Shares in Diversified Energy Co. PLC have lost nearly half their value on the London Stock Exchange over the last 12 months, causing the company to announce Oct. 5 that it was delaying its pursuit of a listing on a US stock exchange.
Diversified shares, already on a slide, abruptly dropped another 10 percentage points in less than two weeks of extremely heavy trading leading up to Oct. 4. Diversified regained some of that ground on Oct. 5, with shares gaining 7% to close at 71.65 pence per share, a day after the equity hit its 52-week low of 64.69 pence per share.
Diversified, which buys old oil and gas wells from larger US operators and milks the production stream until the well is retired, told the London market Oct. 5 that it had no idea what was behind the steep drop-off.
"The company notes the recent decline in its share price and confirms it is unaware of any operational or company specific reason for this share price movement," Diversified told the London exchange. Diversified said there has been no material change to its operations or finances since it released its earnings report for the first half of 2023 on Sept. 1.
"As confirmed in our September interim results and increased borrowing base, our business financial and operational fundamentals remain strong," Doug Kris, Diversified's senior vice president of investor relations and corporate communications, said in an email. "While we remain convinced in the longer-term benefits of a US listing regarding valuation, liquidity, and the potential demand from investors, given current market conditions, we believe the proper course of action is to suspend these efforts."
Stifel Nicolaus & Co. analyst David Round said the announcement of no material change, coming so soon after the Sept. 1 earnings announcement, might be enough to stop the skid. "Hopefully, the commentary that it is unaware of any reason for the share price movement, plus confirmation that it will not pursue a US listing given the equity situation, should provide some relief for investors," Stifel said.
Diversified buys back shares on the dip
The silver lining to the drop in share prices is Diversified can buy back shares at a discount, Round said. The analyst said buybacks are the best use of Diversified's capital right now.
In a separate Oct. 5 announcement to the London Exchange, Diversified said it bought back 200,000 shares when prices were their lowest on Oct. 4. Those shares will be canceled, the company said.
Jefferies analyst Mark Wilson said he was surprised by the fall in share pricing and has been fielding more calls about Diversified than any other company in recent days. "Overall, we have viewed [Diversified's] capital requirements of debt and equity for growth as higher than expected, which led us to downgrade to Hold in April, but recent share moves have surprised us," Wilson said before the London market opened Oct. 5.
Largest yield in company history
Tim Hurst-Brown, an analyst with London-based brokerage Tennyson Securities, noted that Diversified is trading at the highest dividend yield in its history, 21.4%, with free cash flows before dividend payments of greater than $800 million, or more than Diversified's Oct. 4 market capitalization of $790 million.
"This cash flow is underpinned by a hedge book that negates commodity risk, a debt structure that shields against rising rates, and a diverse production base with low decline rates and extraction costs," Tennyson told clients. "With all this in mind, we view the recent share price action as completely overdone."
Diversified buys older wells from exploration and production companies such as EQT Corp. and ConocoPhillips, makes quick repairs in the field, and then draws on the dwindling production stream for decades. Older, horizontally drilled shale gas wells are suited to this model because their production peaks in the first three years, but they keep producing smaller quantities of gas for decades.
S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.