from those expressed or implied by the forward-looking statements including, without limitation, general economic and business
conditions, industry trends, competition, commodity prices, changes in regulation, currency fluctuations, our ability to recover our reserves, changes in
our business strategy, political and economic uncertainty.
Forward-looking statements may, and often do, differ materially from actual results. Any forward-looking statements in this Interim Report speak only as
of the date of this Interim Report, reflect our current view with respect to future events and are subject to risks relating to future events and other risks,
uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. Subject to the requirements of the
Prospectus Rules, the Disclosure and Transparency Rules and the Listing Rules or applicable law, we explicitly disclaim any obligation or undertaking
publicly to release the result of any revisions to any forward-looking statements in this Interim Report that may occur due to any change in our
expectations or to reflect events or circumstances after the date of this Interim Report.
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Diversified Energy Company PLC Interim Report 2024
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Strategic Review
Overview of Our Business
Diversified Energy Company PLC (the “Parent” or “Company”) and its wholly owned subsidiaries (together the “Group,” “DEC,” or “Diversified”) is an
independent energy company engaged in the production, marketing and transportation of primarily natural gas.
Our proven business model creates sustainable value in today's natural gas market by investing in producing assets, reducing emissions and improving
asset integrity while generating significant, hedge-protected cash flows. We Acquire, Optimize, Produce and Transport natural gas, natural gas liquids
and oil from existing wells then Retire our wells at the end of their life to optimally steward the resource already developed by others within our
industry, reducing the environmental footprint, while sustaining important jobs and tax revenues for many local communities. While most companies in
our sector are built to explore and develop new reserves, we fully exploit existing reserves through our focus on safely and efficiently operating existing
wells to maximize their productive lives and economic capabilities, which in turn reduces the industry’s footprint on our planet.
Financial & Operating Results
Financial and operating results for the six months ended June 30, 2024 include:
•Net income of $16 million representing a decrease of 98% when compared to net income of $631 million for the same period in 2023. Diluted
earnings per share of $0.32, compared to diluted earnings per share of $13.43 for the same period in 2023;
•Total debt of $1,703 million compared to $1,555 million for the same period in 2023;
•Operating expense of $196 million compared to $227 million for the same period in 2023;
•Operating profit of $2 million representing a decrease of 100% when compared to operating profit of $910 million for the same period in 2023;
•Average daily production of 746 MMcfepd representing a decrease of 12% when compared to 852 MMcfepd for the same period in 2023, of which
8% of the decrease is related to the sale of equity interest in DP Lion Equity Holdco in December 2023;
•Realized $78 million in net gains on commodity derivatives settlements, an increase of 43% when compared to $55 million in net gains for the
same period in 2023;
•Repurchased 618,547 shares for $8.1 million (£6.4 million) at an average of $13.09 per share (£10.28) compared to 10,000 shares for $0.2 million
(£0.2 million) at an average of $21.30 per share (£17.00) for the same period in 2023;
•On June 6, 2024 we acquired Oaktree’s proportionate interest in the East Texas, Tapstone, Tanos and Indigo transactions for total consideration of
$221 million, which includes $177 million in cash and the issuance of a note payable to Oaktree of $83 million (the “Oaktree Seller’s Note”). As part
of this transaction, we assumed Oaktree’s proportionate debt of $133 million associated with the ABS VI Notes;
•Retired 140 DEC wells, including 5 Central Region wells. Further retired 34 third-party wells, including 18 state and federal orphan wells and 16
other third-party operators, for a total of 174 wells retired;
•On May 30, 2024, we issued the ABS VIII Notes, a sustainability-aligned asset-backed securitization for $610 million; and
•PV-10 value of reserves of $3.5 billion and volumes of 4,423,218 MMcfe based on NYMEX strip pricing.
Recent developments subsequent to the six months ended June 30, 2024 include:
•On July 10, 2024 we entered into a conditional agreement to acquire certain upstream assets and related infrastructure in the East Texas area of
the Central Region from Crescent Pass Energy (“Crescent Pass”) for an estimated gross purchase price of $106 million before customary purchase
price adjustments.
Key Performance Indicators
In assessing our performance, the Directors use key performance indicators (“KPIs”) to track our success against our stated strategy. The Directors
assess our KPIs on an annual basis and modify them as needed, taking into account current business developments. The following KPIs focus on
corporate and environmental responsibility, consistent cash flow generation underpinned by prudent cost management, low leverage and adequate
liquidity to protect the sustainability of the business.
Refer to the APMs section within this Interim Report for information on how these metrics are calculated and reconciled to IFRS measures.
Six Months Ended |
|||
June 30, 2024 |
June 30, 2023 |
December 31, 2023 |
|
Net debt-to-pro forma TTM Adjusted EBITDA |
2.8x |
2.4x |
2.3x |
Adjusted EBITDA margin |
49% |
52% |
52% |
Adjusted operating cost per Mcfe |
$1.74 |
$1.72 |
$1.80 |
Net cash provided by operating activities |
$161 million |
$173 million |
$238 million |
Actual wells retired: |
|||
DEC wells retired(a)
|
140 |
100 |
122 |
Wells retired by Next LVL |
118 |
87 |
95 |
(a)Inclusive of 5, 8 and 13 Central Region wells retired during 1H24, 2H23 and 1H23, respectively.
Our Emissions Intensity, State Asset Retirement Goals and Total Recordable Incident Rate (“TRIR”) are reported on an annual basis. For the years
ended December 31, 2023 and 2022, our Emissions Intensity was 0.8 MT CO2e/MMcfe and 1.2 MT CO2e/MMcfe, respectively. For the years ended
December 31, 2023 and 2022, our State Asset Retirement Goal was 80 wells. For the years ended December 31, 2023 and 2022, our TRIR was 1.28 and
0.73, respectively. Refer to our 2023 Annual Report for additional information on Emissions Intensity, State Asset Retirement Goals and TRIR.
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Diversified Energy Company PLC Interim Report 2024
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Principal Risks & Uncertainties
The Directors have reconsidered our principal risks and uncertainties and determined that the principal risks and uncertainties published in the Annual
Report for the year ended December 31, 2023 remain appropriate and will continue to be appropriate for the remainder of 2024. The risks and
associated risk management processes can be found in our 2023 Annual Report, which is available in the Investor Relations section of our website at
www.div.energy.
The risks referred to and which could have a material impact on performance relate to:
•Corporate Strategy & Acquisition Risk;
•Cybersecurity Risk;
•Health & Safety Risk;
•Regulatory & Political Risk;
•Climate Risk;
•Commodity Price Volatility Risk; and
•Financial Strength & Flexibility Risk.
Going Concern
As described in Note 2 in the Notes to the Interim Condensed Consolidated Financial Statements, the Directors have formed a judgement, at the time of
approving the Interim Condensed Consolidated Financial Statements, that there is a reasonable expectation that we are sufficiently well funded to be
able to operate as a going concern for at least the next twelve months from the date of approval of the Interim Condensed Consolidated Financial
Statements. In making this judgement, they have considered the impacts of current and severe, but plausible, consequences arising from our identified
principal risks and uncertainties to our activities. For this reason, the Directors continue to adopt the going concern basis in preparing the Interim
Condensed Consolidated Financial Statements.
Responsibility Statement
Each of the Directors confirm that, to the best of their knowledge:
•The Interim Condensed Consolidated Financial Statements have been prepared in accordance with UK-adopted International Accounting Standard
34, ‘Interim Financial Reporting’, and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group as required
by DTR 4.2.4R; and
•The interim report includes a fair review of the information required by:
◦(a) DTR 4.2.7R, being an indication of important events that have occurred during the first six months of the financial year ending December
31, 2024, and their impact on the interim financial statements; and a description of the principal risks and uncertainties for the remaining six
months of the financial year; and
◦(b) DTR 4.2.8R, being material related party transactions that have taken place in the first six months of the financial year ending December
31, 2024, and any material changes in the related party transactions described in the 2023 Annual Report.
A list of the current Directors is maintained on our website at www.div.energy.
The maintenance and integrity of the Diversified Energy Company PLC website is the responsibility of the Directors; the work carried out by the Auditors
does not involve consideration of these matters and, accordingly, the Auditors accept no responsibility for any changes that may have occurred to the
Interim Condensed Consolidated Financial Statements since they were initially presented on the website.
Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Conclusion
As we move through 2024, we celebrate our achievements so far and eagerly anticipate further progress in the second half of the year. I express my
heartfelt gratitude to the Diversified team for their unwavering dedication and hard work. I also appreciate the diligent oversight and guidance provided
by the Board. To our shareholders, lenders, and other stakeholders who entrust us with their capital, thank you for your confidence and investment in
our vision. Your trust in us to deliver sustainable value and ensure energy security is invaluable. I eagerly await the opportunity to share our full-year
results with you.
/s/ David E. Johnson
David E. Johnson
Chairman of the Board
August 15, 2024
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Diversified Energy Company PLC Interim Report 2024
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Results of Operations
Please refer to the APMs section within this Interim Report for information on how these metrics are calculated and reconciled to IFRS measures.
Six Months Ended |
||||
June 30, 2024 |
June 30, 2023 |
Change |
% Change |
|
Net production |
||||
Natural gas (MMcf) |
114,409 |
131,868 |
(17,459) |
(13)% |
NGLs (MBbls) |
2,829 |
2,981 |
(152) |
(5)% |
Oil (MBbls) |
730 |
738 |
(8) |
(1)% |
Total production (MMcfe) |
135,763 |
154,182 |
(18,419) |
(12)% |
Average daily production (MMcfepd) |
746 |
852 |
(106) |
(12)% |
% Natural gas (Mcfe basis) |
84% |
86% |
||
Average realized sales price |
||||
(excluding impact of derivatives settled in cash) |
||||
Natural gas (Mcf) |
$1.83 |
$2.54 |
$(0.71) |
(28)% |
NGLs (Bbls) |
25.07 |
22.53 |
2.54 |
11% |
Oil (Bbls) |
76.97 |
73.57 |
3.40 |
5% |
Total (Mcfe) |
$2.48 |
$2.96 |
$(0.48) |
(16)% |
Average realized sales price |
||||
(including impact of derivatives settled in cash) |
||||
Natural gas (Mcf) |
$2.58 |
$2.96 |
$(0.38) |
(13)% |
NGLs (Bbls) |
23.82 |
23.39 |
0.43 |
2% |
Oil (Bbls) |
70.49 |
68.44 |
2.05 |
3% |
Total (Mcfe) |
$3.05 |
$3.31 |
$(0.26) |
(8)% |
Revenue (in thousands)
|
||||
Natural gas |
$209,008 |
$334,588 |
$(125,580) |
(38)% |
NGLs |
70,935 |
67,159 |
3,776 |
6% |
Oil |
56,185 |
54,294 |
1,891 |
3% |
Total commodity revenue |
$336,128 |
$456,041 |
$(119,913) |
(26)% |
Midstream revenue |
17,416 |
16,662 |
754 |
5% |
Other revenue |
15,130 |
14,602 |
528 |
4% |
Total revenue |
$368,674 |
$487,305 |
$(118,631) |
(24)% |
Gain (loss) on derivative settlements |
||||
(in thousands) |
||||
Natural gas |
$86,035 |
$55,741 |
$30,294 |
54% |
NGLs |
(3,561) |
2,569 |
(6,130) |
(239)% |
Oil |
(4,725) |
(3,785) |
(940) |
25% |
Net gain (loss) on derivative settlements(a)
|
$77,749 |
$54,525 |
$23,224 |
43% |
Total revenue, inclusive of settled hedges |
$446,423 |
$541,830 |
$(95,407) |
(18)% |
(a)Net gain (loss) on commodity derivative settlements represents cash (paid) or received on commodity derivative contracts. This excludes settlements on foreign
currency and interest rate derivatives as well as the gain (loss) on fair value adjustments for unsettled financial instruments for each of the periods presented.
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Diversified Energy Company PLC Interim Report 2024
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Six Months Ended |
||||
June 30, 2024 |
June 30, 2023 |
Change |
% Change |
|
Per Mcfe metrics |
||||
Average realized sales price |
||||
(including impact of derivatives settled in cash) |
$3.05 |
$3.31 |
$(0.26) |
(8)% |
Other revenue |
0.24 |
0.20 |
0.04 |
20% |
LOE |
(0.73) |
(0.72) |
(0.01) |
1% |
Midstream operating expense |
(0.26) |
(0.22) |
(0.04) |
18% |
Employees, administrative costs and professional
services
|
(0.30) |
(0.25) |
(0.05) |
20% |
Production taxes |
(0.15) |
(0.20) |
0.05 |
(25)% |
Transportation expense |
(0.31) |
(0.32) |
0.01 |
(3)% |
Proceeds received for leasehold sales |
0.05 |
0.04 |
0.01 |
25% |
Adjusted EBITDA per Mcfe |
$1.59 |
$1.84 |
$(0.25) |
(14)% |
Adjusted EBITDA margin |
49% |
52% |
||
Other financial metrics (in thousands) |
||||
Adjusted EBITDA |
$217,787 |
$282,864 |
$(65,077) |
(23)% |
Operating profit (loss) |
$2,391 |
$909,656 |
$(907,265) |
(100)% |
Net income (loss) |
$15,745 |
$630,932 |
$(615,187) |
(98)% |
Production, Revenue & Hedging
Total revenue in the six months ended June 30, 2024 of $369 million decreased 24% from $487 million reported for the six months ended June 30,
2023, primarily due to a 16% decrease in the average realized sales price, excluding the impact of derivatives settled in cash, and a 12% decrease in
sold volumes, which was primarily related to the sale of equity interest in DP Lion Equity Holdco in December 2023 along with normal declines. Including
commodity hedge settlement gains of $78 million and $55 million in the six months ended June 30, 2024 and 2023, respectively, total revenue, inclusive
of settled hedges decreased by 18% to $446 million in 2024 from $542 million in 2023.
The following table summarizes average commodity prices for the periods presented:
Six Months Ended |
||||
June 30, 2024 |
June 30, 2023 |
$ Change |
% Change |
|
Henry Hub (Mcf) |
$2.07 |
$2.76 |
$(0.69) |
(25)% |
Mont Belvieu (Bbls) |
38.58 |
34.28 |
4.30 |
13% |
WTI (Bbls) |
78.76 |
74.96 |
3.80 |
5% |
Commodity Revenue
The following table reconciles the change in commodity revenue (excluding the impact of hedges settled in cash) for the periods presented by reflecting
the effect of changes in volume and in the underlying prices:
(In thousands) |
Natural Gas |
NGLs |
Oil |
Total |
Commodity revenue for the six months ended June 30, 2023 |
$334,588 |
$67,159 |
$54,294 |
$456,041 |
Volume increase (decrease) |
(44,346) |
(3,425) |
(589) |
(48,360) |
Price increase (decrease) |
(81,234) |
7,201 |
2,480 |
(71,553) |
Net increase (decrease) |
(125,580) |
3,776 |
1,891 |
(119,913) |
Commodity revenue for the six months ended June 30, 2024 |
$209,008 |
$70,935 |
$56,185 |
$336,128 |
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Diversified Energy Company PLC Interim Report 2024
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To manage our cash flows in a volatile commodity price environment, we utilize derivative contracts that allow us to fix the per unit sales prices for our
production. As of June 30, 2024, approximately 75% of our production was fixed through derivative contracts over the next twelve months. The tables
below set forth the commodity hedge impact on commodity revenue, excluding and including cash received for commodity hedge settlements with
natural gas on a per Mcf basis, NGLs and oil on a per Bbl basis and Total Commodity on a per Mcfe basis:
(In thousands, except per unit data) |
Six Months Ended June 30, 2024 |
|||||||
Natural Gas |
NGLs |
Oil |
Total Commodity |
|||||
Revenue |
Realized $ |
Revenue |
Realized $ |
Revenue |
Realized $ |
Revenue |
Realized $ |
|
Excluding hedge impact |
$209,008 |
$1.83 |
$70,935 |
$25.07 |
$56,185 |
$76.97 |
$336,128 |
$2.48 |
Commodity hedge impact |
86,035 |
0.75 |
(3,561) |
(1.25) |
(4,725) |
(6.48) |
77,749 |
0.57 |
Including hedge impact |
$295,043 |
$2.58 |
$67,374 |
$23.82 |
$51,460 |
$70.49 |
$413,877 |
$3.05 |
(In thousands, except per unit data) |
Six Months Ended June 30, 2023 |
|||||||
Natural Gas |
NGLs |
Oil |
Total Commodity |
|||||
Revenue |
Realized $ |
Revenue |
Realized $ |
Revenue |
Realized $ |
Revenue |
Realized $ |
|
Excluding hedge impact |
$334,588 |
$2.54 |
$67,159 |
$22.53 |
$54,294 |
$73.57 |
$456,041 |
$2.96 |
Commodity hedge impact |
55,741 |
0.42 |
2,569 |
0.86 |
(3,785) |
(5.13) |
54,525 |
0.35 |
Including hedge impact |
$390,329 |
$2.96 |
$69,728 |
$23.39 |
$50,509 |
$68.44 |
$510,566 |
$3.31 |
Refer to Note 8 in the Notes to the Interim Condensed Consolidated Financial Statements for additional information regarding derivative financial
instruments.
Expenses
(In thousands, except per unit data) |
Six Months Ended |
|||||||
Total Change |
Per Mcfe Change |
|||||||
June 30, 2024 |
Per Mcfe |
June 30, 2023 |
Per Mcfe |
$ |
% |
$ |
% |
|
LOE(a)
|
$98,511 |
$0.73 |
$111,637 |
$0.72 |
$(13,126) |
(12)% |
$0.01 |
1% |
Production taxes(b)
|
19,993 |
0.15 |
31,307 |
0.20 |
(11,314) |
(36)% |
(0.05) |
(25)% |
Midstream operating expense(c)
|
35,563 |
0.26 |
34,391 |
0.22 |
1,172 |
3% |
0.04 |
18% |
Transportation expense (d)
|
42,045 |
0.31 |
49,964 |
0.32 |
(7,919) |
(16)% |
(0.01) |
(3)% |
Total operating expense |
$196,112 |
$1.45 |
$227,299 |
$1.46 |
$(31,187) |
(14)% |
$(0.01) |
(1)% |
Employees, administrative costs and
professional services(e)
|
40,482 |
0.30 |
38,497 |
0.25 |
1,985 |
5% |
0.05 |
20% |
Costs associated with acquisitions(f)
|
3,724 |
0.03 |
8,866 |
0.06 |
(5,142) |
(58)% |
(0.03) |
(50)% |
Other adjusting costs(g)
|
10,451 |
0.08 |
3,376 |
0.02 |
7,075 |
210% |
0.06 |
300% |
Non-cash equity compensation(h)
|
3,669 |
0.03 |
4,417 |
0.03 |
(748) |
(17)% |
— |
—% |
Total operating and G&A expense |
$254,438 |
$1.89 |
$282,455 |
$1.82 |
$(28,017) |
(10)% |
$0.07 |
4% |
Depreciation, depletion and
amortization
|
119,220 |
0.88 |
115,036 |
0.75 |
4,184 |
4% |
0.13 |
17% |
Total expenses |
$373,658 |
$2.77 |
$397,491 |
$2.57 |
$(23,833) |
(6)% |
$0.20 |
8% |
(a)LOE includes costs incurred to maintain producing properties. Such costs include direct and contract labor, repairs and maintenance, water hauling, compression,
automobile, insurance, and materials and supplies expenses.
(b)Production taxes include severance and property taxes. Severance taxes are generally paid on produced natural gas, NGLs and oil production at fixed rates established
by federal, state, or local taxing authorities. Property taxes are generally based on the taxing jurisdictions’ valuation of our natural gas and oil properties and midstream
assets.
(c)Midstream operating expenses are daily costs incurred to operate our owned midstream assets inclusive of employee and benefit expenses.
(d)Transportation expenses are daily costs incurred from third-party systems to gather, process and transport our natural gas, NGLs and oil.
(e)Employees, administrative costs and professional services includes payroll and benefits for our administrative and corporate staff, costs of maintaining administrative
and corporate offices, costs of managing our production operations, franchise taxes, public company costs, fees for audit and other professional services and legal
compliance.
(f)We generally incur costs related to the integration of acquisitions, which will vary for each acquisition. For acquisitions considered to be a business combination, these
costs include transaction costs directly associated with a successful acquisition transaction. These costs also include costs associated with transition service
arrangements where we pay the seller of the acquired entity a fee to handle various G&A functions until we have fully integrated the assets onto our systems. In
addition, these costs include costs related to integrating IT systems and consulting as well as internal workforce costs directly related to integrating acquisitions into our
systems.
(g)Other adjusting costs include items that affect the comparability of results or that are not indicative of trends in the ongoing business. These costs consist of one time
projects, contemplated transactions or financing arrangements, contract terminations, deal breakage and/or sourcing costs for acquisitions, and unused firm
transportation.
(h)Non-cash equity compensation reflects the expense recognition related to share-based compensation provided to certain key members of the management team.
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Diversified Energy Company PLC Interim Report 2024
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Operating Expense
Per unit operating expense decreased due to:
•Lower per unit production taxes that declined 25%, or $0.05 per Mcfe, primarily attributable to a decrease in severance and property taxes as a
result of a decrease in unhedged revenue due to lower production and commodity prices; and
•Lower per unit transportation expense that declined 3%, or $0.01 per Mcfe, were primarily related to decreases in commodity price-linked
components of third-party midstream rates and costs.
Partially offsetting the per unit decrease was:
•Higher per unit LOE rose 1%, or $0.01 per Mcfe. While total LOE decreased, primarily as a result of changes in variable operating costs due to
lower production, the fixed component of LOE, coupled with decreased production, led to a slight per unit increase.
General & Administrative (“G&A”) Expense
G&A expense increased due to:
•Higher other adjusting costs primarily due to costs associated with unused firm transportation, residual costs associated with our listing on the
NYSE and litigation expense; and
•Higher employees, administrative costs and professional services due to investments made in staff and systems and costs related to services
required for our listing on two stock exchanges. On a per Mcfe basis, these costs increased 20%, or $0.05 per Mcfe.
Partially offsetting the increase was:
•A decrease in costs associated with acquisitions when compared to the same period of 2023 which was primarily due to lower costs associated with
the integration of the Oaktree acquisition, whose assets we already operate and manage, as compared to the integration of the prior year Tanos II
acquisition.
Other Expenses
Depreciation, depletion and amortization (“DD&A”) increased due to:
•Higher depletion expense as a result of an increase in our DD&A rate, which was partially offset by a 12% decrease in production over the period.
The increase in our DD&A rate was due to the decrease in our estimated proved reserves relative to our depreciable base driven primarily by
changes in commodity prices year-over-year as well as the sale of equity interest in DP Lion Equity Holdco LLC in December 2023;
•Higher depreciation and amortization expense attributable to an increase in the depreciable cost basis of property, plant & equipment primarily
resulting from maintenance and fleet capital expenditures.
Derivative Financial Instruments
We recorded the following gain (loss) on derivative financial instruments in the Consolidated Statement of Comprehensive Income for the periods
presented:
(In thousands) |
Six Months Ended |
|||
June 30, 2024 |
June 30, 2023 |
$ Change |
% Change |
|
Net gain (loss) on commodity derivatives
settlements(a)
|
$77,749 |
$54,525 |
$23,224 |
43% |
Net gain (loss) on interest rate swap(a)
|
100 |
(2,824) |
2,924 |
(104)% |
Gain (loss) on foreign currency hedges(a)
|
— |
(521) |
521 |
(100)% |
Total gain (loss) on settled derivative
instruments
|
$77,849 |
$51,180 |
$26,669 |
52% |
Gain (loss) on fair value adjustments of unsettled
financial instruments(b)
|
(80,117) |
760,933 |
(841,050) |
(111)% |
Total gain (loss) on derivative financial
instruments
|
$(2,268) |
$812,113 |
$(814,381) |
(100)% |
(a)Represents the cash settlement of hedges that settled during the period.
(b)Represents the change in fair value of financial instruments net of removing the carrying value of hedges that settled during the period.
For the six months ended June 30, 2024, the total loss on derivative financial instruments of $2 million decreased by $814 million compared to a gain of
$812 million in 2023. Adjusting our unsettled derivative contracts to their fair values drove a loss of $80 million in 2024, a decrease of $841 million, as
compared to a gain of $761 million in 2023, which is reflective of higher commodity prices on the forward curve.
For the six months ended June 30, 2024, the total cash gain on settled derivative instruments was $78 million, an increase of $27 million when
compared to 2023. The gain on settled derivative instruments relates to lower commodity prices than those we secured through our derivative
contracts. With consistent reliable cash flows central to our strategy, we routinely hedge at levels that, based on our operating and overhead costs,
provide a significant adjusted EBITDA margin even if it means forgoing potential price upside.
Refer to Note 8 in the Notes to the Interim Condensed Consolidated Financial Statements for additional information regarding derivative financial
instruments.
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Diversified Energy Company PLC Interim Report 2024
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Finance Costs
(In thousands) |
Six Months Ended |
|||
June 30, 2024 |
June 30, 2023 |
$ Change |
% Change |
|
Interest expense, net of capitalized and income
amounts(a)
|
$52,494 |
$58,768 |
$(6,274) |
(11)% |
Amortization of discount and deferred finance costs |
8,087 |
8,968 |
(881) |
(10)% |
Total finance costs |
$60,581 |
$67,736 |
$(7,155) |
(11)% |
Loss on early retirement of debt(b)
|
$10,649 |
$— |
$10,649 |
100% |
(a)Includes payments related to borrowings and leases.
(b)In May 2024, we used proceeds from the ABS VIII Notes to repay the outstanding principal of the ABS III & V notes, thereby retiring the ABS III & V notes from our
outstanding debt and resulting in a loss on the early retirement of debt of $11 million. Diversified ABS III LLC & Diversified ABS V LLC were concurrently dissolved. The
ABS VIII Notes are secured by the collateral previously securing the ABS III & V notes.
For the six months ended June 30, 2024, interest expense of $52 million decreased $6 million compared to $59 million in 2023, primarily due to lower
outstanding balances on our existing ABS structures, as well as lower interest on the credit facility due to a lower average outstanding balance during
the six months ended June 30, 2024 as compared to the six months ended June 30, 2023. These decreases were partially offset by interest on the new
ABS Facility Warehouse and Oaktree Sellers Note.
As of June 30, 2024 and 2023, total borrowings were $1,703 million and $1,555 million, respectively. For the period ended June 30, 2024, the weighted
average interest rate on our borrowings was 7.22% as compared to 6.19% as of June 30, 2023. This increase primarily resulted from a change in the
mix of our financing year-over-year. As of June 30, 2024, 79% of our borrowings were in fixed-rate, hedge-protected, amortizing ABS structures as
compared to 82% as of June 30, 2023.
As discussed above, we used proceeds from the ABS VIII Notes to repay the outstanding principal of the ABS III & V notes, which resulted in a loss on
early extinguishment of debt of $11 million, which primarily included a $9 million charge for the accelerated amortization of the remaining deferred
financing costs and $2 million related to an early payment fee.
Refer to Notes 4 and 12 in the Notes to the Interim Condensed Consolidated Financial Statements for additional information regarding acquisitions and
borrowings, respectively.
Taxation
Income tax benefit (expense) is recognized based on management’s estimate of the weighted average effective annual income tax rate expected for the
full financial year. The estimate of the annual effective tax rate is subject to variation due to several factors, including variability in forecasted pre-tax
book income or loss by jurisdiction, tax credits, and changes in tax laws. Additionally, the effective tax rate can be more or less volatile based on the
amount of pre-tax income or loss. For example, the impact of tax credits on our effective tax rate is greater when our pre-tax income or loss is lower.
The estimated average annual tax rate used for the six months ended June 30, 2024 was 119.1%, compared to 23.8% for the six months ended June
30, 2023. For the six months ended June 30, 2024, we reported tax benefit of $98 million, a change of $295 million, compared to an expense of $197
million in 2023, which was a result of the change in the income (loss) before taxation primarily due to the change in the fair value of unsettled derivative
financial instruments. The June 30, 2024 effective tax rate was primarily impacted by the recognition of the federal marginal well tax credit available to
qualified producers. The federal government provides these credits to encourage companies to continue producing natural gas from lower-volume wells
during periods of low prices to maintain the underlying jobs they create and the state and local tax revenues they generate for communities to support
schools, social programs, law enforcement and other similar public services. Refer to the following section for additional information regarding period-
over-period changes in income (loss) before taxation. The marginal well credit was not available in 2023 due to higher gas prices in 2022, therefore the
effective tax rate was closer to the statutory rate.
The provision for income taxes in the Consolidated Statement of Comprehensive Income is summarized below:
Six Months Ended |
||||
(In thousands) |
June 30, 2024 |
June 30, 2023 |
$ Change |
% Change |
Current income tax (benefit) expense |
||||
Federal (benefit) expense |
$4,568 |
$1,993 |
$2,575 |
129% |
State (benefit) expense |
4,217 |
2,128 |
2,089 |
98% |
Foreign - UK (benefit) expense |
— |
17 |
(17) |
(100)% |
Total current income tax (benefit) expense |
$8,785 |
$4,138 |
$4,647 |
112% |
Deferred income tax (benefit) expense |
||||
Federal (benefit) expense |
$(98,109) |
$172,067 |
$(270,176) |
(157)% |
State (benefit) expense |
(8,722) |
21,119 |
(29,841) |
(141)% |
Foreign - UK (benefit) expense |
49 |
— |
49 |
100% |
Total deferred income tax (benefit) expense |
$(106,782) |
$193,186 |
$(299,968) |
(155)% |
Total income tax (benefit) expense |
$(97,997) |
$197,324 |
$(295,321) |
(150)% |
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Diversified Energy Company PLC Interim Report 2024
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The effective tax rate is calculated on the face of the Statement of Comprehensive Income by dividing the amount of recorded income tax benefit
(expense) by the income (loss) before taxation as follows:
(In thousands) |
Six Months Ended |
|||
June 30, 2024 |
June 30, 2023 |
$ Change |
% Change |
|
Income (loss) before taxation |
$(82,252) |
$828,256 |
$(910,508) |
(110)% |
Income tax benefit (expense) |
97,997 |
(197,324) |
295,321 |
(150)% |
Effective tax rate |
119.1% |
23.8% |
||
The differences between the statutory U.S. federal income tax rate and the effective tax rates are summarized as follows:
Six Months Ended |
||
|
(In thousands) June 30, 2024 |
June 30, 2023 |
|
Expected tax at statutory U.S. federal income tax rate |
21.0% |
21.0% |
State income taxes, net of federal tax benefit |
2.1% |
3.0% |
Federal credits |
96.9% |
—% |
Other, net |
(0.9)% |
(0.2)% |
Effective tax rate |
119.1% |
23.8% |
Operating Profit, Net Income, EPS & Adjusted EBITDA
(In thousands, except per unit data) |
Six Months Ended |
|||
June 30, 2024 |
June 30, 2023 |
$ Change |
% Change |
|
Operating profit (loss) |
$2,391 |
$909,656 |
$(907,265) |
(100)% |
Net income (loss) |
15,745 |
630,932 |
(615,187) |
(98)% |
Adjusted EBITDA |
217,787 |
282,864 |
(65,077) |
(23)% |
Earnings (loss) per share - basic |
$0.32 |
$13.61 |
$(13.29) |
(98)% |
Earnings (loss) per share - diluted |
0.32 |
13.43 |
(13.11) |
(98)% |
For the six months ended June 30, 2024, we reported net income of $16 million and diluted earnings per share of $0.32 compared to net income of
$631 million and EPS of $13.61 in 2023, a decrease of 98% and 98%, respectively. We also reported an operating profit of $2 million compared with an
operating profit of $910 million for the six months ended June 30, 2024 and 2023, respectively. This year-over-year decrease in net income was
primarily attributable to a decrease of $841 million in the gain (loss) on fair value adjustments of unsettled derivative financial instruments. For the six
months ended June 30, 2024, the impact on the fair value of derivative financial instruments was a loss of $80 million in 2024 compared to a gain of
$761 million for the same period in 2023.
Additional adjustments for DD&A, interest, and taxes resulted in adjusted EBITDA of $218 million compared to $283 million in 2023, representing a
decrease of 23%. The decrease in this metric is a result of the low commodity price environment experienced during 2024 as well as decreased
production from the sale of equity interest in DP Lion Equity Holdco in December 2023 and normal production declines.
Refer to the APMs section within this Interim Report for information on how adjusted EBITDA is calculated and reconciled to IFRS measures.
Liquidity & Capital Resources
Overview
Our principal sources of liquidity are cash generated from operations and available borrowings under our Credit Facility. To minimize interest expense,
we use our excess cash flow to reduce borrowings on our Credit Facility and as a result have historically carried little cash on our Consolidated
Statement of Financial Position as evidenced by our $3 million and $4 million in cash and cash equivalents as of June 30, 2024 and December 31, 2023,
respectively.
When we acquire assets to grow, we complement our Credit Facility with long-term, fixed-rate, fully-amortizing, asset-backed debt secured by certain
natural gas and oil assets that better match the long-life nature of our assets. These structures afford us low borrowing rates and also provide a visible
path for reducing leverage as we make scheduled principal payments. For larger value-adding acquisitions, and to ensure we maintain a leverage profile
that we believe is appropriate for the type of assets we acquire, we also raise proceeds through secondary equity offerings from time to time.
We monitor our working capital to ensure that the levels remain adequate to operate the business with excess liquidity primarily utilized for the
repayment of debt. In addition to working capital management, we have a disciplined approach to managing operating costs and allocating capital
resources, ensuring that we are generating returns on our capital investments to support the strategic initiatives in our business operations.
Capital expenditures were $21 million for the six months ended June 30, 2024 compared to $32 million for the six months ended June 30, 2023. This
decrease in capital expenditures was primarily driven by the completion of wells in 2023 that were under development at the time of the March 2023
Tanos II acquisition offset by the expansion and processing capabilities at our Black Bear facility in the Central Region during the first half of 2024. We
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Diversified Energy Company PLC Interim Report 2024
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expect to meet our capital expenditure needs for the foreseeable future from our operating cash flows and our existing liquidity. Our future capital
requirements will depend on several factors, including our growth rate and future acquisitions, among other things.
With respect to our other known current obligations, we believe that our sources of liquidity and capital resources will be sufficient to meet our existing
business needs for at least the next 12 months. However, our ability to satisfy our working capital requirements, debt service obligations and planned
capital expenditures will depend upon our future operating performance, which will be affected by prevailing economic conditions in the natural gas and
oil industry and other financial and business factors, some of which are beyond our control.
Refer to Note 11 in the Notes to the Interim Condensed Consolidated Financial Statements for additional information regarding our current debt
obligations.
Liquidity
The table below represents our liquidity position as of the periods presented:
As of |
||
(In thousands) |
June 30, 2024 |
December 31, 2023 |
Cash and cash equivalents |
$3,483 |
$3,753 |
Available borrowings under the Credit Facility(a)
|
103,088 |
134,817 |
Liquidity |
$106,571 |
$138,570 |
(a)Represents available borrowings under the Credit Facility of $117 million and $146 million less outstanding letters of credit of $14 million and $11 million as of June 30,
2024 and December 31, 2023, respectively.
Debt
Our net debt consisted of the following as of the periods presented:
As of |
||
(In thousands) |
June 30, 2024 |
December 31, 2023 |
Credit Facility |
268,000 |
159,000 |
ABS I Notes |
90,847 |
100,898 |
ABS II Notes |
114,945 |
125,922 |
ABS III Notes |
— |
274,710 |
ABS IV Notes |
88,418 |
99,951 |
ABS V Notes |
— |
290,913 |
ABS VI Notes(a)
|
273,805 |
159,357 |
ABS VIII Notes |
607,740 |
— |
ABS Warehouse Facility |
71,000 |
— |
Term Loan I |
98,023 |
106,470 |
Deferred consideration and miscellaneous(b)
|
90,717 |
7,627 |
Total debt |
$1,703,495 |
$1,324,848 |
LESS: Cash and cash equivalents |
3,483 |
3,753 |
LESS: Restricted cash(c)
|
54,976 |
36,252 |
Net debt |
$1,645,036 |
$1,284,843 |
(a)Includes $133 million for the assumption of Oaktree’s proportionate share of the ABS VI debt as part of the Oaktree transaction as of June 30, 2024. Refer to Note 4 in
the Notes to the Interim Condensed Consolidated Financial Statements for additional information regarding the Oaktree transaction.
(b)Includes $83 million in notes payable issued as part of the consideration in the Oaktree transaction as of June 30, 2024. Refer to Note 4 in the Notes to the Interim
Condensed Consolidated Financial Statements for additional information regarding the Oaktree transaction.
(c)Includes $28 million and $3 million in restricted cash attributable to the ABS VIII Notes and ABS Warehouse Facility, respectively, offset by $7 million and $8 million
attributable to the retirement of the ABS III Notes and ABS V Notes, respectively.
Refer to Note 12 in the Notes to the Interim Condensed Consolidated Financial Statements for additional information regarding borrowings.
Asset Retirement Obligations
We continue to be proactive and innovative with respect to asset retirement. In 2017, after our LSE IPO, we began to meet with state officials to
develop a long-term plan to retire our growing portfolio of long-life wells. Collaborating with the state regulators, we designed our retirement activities
to be equitable for all stakeholders with an emphasis on the environment.
During the six months ended June 30, 2024 we accomplished the following:
•Retired 140 Diversified wells, inclusive of the Central Region, an increase of 40% when compared to the same period in 2023, and on track to meet
our stated goal to retire 200 wells per year; and
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Diversified Energy Company PLC Interim Report 2024
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•Retired 34