Executive Summary / Key Takeaways

• Differentiated Business Model: Diversified Energy Company ($DEC) stands as the "PDP Champion," uniquely focused on acquiring, optimizing, and responsibly retiring mature, low-decline proved developed producing (PDP) natural gas and oil assets. This strategy minimizes traditional E&P risks and generates highly consistent cash flow.
• Transformational Growth & Carlyle Partnership: The recent Maverick Natural Resources acquisition significantly scaled the company, nearly doubling EBITDA and cash flow year-over-year in Q2 2025. A strategic partnership with Carlyle (CG) provides a clear, non-dilutive pathway to fund up to $2 billion in future acquisitions, reinforcing DEC's growth-through-acquisition model.
• Robust Financial Performance & Shareholder Returns: DEC consistently achieves over 50% cash margins, supported by a disciplined hedging program that generated $130 million in realized gains in the first nine months of 2024. The company is on track for over $420 million in free cash flow for 2025 and has returned approximately $2 billion to shareholders and through debt reduction since its 2017 IPO.
• Technological Edge & Diversified Revenue Streams: DEC leverages its "Smarter Asset Management" and "OneDEC platforms" for operational efficiency, cost reduction, and enhanced production. Emerging opportunities in coal mine methane (projected 300%+ FCF growth by 2026) and data center power generation further diversify revenue and capitalize on secular energy trends.
• Undervalued Equity with Catalysts: Despite strong fundamentals and strategic advancements, management believes DEC's shares are undervalued due to macro headwinds. Near-term catalysts, including full synergy realization from Maverick, continued portfolio optimization, and the growth of adjacent businesses, are expected to drive a meaningful re-rate of the stock.

The PDP Champion's Strategic Ascent Amidst Energy Transition

Diversified Energy Company PLC ($DEC), founded in 2001 and publicly listed in 2017, has carved a distinct niche in the U.S. energy landscape. Operating across ten states, primarily in the Appalachian and Central regions, DEC's core business revolves around the acquisition, optimization, and responsible retirement of mature, low-decline proved developed producing (PDP) natural gas and oil assets. This "energy optimized" approach differentiates DEC from traditional exploration and production (E&P) companies, focusing on maximizing cash flow from existing infrastructure rather than high-risk, capital-intensive drilling for new reserves. This strategy has enabled the company to build a resilient business model, consistently delivering robust cash flows and returning capital to shareholders.

The industry landscape is currently shaped by significant trends, including growing demand for natural gas in power generation, the rapid build-out of data centers, and increasing liquefied natural gas (LNG) exports. These secular trends create a positive macro tailwind for natural gas-focused companies like DEC. The company's strategic positioning, particularly its proximity to emerging data center hubs in Appalachia, positions it to benefit from rising natural gas demand, potentially leading to improved basin pricing and direct supply agreements. Management is "highly enthused" by the "generational economic impact" of headline investments in Pennsylvania alone, which could drive regulatory streamlining and further demand for natural gas.

Competitive Positioning: A Differentiated Approach

In a sector often dominated by larger E&P players like EQT Corporation (EQT), Chesapeake Energy Corporation (CHK), and CNX Resources Corporation (CNX), Diversified Energy maintains a unique competitive stance. While these larger competitors often pursue aggressive growth through new drilling and extensive acreage positions, DEC focuses on the often-overlooked segment of mature, long-life assets. This specialization allows DEC to acquire assets at attractive valuations, often from growth-oriented E&Ps looking to recycle capital by divesting mature properties.

DEC's competitive advantages stem from its operational stability, diversified asset base, and a cost-efficient model. The company's extensive network of producing wells and gathering systems, particularly in the Appalachian Basin, provides a reliable supply chain. Compared to peers, DEC's business model, with its low capital intensity (around 11%) and strong cash margins, results in a free cash flow conversion rate of approximately 42%, which is roughly five times the peer group average. This financial efficiency allows DEC to generate consistent cash flow, even in volatile commodity markets, a resilience that larger, more growth-focused competitors may struggle to match.

However, DEC's focus on mature assets means it may lag in innovation speed related to new drilling technologies compared to companies like EQT or CHK, which invest heavily in advanced extraction methods. Its dependence on commodity prices, while mitigated by hedging, remains a vulnerability. Yet, DEC's strategic response to these challenges is its "Smarter Asset Management" approach and vertical integration, which allows it to "own the cost structure" and be less subject to inflationary and third-party costs, a distinct advantage over competitors.

Technological Edge: Smarter Asset Management and Vertical Integration

Diversified Energy's operational prowess is underpinned by its differentiated technology stack and vertically integrated model. The company's "Smarter Asset Management" (SAM) practices are central to optimizing cash flow from acquired assets through both production enhancements and expense efficiency. This involves leveraging a leading technology platform and data-driven analytics to manage wells for decades into the future.

The tangible benefits of this technological differentiation are quantifiable. Over the last few years, during a higher inflationary environment, DEC has reduced costs and saved over 9% compared to inflation-adjusted costs, demonstrating the power of its platform and operating philosophy. This cost leverage is a unique competitive advantage. Furthermore, the company's "OneDEC platforms" facilitate seamless integration of acquired assets, streamlining processes and capturing meaningful synergies.

Beyond its core production optimization, DEC has developed adjacent technological capabilities. Its wholly-owned well retirement company, Next Level Energy, utilizes leading-edge emissions technology to control the life of wells until retirement, reducing emissions and demonstrating environmental stewardship. The company has plugged over 1,100 wells in recent years and expects to plug close to 400 wells in 2025. This in-house capability not only addresses asset retirement obligations but also generates revenue from third-party plugging activity, turning a potential risk into an opportunity.

Emerging technological initiatives include the partnership with FuelCell Energy (FCEL) and TESIAC to power data centers. This collaboration leverages DEC's existing natural gas and coal mine methane as a fuel source for innovative low-emission and onsite power generation. While specific quantifiable targets for this nascent venture are still developing, the strategic intent is clear: to capitalize on the rapidly expanding data center sector in Appalachia by providing reliable baseload power, potentially through direct supply agreements and improved basin pricing.

Financial Performance: A Story of Resilient Cash Flow and Strategic Growth

Diversified Energy's financial performance in recent periods underscores the effectiveness of its differentiated strategy and technological advantages. For the second quarter of 2025, the company reported total revenue of approximately $510 million and adjusted EBITDA of $280 million, yielding an impressive 63% adjusted EBITDA margin. This contributed to a first-half 2025 adjusted EBITDA of $418 million. The company's production exit rate for June 2025 was approximately 1.14 Bcf per day, with quarterly production averaging over 1.15 Bcf per day. Notably, approximately 65% of these volumes originated from the expanded Central region, strategically increasing exposure to LNG exports and data center demand.

The transformational Maverick Natural Resources acquisition, which closed in March 2025, played a pivotal role in these results, with adjusted EBITDA and cash flow nearly doubling year-over-year. This acquisition added liquids-rich exposure, with Maverick's production averaging 59,000 barrels of oil equivalent per day, split as 34% oils, 24% NGLs, and 42% natural gas. The company's portfolio optimization efforts in Q2 2025 generated approximately $70 million in additional cash proceeds, further enhancing the return on investment from Maverick.

Free cash flow for Q2 2025 stood at $88 million, even after being burdened with approximately $25 million of nonrecurring transaction-related costs. For the full year 2025, DEC is targeting over $420 million in free cash flow, representing an approximate 200% uplift from its standalone 2024 results. This robust cash generation is a testament to its low-decline production profile and disciplined hedging program, which provided $130 million in realized gains during the first nine months of 2024, with an average floor price of $3.34 in Q3 2024.

DEC maintains a strong balance sheet, with net debt at approximately $2.6 billion in Q2 2025. The company improved its overall leverage by 10% in the first half of 2025, making progress towards its target of 2.0x to 2.5x net debt to EBITDA. Liquidity remains strong at approximately $420 million. The company's commitment to debt reduction is evident, with approximately $130 million in debt principal reduction during the first half of 2025 and $205 million in 2024. Since its IPO in 2017, DEC has returned approximately $2 billion to shareholders and through debt principal repayments, representing about 1.6 times its current market capitalization.

Strategic Initiatives and Future Outlook: Fueling Non-Dilutive Expansion

Diversified Energy's future growth is strategically underpinned by its capital allocation framework: systematic debt reduction, returning capital to shareholders, and accretive acquisitions. A pivotal development is the strategic partnership with Carlyle, announced in June 2025, which provides a clear pathway to fund up to $2 billion in acquisitions without raising new equity capital. This partnership, leveraging Carlyle's credit expertise and DEC's operational capabilities, is expected to drive significant non-dilutive growth in a "highly compelling environment for PDP asset consolidation".

The first major transaction under this partnership is the acquisition of Canvas Energy for approximately $550 million, announced in September 2025. This deal is expected to deliver approximately an 18% increase in adjusted EBITDA and a 29% increase in free cash flow, driven by a 13% increase in production. It further expands DEC's leadership position in Oklahoma's Western Anadarko Basin, where it is already the largest leaseholder and top producer.

Operational synergies are a cornerstone of DEC's growth strategy. Following the Maverick integration, the company increased its targeted annual synergy run rate to approximately $60 million. This includes benefits from integrated field operations, corporate-level process finalization, and strategic moves like a pipeline swap transaction in Q2 2025, which allowed DEC to acquire gathering system infrastructure for no-fee gas flow and reduced field expenses.

The company's non-operated joint venture (JV) in the Western Anadarko Basin represents a capital-light approach to adding production and free cash flow. This JV has a "healthy inventory of approximately 245 additional identified locations" and has seen an approximate 60% year-to-date rate of return on new wells, which are trending approximately 75% liquids. This program is expected to provide a "material amount of production" in 2026, potentially reducing the corporate decline rate by 1% to 2%, a substantial impact given the company's scale.

Adjacent business segments are also poised for growth. Coal mine methane (CMM) capture and environmental credit sales are expected to see over 300% growth in free cash flow over the next 24 months from Q4 2024 levels, building on the $8 million to $10 million in EBITDA generated in 2024. The emerging data center power market, leveraging DEC's natural gas and CMM as fuel, presents another significant opportunity, with projects being explored in Virginia, West Virginia, and Kentucky.

Risks and Challenges: A Balanced Perspective

While Diversified Energy's investment thesis is compelling, investors should consider several risks. Commodity price volatility remains a fundamental challenge for the energy sector. Although DEC's disciplined hedging program significantly de-risks its cash flows, sustained low prices, particularly for oil, could impact the economics of its liquids-rich wells. Management acknowledges that market volatility makes asset valuation difficult, and a "freezing up" in the oil acquisition market has been observed due to price uncertainty.

Asset retirement obligations (AROs) have historically been a concern for some investors. However, DEC proactively addresses this by operating its in-house well retirement company, Next Level Energy, and by doubling its annual well plugging commitments to states. The company is hopeful that potential regulatory changes under a new administration could lead to more cost-effective retirement processes.

Macroeconomic headwinds, including tariffs and geopolitical disturbances, can also create market uncertainty. However, DEC management believes these factors have a "limited impact" on its fundamental business, as it focuses on controllable operational aspects. The company's share price has been impacted by these broader macro factors, leading to what management views as an undervaluation not connected to its strong fundamentals.

Conclusion

Diversified Energy Company stands as a compelling investment opportunity, uniquely positioned as the "PDP Champion" in the U.S. upstream sector. Its core strategy of acquiring and optimizing mature, low-decline assets, coupled with a robust technological framework for "Smarter Asset Management" and vertical integration, consistently generates strong, predictable cash flows. The recent transformational Maverick acquisition and the strategic $2 billion partnership with Carlyle underscore a clear, non-dilutive growth trajectory, further solidifying its operational scale and financial resilience.

With a commitment to systematic debt reduction, consistent shareholder returns through dividends and share repurchases, and the promising growth of adjacent businesses like coal mine methane and data center power, DEC is well-equipped to capitalize on evolving energy market dynamics. Despite current market undervaluation, the company's strong financial performance, including nearly doubled EBITDA and cash flow in Q2 2025 and projected $420 million in free cash flow for 2025, combined with its operational excellence and strategic partnerships, presents a clear path for meaningful shareholder value creation. DEC's ability to deliver reliable energy responsibly, while optimizing assets for the long term, positions it as a differentiated and resilient player in the ongoing energy transition.