Diversified Energy (DEC) Q2 2026 earnings call transcript

It is now my pleasure to introduce your host, Douglas Criss, Senior Vice President, Investor Relations and Corporate Communications. Thank you. You may begin. Good morning. Thank you all for joining us today, and welcome to our second quarter 2026 results conference call. With me today are Diversified Chairman and Chief Executive Officer Rusty Hudson, President and Chief Financial Officer Brad Gray, and Executive Vice President and Chief Operating Officer Rick Gideon. Before we get started, I will remind everyone that the remarks on this call reflect the financial and operational outlook as of today, August 6, 2026.

Certain statements made on today's call are forward-looking and may be subject to risks and uncertainties related to future events and the future financial performance of the company. Actual results could differ materially from those anticipated. The risk factors that may affect results are detailed in the company's public filings with the SEC, included the annual report on Form 10-K for the fiscal year ended December 31, 2025, filed on February 26, 2026, and subsequent filings with the SEC. During this call, we also reference certain non-GAAP financial measures. Our disclosures regarding those items are found in our earnings materials, on our website, and in our regulatory filings. I will now turn the call over to Rusty.

Thank you, Doug, and thank you all for joining the call today. For those of you following along with our results slide deck, which we posted to our website last night, I plan to cover a few slides focusing on the results that we announced. And our introduction of a development program. I will then turn the call over to Rick to provide some greater detail on that program, and Brad will provide a look at the financial rationale and our updated 2026 guidance. After Brad's remarks, I will provide some closing thoughts before opening the call for your questions. We'll start on slide three. This slide tells the story of how we run the company through disciplined capital allocation priorities that are core to our differentiated business model.

Not only is our business model differentiated, it is proven. Our model continues to deliver durable free cash flow from a low-declined asset base, along with continued portfolio optimization of non-core assets that we can deploy to our four key priorities for capital allocation. Which are as follows, systematic debt reduction, return of capital through dividend distributions and share repurchases, and growing our portfolio of cash-generating assets through accretive strategic acquisitions.

Going into the second half of the year, we are in one of the strongest fiscal positions we have been in during our 25-year history. And notably, after closing three acquisitions for over $2 billion in headline value within the last 12 months. I am extremely proud of our team for delivering outstanding results. As you can see on this page, we reinforced our track record across all our shareholder priorities during the first half of this year. During the first half of 2026, we repaid approximately $233 million in debt principal, which also includes the retirement of debt associated with our non-core Barnett asset, which was recently sold. This is not just financial housekeeping. It's strategic. Every dollar of debt we retire strengthens our balance sheet, reduces our cost of capital, and expends our capacity to deliver consistent results and to create long-term value for our shareholders.

With our pro-forma leverage at approximately 2.45 times within our target range and over $678 million in liquidity at the end of the quarter, we are operating from a position of strength. We returned approximately $136 million to shareholders through dividends and strategic share repurchases. At current levels, that is an approximate 14% shareholder return on capital yield. We are confident in our durable cash generation abilities, and we were pleased to provide our shareholders with this level of return thus far this year. Worth noting, we have demonstrated a track record of robust and disciplined capital allocation with approximately $2.5 billion in shareholder returns and debt principal repayments since our IPO in 2017.

Together, these actions demonstrate the power of our disciplined and flexible capital allocation priorities and the quality and consistency of the cash generation capabilities of our portfolio of assets. And as a result, our free cash flow engine is expected to generate approximately $440 million this year.

Turning to slide four, for the second quarter of 2026, starting with production, the daily production exit rate for June was approximately 1.3 BCFE per day, and our production for the quarter averaged approximately 1.3 BCFE per day. And importantly, we maintained our industry-leading consolidated production decline. Our low-declined predictable base is the foundation of everything else on this page. Total commodity revenue was $504 million, equating to approximately $4.23 per MCFE, and adjusted EBITDA was $240 million for the quarter, with our adjusted EBITDA margin at 52%. Notably, our portfolio optimization processes, or better known as the POP program, allowed us to generate approximately $126 million in additional cash proceeds during the first half of 2026.

That POP program is the ongoing work of monetizing non-core acreage and surface assets, which adds to our robust cash generation. In addition, we completed the strategic sale of non-core, lower-margin Barnett and Arkansas assets for $147 million, enhancing corporate profitability and further strengthening near-term adjusted free cash flow. As the largest well owner and third-largest leaseholder in the lower 48, these non-core assets are something that we are continuously evaluating and anticipate having additional opportunities to high-grade our portfolio in the future. Our adjusted free cash flow for the second quarter was $115 million and was burdened with approximately $10 million of transaction costs.

On the balance sheet, we closed the quarter with $678 million of liquidity as of June 30th. As mentioned previously, leverage stood at 2.45 times inside our stated target range of two to two and a half times. And I would point you to the last bullet. 76% of our outstanding debt is non-recourse, investment-grade rated ABS. Our efficient financing strategy is fundamental to how we finance PDP assets, and in a rate environment like this one, it matters. The table on the right frames the trailing 12-month picture, 1.2 BCFE per day of production, $1.9 billion of commodity revenue, $1.1 billion of adjusted EBITDA, and $578 million of adjusted free cash flow.

Those results show the run rate cash engine of this business. In summary, our team's strong execution of our strategy to acquire and optimize stable, consistent cash-generating energy assets enabled strong free cash flow generation and allowed us to continue to prioritize returning capital to shareholders and paying down debt. This is what operational innovation looks like in the real world, a relentless, systematic, compounding improvement in everything we do, and the financial results reflected.

Turning to slide five. Slide five is the most important strategic page of this deck, so I want to spend a little time on it. For 25 years, our identity has been clear. We acquire approved, developed, producing assets. We operate them better, more efficiently, and at a lower cost than the seller did through focus, vertical integration, scale, and the use of modern technological innovation. We ultimately convert that commodity stream into cash, and that is not changing. What I am announcing today is adding to the playbook, not replacing it. Here's the strategic logic. Through consolidation, we have assembled an expansive footprint across four basins. Inside that footprint sits a deep inventory of undeveloped locations that we acquired essentially with little ascribed value.

In most instances, we underwrote and paid for the PDP cash flow, not the development upside. For years, we chose not to develop it because, in our view, the returns on acquisitions and the long runway of accretive opportunities were our focus. With the exponential growth we have achieved and the scale of the company we sit at today, we now have a team capable of capturing value and, importantly, growing our underlying free cash flow in a highly capital-efficient manner. This is not a strategic pivot, but a natural extension of optimizing upside from our acquisitions and extensive portfolio of assets.

In essence, we are pulling forward additional net asset value, which we believe the markets have not appropriately valued. So, we expect to allocate $250 to $300 million of annual run rate capital, which is approximately 25 to 30 percent of expected run rate EBITDA, based on our current operating outlook across three buckets you can see in this chart.

Approximately 50 percent to operated development, 30 percent to non-operated programs, and approximately 20 percent to our core TDP maintenance capital. Let me make five key points about what this additional capital allocation does, and just as importantly, what it does not do.

First, the Operated Oklahoma program is a genuine expansion of the playbook. When we operate, we control the pace, we control the cost, and we control the returns. We are not a passive participant in someone else's development schedule. That control makes this strategy an effective extension of our vertically integrated operating platform, not a pivot into one-off high-risk program to grow production volumes.

Second, the operating program provides incremental volume with manageable capital. This program is designed to offset our corporate production decline while preserving the balance sheet. We will have the opportunity to benefit from unhedged production, providing upside exposure to the commodity price, and importantly, we retain the long-term upside.

Third, this program is built around optionality, not obligation. We drill when the risk-adjusted returns justify it versus other uses of our capital. If the acquisition market gives us a better opportunity, we will have the ability to execute on it. If prices deteriorate, we will slow down. There is no mandatory treadmill or mandate to grow in this program, and that is by design. Fourth the non program complements rather than competes Our Anadarko and Permian non programs where we contribute acreage to joint ventures give us access to the highest caliber private operators enhanced well economics and organic production growth without carrying the development burden in areas where we have less scale And fifth, we did the work before we made the commitment.

Significant technical and economic analysis underpins this decision. Our conviction is that this level of development strengthens our long-term cash flow profile and improves long-term financial stability, which is precisely the opposite of what most investors assume when an acquirer picks up a drill bit. The bottom line, we are applying a proven playbook to a flexible, operated development program focused on attractive risk-adjusted returns inside a footprint we already own. I will now turn the call over to Rick, our Chief Operating Officer, to discuss our development program in greater detail. I have been extremely impressed with Rick and his capabilities since joining Diversified. The breadth of his experience throughout his career and his knowledge base reinforced the confidence we collectively have in adding the development programs and his ability to execute and deliver results.

Thank you, Rusty. I share Rusty's excitement for Diversified's future and my confidence in our teams, in our assets, and in our ability to generate consistent, reliable cash flow from high-return development. I appreciate the dedication and commitment of our teams in analyzing, identifying, and establishing the operational development programs we've begun to execute. In turning to slide six, here we put some specifics behind the strategy that Rusty has outlined. I want to start with the framing on the left of the page because it is the discipline the team operates under. Our focus is on extracting cash flow from the commodity, not simply extracting the commodity from the ground. Let me repeat that. Our focus is on extracting cash flow from the commodity, not simply extracting the commodity from the ground.

Those are two very different mandates, and they lead to different decisions at the wellhead. Our core business at Diversified is focused on cash-generating energy assets, and that does not change with our operated development. It is a natural extension and an additional opportunity to grow that long-term cash flow.

Turning to the operated Oklahoma plan, we have identified approximately 450 highly economic locations at $65 oil and $3.25 natural gas. In the program currently contemplated, which covers the 12 months from September 2026 through September 2027, we plan to drill approximately 19 gross or 17 net wells. As you can see, these wells have a high average working interest of roughly 90%. Net capital would be approximately $145 million on an annualized basis. Average lateral length is approximately 11,000 feet. The production split is approximately 15% oil, 35% NGLs, and 50% natural gas, giving us meaningful liquids exposure along with our traditional gas-weighted portfolio.

Looking ahead, given the current start time and the typical turn-to-sales cadence, while capital is being deployed today, we anticipate a production contribution beginning in 2027. At a one-rig pace, that type of program equates to more than 20 years of remaining inventory. It's worth mentioning that the main areas identified on the map where the program is starting were specifically part of the recent Camino acquisition. Prior to that acquisition, Camino was running a multi-rig development program on that acreage during a time of lower oil prices. But importantly, we are not drilling to maintain leaseholds, keep a growth trajectory intact, keep a narrative going, or to ultimately monetize the asset. We are executing on an operated drilling program to generate a high rate of return and grow bottom line cash flow.

On the non-operated side, we are currently running three programs, which are highlighted on the right side of the slide. In the Oklahoma Anadarko Basin, we participate with MUBER. 150 wells have been drilled to date, with approximately 145 remaining locations, about three years of inventory, and program IRRs exceeding 60% to date. Those are tangible, realized results. In Texas, we are participating with Continental Resources on the Central Basin platform with initial drilling expected in the fourth quarter of 2026. This is an exciting development opportunity in the new emerging Barnett, Miss, and Woodford, or BMW, trend, and we have already seen Continental expressing excitement about the results today. And in New Mexico on the Northwest Shelf, we are participating with a private operator with initial drilling beginning in the third quarter of 2026.

Taken together, we expect our non-operated development to help meaningfully replace the base production decline in our core PDP business. We continue to evaluate our acreage position and see additional opportunities to participate in non-operated partnerships. Acreage contributions to the programs give us opportunities to have carried interest or enhanced economics in these partnerships, and we continue to see significant opportunities for outsized returns in non-operated positions due to our unique acreage position across the lower 48. One final note on execution. This program is supported by a highly experienced internal development team of approximately 10 industry professionals with vast engineering and technical capabilities, and they're excited to show the results that they know they can deliver.

With that, I will turn the call over to Brad.

Thank you, Rick. We'll start on slide seven. Slide seven is where the numbers validate the strategy, and I would encourage anyone that's skeptical about a low-declined consolidator adding development capital to focus on this page. The top chart shows annual base production decline across the natural gas peer group. Diversified sits at approximately 10%. The peer average is 31%, and the peer set runs from 22% all the way to 44%. That structural advantage is a function of how we deploy capital and of the assets we choose to buy. Below each bar, look at capital intensity, which is measured by capital expenditures as a percentage of adjusted EBITDA. Diversified lands at approximately 25% on a go-forward basis, which is inclusive of our planned, operated drilling.

The peer group runs roughly 40% to over 110%, with several peers spending meaningfully more cash than they generate. And even with the development program fully layered in, our capital intensity remains the lowest in the group by a wide margin. The bottom chart is the output of these two inputs, free cash flow conversion. Diversified converts approximately 47% of adjusted EBITDA into free cash flow versus the peer average of 28%. And two peers in this set have a negative free cash flow. So the message is that on this page is very straightforward. Our capital investment plan does not compromise our differentiation, our unique business strategy, or our competitive advantage. Rather, it complements it. Low decline plus low capital intensity plus high return development equals durable free cash flow conversion and long-term cash generation.

We are flattening go-forward production within cash flow while bolstering long-term cash flow durability and stability, and we are doing it before we layer on incremental accretive acquisitions. Slide 8. We are updating our full year 2026 guidance today. This update will encompass the Sheridan acquisition and the recently closed Camino acquisition, as well as capital spending associated with the 2026 Operated Development Program. We expect total production of approximately 1.2 BCFB per day, with a mix of approximately 29% liquids and 71% natural gas. Adjusted EBITDA guidance has increased and now sits in a range of $960 million to $1 billion, with adjusted free cash flow also increasing to approximately $440 million. Total capital expenditures are expected in the range of $225 to $255 million, with operated development for the second half of 2026 of approximately $35 million to $50 million.

Worth noting, we have decreased our non-operated CapEx to a range of $115 to $125 million, which was primarily due to some reallocation from non-op to operated development, timing, and some changes in working interest levels within the non-op development. We remain committed to our leverage target of two to two and a half times. The headline here is really capital allocation flexibility. Approximately $440 million of free cash flow after a $225 to $255 million capital program means that we retain the flexibility to allocate capital across the highest and best uses of capital rather than being forced into any one of them. Additionally, I'll call out that we have included a line item in our guidance to account for the minority ownership of our Camino special purpose vehicle that will sit off balance sheet.

I'll now turn the call back to Rusty.

Thanks, Brad. Before we take questions, I want to take a step back for a moment to provide some final thoughts on our investment thesis and our strategic outlook. Turning to slide nine, I want to close on a strategic note and zoom out on who we were, who we are today, and who we plan to become.

25 years ago, this company started with a simple, unfashionable idea that the wells that everyone else had written off still had decades of value in them if someone was willing to do the unglamorous work of operating them efficiently and with a high degree of focus. We were told that it was a small idea. Today, it is a four-basin vertically integrated platform generating more than a billion dollars of annual adjusted EBITDA.

And I can tell you with confidence that we are operating from the strongest fiscal position in the company's history. Our scaled, stable core production base generates durable cash flow. Our balance sheet is anchored by investment-grade ABS financing that no one else in our public peer group has replicated, allowing our cost of capital to decrease and have better terms.

And importantly, we have the opportunity, but not the mandate, for organic high rate of return growth from a deep inventory of high-quality undeveloped locations. I want to emphasize that last point of distinction because it is the strategic addition to our playbook and we have the opportunity to optimize our inventory for the next 25 years Optionality without obligation is a rare thing in this industry Most companies must drill We get to choose The four pillars on this page are what we are building upon They are four to our strategy and we are steadfast in our execution Scale, vertical integration, and technological innovation all enhance margins in our core cash flow business. We are built to consolidate, and that engine is not slowing down.

Here's what I would leave with you with. The energy transition conversation has spent a decade asking who will steward the assets that keep the lights on and the heat running when others step away. We have spent 25 years answering that question with our capital, our people, and our track record. We plug the wells. We reduce the emissions. We pay the dividends. We deliver the gas. We power the communities. We provide energy security. Our 25th anniversary seal this year reads, built by the proven, and that is not a marketing line. It is a description of how we got here. Proven strategy, proven assets, proven cash flow, proven people, proven results.

We built the first 25 years on doing the hard, patient work others avoided. We are going to build the next 25 on exactly the same thing, but with more scale, more optionality, greater innovation and technology, and a stronger balance sheet than we have ever had. We look forward to the opportunities ahead, and we are just getting started.

We are excited about what comes next, and we appreciate you being on this journey with us. With that, I'd like to turn it over to the operator for the Q&A portion of today's call.

Well, I mean, look, we have 450 locations in Oklahoma. Rick said it earlier, we had 20-some years of drilling. You know, obviously, it could grow as big as we want it to be, but it's really about the optionality for us. And, you know, we get excited when we look at the impacts to our production over the next few years just from being able to run a one-rig program.

Obviously, if prices ran up and you wanted to put more capital to work with even higher IRRs, we would do that. But it's really, Neil, it's really about the optionality and the ability to do it on our terms. We don't have to do anything, but it's a big opportunity. We have a lot of acreage up there, a big footprint. We have acreage positions in the Permian. We have acreage positions in Appalachia. So it's not just about Oklahoma, but Oklahoma is really where we have the size, scale, and the ability that we felt was able to generate good returns.

Well, we're always looking for opportunities to acquire, but we're also looking at ways to take our existing portfolio and make it more profitable. And so, you know, that was part of why we chose to divest the Barnett and the Arkansas assets. We felt that those were lower margin. We didn't have the chance or the ability to really scale those anymore. And so it just made all the sense in the world. And the value that we got for them was top end. And so we felt that that was the best. But we have other opportunities in the portfolio to do the same thing, and we'll continue to evaluate that. The PDP market, I would tell you, is very, very strong.

We continue to evaluate a lot of things. We do a lot of deals, and I've said this on some of the other calls. People don't realize we walk away from a ton of them. We don't do all the deals. We like some. We don't like others, and we're going to be competitive and do the best we can on the ones that we really like, but we're not forced into doing anything. I can sit here right now for the next five years and do nothing. And so it's just a good position to be in. But obviously, you know, we're looking at the next 25 years. Now, that's going to go way past my time, as you know, Neil.

But, you know, you have to look at the company from the longevity and the sustainability and doing all the right things today that will add to the sustainability to the company for the long haul. So we're evaluating a lot of PDP deals.

Neil, I would just add, Rusty mentioned this in his comments. The company's in the strongest financial position it's been in in 25 years and definitely since we went public. And so we've worked very hard to achieve that position. And so we're going to be very – we're going to continue to be disciplined in the deals that we look at to ensure that we maintain that balance sheet strength.

Yeah, I think right now we're going to evaluate that probably in the third and fourth quarters and give much better guidance around that production. I will tell you it's meaningful, and so we're pretty excited about it. But a lot of that's going to depend on, you know, we're standing up the rig, we're getting it moving as we speak, when those wells come online. So I would rather give you a much more precise number later, you know, at the end of the third quarter, most likely, than to try to do that today.

But I will say that, you know, the whole strategy really came down to two things for me. Number one, do we have the type of IRRs and the running room to operate a rig comfortably where we had enough acreage position, where we didn't have to rely on others, those kind of things? And then having a significant amount of confidence in our internal team led by Rick to make it happen.

You know, that's one of the things that until we bought the Maverick transaction last year and Rick came on board and his team came on board, you know, there was, you know, we didn't have a lot of that expertise. We now have a very technical and reliable group that can look at all of our acreage positions and help us make good decisions around drill it, sell it, or JV it. And so those are going to be continual as we move forward. But the production will be impactful. But I think just to give you a number today, I think is too early. We'll come back to it. Rick, do you want to add to that?

Yeah, the only part I would add to that, Gabe, is please remember as we went through what our focus is, and our focus is helping to offset the declines we have right now as well as growth on cash flow. So those are the things that we're looking at. That's our intent as we stand up this program. It's focused on those two things.

I think you should expect us to continue to be good stewards of our capital and place it to the highest return within the organization. So, dependent on commodity prices, service costs, a number of things, if that is the highest return, absolutely you should expect that. If there's other opportunities that out-compete, you should expect us to do those things.

Thanks, Gabe.

I'll let Brad chime in here as well, but really about – we talk about our four pillars and what our options are. It's always going to be the best use of our cash. And so, you know, we obviously have a distribution policy that's in place. You know, if shares are, you know, if we have excess cash and shares are trading below what we feel the true value that they should be, we'll put it there. We'll continue to grow the business, you know, either through reinvesting in additional wells or into additional acquisitions. So it's really – we have options. We've mentioned that word multiple times, but we have the ability to move cash to where we feel like is the best shareholder returns.

Do you want to add?

I can't add anything to that. I fully agree.

Are you talking about on the new wells we're drilling?

No, I think we'll use our discretion there because obviously if we're drilling into a commodity price environment that has significant movement up, then we may take some of that risk off the table. But one of the things that we really like about this program, it does give us the ability to have some exposure to the unhedged commodity.

I will now turn the call over look at all the demand that coming to the market So I want to have ability to leg into that and this gives us the ability to do so And, Jonathan, we've always been thoughtful and had a disciplined hedging program in place. We do like the optionality with that exposure to commodity price. But, you know, we've always had a disciplined hedging program in place to ensure that we can continue to provide consistent, reliable cash flow generation to our shareholders.

Well, we know that between our non-operated program and this operated program that we're kicking off this month, that we have the ability to offset a majority, if not all, of our decline rate, which is very, very impactful. Now, look, gas prices go to $450, $5, then you can look at organic growth potentially as an option for the future. But what I would say is right now we see more of an ability to offset existing decline rates completely between the two programs, and that's a great place for us to be. One of our directors says it all the time. He said our 9% to 10% decline rate, with the growth that we have, it becomes larger and larger.

What that percentage represents, this has the ability to offset that, which is tremendous.

No, that's a great question. We always evaluate every option. And yes, we did have inbounds about drilling this acreage for us. We could have participated, we could have sold, whatever. But when we looked at the concentration of acreage, it's got a 90% working interest on it. That's pretty good for any acreage position you pick up nowadays, but that means we don't have to go out and find other people to sublease from and all that other work that comes along with that. And this was just a long runway of optionality for us, and we felt like with the information we had on the wells that Camino had already drilled, that we had a pretty good idea of what our returns were going to be, and this just gave us the ability to run that rig and feel comfortable from an operating perspective with Rick's team of being able to do it ourselves.

Yeah, I'd add to that just slightly. With the scale and consolidated footprint we had there, as well as the low risk, high return, the ability to run your own operated, we get to control the pace of the spend. And so that's beneficial to us. Lots of great partners out there. We would continue to work with them. But remember, as I stated, you know, when we purchased this, Camino was running multiple rigs out there and getting very good results. We're running one rig. We get to control that pace. And we're not doing it because we have to. We're doing it because we choose to.

Thanks, Charles.

Well, that's the total capital allocation for the non-operated and what we call our maintenance CapEx associated with our PDP portfolio. And, you know, we've essentially said that we're going to offset our decline rates, and that's our capital number.

Yeah, and Jared, just one thing, in the event, as we've indicated, that we choose to continue with a one-rig program in the next year or two, then this level of capital would be somewhat over a run rate.

But that's going to be our choice, as we've already highlighted several times today.

I don't think we've given any direction on that yet. What I would tell you is if we are doing it, it competes in our portfolio for capital. So we expect good returns, and both of those, you know, you're going to see the majority of the production in 27 due to the timing in the latter part of this year.

You know, we will always pay attention to the commodity prices. I don't think we've called out the break even, but we did call out, you know, what we ran this at at a 65, 325 flat price deck, just to understand what those returns would be. So I think we're conservative on that side. You know, we make sure that this will be economic on the decks we see out there now. But we have that ability to pivot at any point, as you well stated. And that could be that we decide not to run the program due to commodity price, or we decide to expand the program.

Yeah, I mean, here's the deal. I think where people, they always think about, okay, you're drilling new wells, you're going to have these higher declines. But you also have higher declines that are leaving and coming down over time as well. And so the blend of wells that are coming off of high decline into what we call their lower decline years blended with the stuff that we're drilling today, which is significant but not as significant as our PDP portfolio production, it really marginalizes that. And unless we really just went out and started, you know, 60%, 70% capital intensity, which is not what we're going to do, it's not going to have material impacts on our corporate decline rate moving forward.

We feel really good about covering our corporate decline rate with these programs, but we don't anticipate significant increases in our decline rates.

Yeah, and Paul, that structural advantage that I mentioned in my comments, we've got a significant existing or foundational production base that's already at a lower decline rate, and that's different than just some of the other companies or really all the other companies that are very heavy on the drill business. So, you know, we've got that very stable base underneath that supports what Rusty indicated.

Thank you all for joining today. As always, if you have further questions or clarifications needed, please get in touch with Doug and his team, and they'll be happy to assist. And everyone have a great day.