Diversified Energy Company 2026 Q2 Earnings Call

Good morning. Thank you all for joining us today, welcome to our second quarter 2026 results conference call. With me today are Diversified's 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 6th, 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, including the annual report on Form 10-K for the fiscal year ended December 31st, 2025, filed on February 26th, 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'll now turn the call over to Rusty.

Thank you, Doug, 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 decline 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'm 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 expands 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, 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. 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 BCF per day. Importantly, we maintained our industry-leading consolidated production decline.

Our low decline 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 cost. 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. 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 reflect it. 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 proved 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. We expect to allocate $250 million-$300 million of annual run rate capital, which is approximately 25%-30% of expected run rate EBITDA based on our current operating outlook across three buckets you can see in this chart. Approximately 50% to operated development, 30% to non-operated programs, and approximately 20% to our core PDP 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 operated 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-operated program complements rather than competes. Our Anadarko and Permian non-operated programs, where we contribute acreage to joint ventures, give us access to the highest caliber private operators, enhanced well level economics, and organic production growth without carrying the development burden in areas where we have less scale. Fifth, we did the work before we made the commitment. Significant technical and economic analysis underpins this decision.