WTI $78.36 -$2.40, Brent $80.28 -$2.15, Diff -$1.92 +25c, NG $4.82 -36c, UKNG 237.43p -7.57p

Oil price

Oil has recovered a bit today as the sell off appeared to have been a bit overdone, as I said yesterday maybe the traders are looking a quarter ahead…

Diversified Energy Company

In a Capital Markets Day Update yesterday Diversified Expanded ESG Commitments and during the presentation, Chief Executive Officer Rusty Hutson, Jr., Chief Operating Officer Brad Gray, Chief Financial Officer Eric Williams and other members of Diversified’s leadership team  provided investors an in-depth overview of the Company’s strategy and operations with an emphasis on its commitment to Environmental, Social and Governance (ESG) initiatives.

The Company featured key initiatives that included $15 million of additional investments in methane emissions reduction initiatives and detailed 2022 plans that include the deployment of new methane emissions detection equipment, a multi-year plan to reduce methane emissions from pneumatic devices by installing air compression, expanding internal asset retirement capabilities into Pennsylvania and implementation of a multi-year aerial surveillance program to enhance the Company’s ability to detect and reduce fugitive emissions.

Evolving mid-term (2023-26) plans designed to curb Scope 1 methane emissions intensity by 30% by 2026 versus 2020 levels. Refining long-term plans (2027 and beyond) to accelerate Diversified’s commitment to achieve Scope 1 carbon neutrality by 2040, a decade earlier than its previously stated 2050 commitment. Establishing incremental milestones to achieve carbon neutrality, the Company aims to reduce Scope 1 methane emissions intensity by 50% versus 2020 levels by 2030.

Independent verification of 2021 emissions data, demonstrating its commitment to transparent disclosure of emissions data, Diversified will appoint an independent expert to verify its 2021 and future years’ reported greenhouse gas emissions (GHG).

Commitment to accelerate retirement of non-producing wells, the Company will increase the wells it permanently retires annually to at least 200 by 2023, equating to 250% of its requirements under current state asset retirement agreements. Building on its success in West Virginia, the Company commits to expand its in-house asset retirement capabilities with an additional plugging crew focused on well retirements within Pennsylvania.

$2 million community outreach target, beginning in 2022, Diversified is committing up to $2 million annually for community outreach and support programs. This financial contribution complements the service projects its employees already perform within the communities where they live and work.

Exploring options for a US dual-listing, the Company continues to evaluate the possibility of a US dual-listing to complement its current listing on the London Stock Exchange. Diversified believes its cash flow-centric strategy with a proven track record of meaningful dividend distributions supports demand for a dual US-listing as the Company effects its accretive growth strategy and achieves higher earnings, cash flow, market capitalization and enterprise value. A US dual-listing can improve the Company’s access to high-quality equity investors and enhance its daily trading liquidity.

Rusty Hutson, Jr., CEO of Diversified, commented:

“Today’s Capital Markets Day event allows us to advance our ongoing dialogue with shareholders, analysts and other stakeholders. We are providing an in-depth look at our strategy for acquiring long-life, low-decline producing assets with an emphasis on the important work we do to improve our environmental stewardship in all facets of our operations. As we survey the evolving global landscape, we remain confident that Diversified is essential to the energy transition with our unwavering commitment to sustainability practices and responsible asset retirement. Looking ahead, we will continue to generate substantial free cash flow that will fund today’s announced ESG commitments in addition to our consistent dividends, debt reduction and accretive reinvestment to sustain our business.” 

Yesterday’s CMD gave DEC the opportunity to set the record straight and across the board and beyond, many executives spoke at length about the Company’s philosophy, its vital role in the future of natural gas in which it is poised to thrive  during the inevitable market transition. 

I can see how it will balance the provision of affordable, reliable and clean natural gas and yet still deliver substantial returns from its ‘robust’ cash margins. But first of all what ran through the meat of the five hours of presentations and Q&A was just how serious the company is about emissions and also has a zero tolerance policy on methane emissions. This has been formally stated in a range of commitments with in particular in the above numbers which lead to their statements for 2026, 2030 and 2040. 

Hitting these targets involves at the very minimum meeting and likely comfortably exceeding regulatory requirements as a matter of course. In my view DEC has to be at the very top of the league tables in these requirements, they are deliberately placing themselves there now and I can’t see many, if any, companies who will compete at such levels, market leadership is without doubt within reach. 

The success of the DEC model, to make meaningful acquisitions which create value over a long period of time and importantly create significant margins through synergies and efficiencies.  Acquisitions, initially in the Appalachian Basin and now joined by first deals in the Central region have been of the order of $2bn and I expect more to come, particularly in Central. This policy has been backed up by a commitment to never over leverage or do dilutive deals. 

By adhering to these goals DEC has created a substantial cash flow business and more enabled to pay market topping dividends which appeal to investors across the energy space. At this stage it should be noted that the company is looking at a Dual Listing which if it can make it work should be able to utilise more equity as part of upcoming deals and create a pool of capital. 

At board level the CEO, CFO and COO are an integrated team on their climate responsibilities and this reaches right across the company as we heard in many presentations made. They genuinely believe that when it comes to energy transition, and the tag line of ‘if not Diversified then who’ sets the targets for positive impact on the environment. 

DEC operatives are armed with a selection of detection kit and also the the means to make necessary repairs on the spot, a major part of the investment in eliminating emissions has been this capex. At the operating level I was extremely impressed by the key VP’s particularly at upstream and midstream operations but to be fair this excellence is visible all the way through the company.

My comments today have been made within  hours of a really detailed Capital Markets Day and I will be adding plenty more comments when I have had a further chance to assimilate what we heard. What I can say is that this is a tight, well managed and spectacularly successful company and there is plenty more to go for. Rusty Hutson leads from the front but is clearly highly respected across the whole company and it certainly showed yesterday. Watch out for the Dual Listing, it will have a very positive effect. 

PetroTal Corp

PetroTal has announced its financial and operating results for the nine and three months ended September 30, 2021.In it PetroTal delivers 8% production growth, robust net operating income, continued balance sheet strength, and operational excellence from well 8H performance.

It has achieved Q3 2021 production of 9,508 barrels of oil per day, within 2% of Q3 2021 guidance and 8% above Q2 2021 production of 8,839 bopd, under constrained production levels; Generated record daily oil production of 16,140 barrels on September 24, 2021, demonstrating PetroTal’s ability to handle increased fluid levels, in advance of CPF-2 final commissioning; Attained payback on the recently drilled well (“8H”) in approximately 40 days from completion; Commenced drilling well 9H on September 23, 2021, PetroTal’s longest reach horizontal well to date.

The well is estimated to cost approximately $15.5 million with first production estimated in early December 2021; Q4 2021 production guidance is now revised to approximately 12,500 bopd due to a drilling delay for 9H that required a side-track resulting from recalibration and optimization of the new synthetic mud system; Current average production is approximately 11,775 bopd, over the five days ending November 16, 2021.

Updated 2021 EBITDA guidance is between $105 – $110 million for 2021, up materially from the original 2021 $90 million budget and includes deferred 9H production into 2022, along with timing delays in the realization of the positive true-up revenue from the Petroperu operated North Peruvian Pipeline sales at the Bayovar Port;

Achieved continued net income for the sixth consecutive quarter, $15.0 million in Q3 2021, approximately 32% above Q2 2021 net income of $11.4 million, as a result of higher oil production, higher oil prices and derivative gains;

The Company has outlined its intended capital allocation strategy for the next five years and is prioritizing continued field development and debt repayment followed by dividends and or share buybacks thereafter; and, PetroTal continues to play a key role as liaison between the communities and the Peruvian government towards a revised social profit contract that, upon ratification, is expected to lead to overall community support.

Manuel Pablo Zuniga-Pflucker, President and Chief Executive Officer, commented

“We are pleased to report another strong quarter from both technical and financial perspectives.  During the quarter, our operational team delivered a near record setting well in 8H allowing PetroTal to achieve a record daily field production high of 16,140 bopd, a level previously unseen at PetroTal.  We also demonstrated operational excellence by testing our facilities at full capacity of fluid volumes with great results.  The 9H drill is proceeding nicely with continued learning and operational calibration for the synthetic mud system.  From a commercial perspective, we continue to successfully navigate social headwinds demonstrating leadership with initiatives that are proving valuable in H2 2021 and should provide a lasting and more stable alignment between the Government and communities.”

Yet again PetroTal has delivered the goods well and truly beating forecasts on production and EBITDA guidance. With the 8H well looking better every time I see it it will now push Q4 production up to 12,500 bopd and daily records being set all the time.

The EBITDA guidance is now $105-110m and having been down at $90 earlier in the year is showing that PTAL is 2H weighted and pushing hard into 2022 even before CPF-2 is finally commissioned. The local difficulties are showing the foresight in getting the Brazil export route in place and this provides even more flexibility.

It is worth noting that PTAL has a market leading ESG position and is active with social policies towards a revised social profit contract that should lead to increased local community support. 

To paraphrase Manolo the company has a long term capital policy that increased production giving robust cash flow to pay down debt and distribute to shareholders via dividends and share buy backs. At current levels the market has still to take things into account, my increased TP is 60p but to be honest that should be easily achieved if the numbers are delivered by PetroTal and I for one believe they will be.