Diversified Energy Company PLC

Good morning, Kevin, and thank you, everyone, for joining us today for the special conference call to discuss Diversified's acquisition of Canvas Energy. Joining me today on the call are Diversified's Founder and CEO, Rusty Hutson; and President and CFO, Brad Gray.

We have also posted a slide deck to accompany our remarks today, and we will reference the slide numbers during our discussion. We will open the line for questions after our prepared remarks.

Following the conclusion of today's call, we are happy to follow up with any specific modeling questions. Before we get started, I will remind everyone that the remarks on this call reflect the financial and operational outlook as of today, September 9, 2025.

These outlooks entail assumptions and expectations that involve risks and uncertainties. A discussion of these risks can be found in our regulatory filings.

During this call, we also referenced certain non-GAAP and non-IFRS financial measures. All of our disclosures around those items and additional forward-looking disclosures are found in our materials released today on our website or in regulatory filings.

I will now turn the call over to Rusty.

Thank you, Doug, and thank you all for joining the call today. On our call today, we are providing further context about the acquisition of Canvas Energy and the assets we are acquiring, how their operations and assets fit within our broader financial and operational model and the significant sources of value we expect to deliver from this transaction.

We are excited to announce the acquisition of Canvas Energy, a privately held company headquartered in Oklahoma City. We believe this acquisition will add accretive size and scale advantages and further align with our strategy of building a portfolio of high-quality cash-generating energy assets.

We believe that our team of professionals are experts at optimizing the existing long life and undervalued U.S. assets, and there continues to be a great growth opportunity to consolidate these assets under the diversified vertically integrated infrastructure.

Our focus remains firmly on executing on our unique growth strategy that creates value-based, resilient and consistent cash flow from our growing portfolio of cash generating energy assets. We intend to utilize our experienced employees' institutional knowledge and commercial relationships to extend our position as a dominant force in the Oklahoma market.

In my view, what we are building at Diversified is a battleship, a corporate and financial structure that is strong, durable, agile, resilient and in the best position to serve its shareholders while protecting and delivering cash generation to provide a tangible return to our shareholders. And much like a battleship, our competitive edge, strength and power comes from the importance of every component and the coordination of every team and task no matter how large or small.

The addition of Canvas enhances the size and scale of our company, furthering our progress in our strategy and providing investors with a unique opportunity for value accretion that further bolsters our promise to deliver reliable, long-term shareholder returns. Starting on Slide 3.

This acquisition has the potential to create significant value over and above the purchase price through the combination of high-quality assets with our proven competitive operating model, which leverages operational focus and expertise, scale, vertical integration and technology. We are acquiring additional liquids-rich exposure to premium markets that will help drive top line revenue, adding Canvas' production, which is approximately 147 million cubic feet or approximately 24,000 barrels of oil equivalent per day, with a commodity split between 57% liquids and 43% natural gas, further expanding our exposure to both premium oil and LNG opportunities.

The combined company will continue to maintain an enviable peer-leading low decline production profile with the added resource of total proved reserves on a PV-10 basis of approximately $1.4 billion. Canvas adds approximately 240,000 net acres with the assets creating significant operational overlap where we can apply our proven consolidation and operating model.

Canvas also offers immediate financial accretion through its strong, stable financial profile, which is anticipated to generate approximately $155 million in the next 12 months EBITDA, or an increase of approximately 18% to our current base. Additionally, we are meaningfully growing our free cash flow by 29%.

It's worth noting that these financial metrics do not include any synergies, margin enhancements and our time-tested smarter asset management optimization programs, which we believe provide meaningful uplift in value and bottom line cash flow. This bolt-on acquisition in Oklahoma offers a tremendous opportunity, adding contiguous acreage and the optionality for portfolio optimization either through partnership development or via divestiture.

By remaining disciplined, we are growing our company by acquiring value-accretive reliable PDP assets and consistent cash flow at an approximate 3.5x next 12 months multiple. This transaction brings us solid assets at an accretive value.

Turning to Slide 4. Let me now spend a few minutes talking about the specifics of this deal.

We are acquiring Canvas Energy for approximately $550 million. The purchase price will be funded through the issuance of up to $400 million of asset-backed securitization funding originated by Carlyle and approximately 3.4 million shares of Diversified cash on hand and current liquidity.

Following the closing of the transaction, Canvas unitholders will own approximately 4% of Diversified shares outstanding. Importantly, with a small dilution, we are delivering a leverage-neutral transaction that generates a significant 29% increase in free cash flow.

It's worth noting that this acquisition marks a significant milestone as it is the initial transaction that utilizes the Carlyle Strategic Funding partnership. We have a historically established Carlyle relationship through their previous purchases of ABS notes, and they remain investors in 2 of our ABS notes.

Since then, we have grown their confidence in our acquisition evaluation, management experience, operational capabilities and stewardship focus. We are excited to further leverage our strategic partnership to continue to fund high-quality PDP assets and to grow our combined portfolio.

We expect the transaction to close during the fourth quarter of 2025 after we receive customary approval and regulatory clearance. Turning to Slide 5.

This acquisition creates significant asset density in Oklahoma, and we are very excited about this aspect. The impact on our Sooner State operations will include a combined acreage footprint in Oklahoma of approximately 1.6 million acres, including the largest in the Western Anadarko Basin.

Combined Oklahoma production at approximately 78,000 barrels of oil equivalent per day that consists of a high liquids cut, additional exposure to the emerging Cherokee play and other high-quality acreage creating organic growth opportunities for asset optimization or potential development partnerships. Turning to Slide 6.

This slide further illustrates the combined position in Oklahoma and the Western Anadarko Basin. The map shown on this page creates a powerful picture of the significant acreage position resulting from this acquisition.

We have a proven approach and ability to identify and achieve synergies in our acquisitions. Our stewardship operating model, supported by our smarter asset management practices is all about optimizing the assets we acquire through production optimization and expense efficiency.

We use every lever at our disposal to free cash flow from our investments. With this acquisition, we will accelerate synergies as a result of increasing asset density and field operations, integrating processes and systems into our One DEC platforms and consolidating applicable corporate functions.

In addition to the high-quality developed assets we are adding to our portfolio, there is also room for attractive asset optimization opportunities, which include a variety of options with our expanded acreage position. As we have demonstrated over the past few years, our talented land and legal teams have proven experience to help us optimize cash generation from our acreage positions.

Turning to Slide 7, Diversified has again delivered meaningful growth in important operational and financial metrics that are improving its position among peers and allowing the company to benefit from further trading multiple expansion. The relative performance and significant increase in cash generation have now allowed us to compete with peers with market capitalization and production profiles that are larger.

Specifically, with this acquisition, we have a step change in free cash flow generation increasing by almost 30%, notably without any increase in leverage. Importantly, Diversified provides investors, especially those focused in the small to mid-cap arena, the opportunity to own a company with a high free cash flow yield and long duration exposure to the improving natural gas macro environment.

Turning to Slide 8. Diversified has developed a disciplined acquisition framework, which we utilize to analyze and evaluate all the deals we review.

Because we operate with size and scale in multiple basins, we believe the company has the opportunity to participate in significantly more acquisition opportunities while also allowing us to profitably leverage our scale, vertical integration and technology. By using low cost of capital to finance attractive returns based on purchase price multiples and discounted cash flow percentages, we are able to successfully capture that spread to increase shareholder value.

It's worth noting that there are immediate transaction benefits with the Canvas acquisition before giving any value to multiple avenues for upside, including strategically monetizing undeveloped acreage, implementing targeted synergies and potentially entering into joint development agreements to accelerate additional value creation. This acquisition is accretive on several metrics, and it will allow us to continue to deliver and unlock additional shareholder value while providing our investors with peer-leading shareholder returns anchored by a quarterly dividend that we intend to maintain at $0.29 per share.

We will also provide the option to return additional capital to shareholders through continued deleveraging and share repurchases. Finally, moving to Slide 9.

Our acquisition of Canvas continues to reinforce our leadership in the industry as the right company to manage resilient cash flow generating assets now and into the future. The strategic acquisition of Canvas Energy allows us to grow our Diversified low-risk business model while also being financially accretive on many key metrics and notably grows our EBITDA by 18% and free cash flow by 29%.

We also gain best-in-class operational efficiencies with an expanded geographic footprint in one of our favorite operating areas, the Sooner State. With enhanced cash flow, achievable synergies and an increase in liquids weighting that strengthens our margins, we create a must-own energy asset manager with substantial equity upside through a multiple rerate.

The bottom line is we have created a highly scalable and highly investable platform that generates significant free cash flow and is well positioned for future growth. Thank you for your continued interest in our company and in this transaction.

We believe this acquisition is a win for our employees, our customers, our shareholders and our partners, notably our initial partnership funding with Carlyle. I'm excited to work with our teams to integrate the Canvas assets into our great company.

With that, I'll now open the floor to questions. Operator, please open the line for questions.

Congrats on the deal. Rusty, I see the acquisition grows your production by 13%, but we also see that 16% 5-year PDP decline which I guess would imply years 1 and 2 maybe closer to 20%.

So do you expect to need to sort of increase your D&C CapEx much to sort of offset that a little steeper decline? Or do you think your Mewbourne JV or something else in the mix can address that?

Yes, I think that's exactly right, Tim. I mean we -- some of these wells were drilled -- that canvas had drilled in the last few years, obviously, have a little steeper decline rate on them.

But with what we're doing at Mewbourne with our Mewbourne JV, and also with the upside that's potentially in this portfolio with some JV opportunities, we're more than able to moderate that and not really affect our overall decline rate as a company. Keep in mind, it's only 13% of our total production as it sits here today.

So even with a little steeper decline on that with our other organic mechanisms within the portfolio, we'll be able to maintain and moderate that pretty well.

And Tim, this is Brad. I'll just add the fact that in modeling this transaction for us and building it into our existing portfolio, we've not looked at intentionally increasing CapEx as a result of this deal.

Okay. That's great context.

And then as a follow-up, it's been now 2.5 months since you announced the JV with the Carlyle funds, and you have a deal with about 20% of that capital committed. Can you talk about maybe the quality and quantity of asset packages that you're evaluating and what a potential capital deployment time line could be like?

Could this fully be deployed by the middle of 2026? Do you have any sort of line of sight on how to do that?

Yes. I think it's -- we obviously evaluate a lot of things.

And we don't do very many of them. I mean, I know that sounds funny because we do so many transactions, but we do pass on a lot of stuff.

And we're looking for the right deals. We're looking for the ones that have the most synergies attached to them in good locations where we feel like we like the production.

We like the production profiles, we like the assets. We like where they're located.

And so we're not just grabbing everything that's out there in the market. So we're trying to be very focused on what we like and what we think is going to add to the long-term success of the company.

And we want to buy it right. As it relates to the Carlyle partnership, yes, this was 20% in essence of the commitment.

But I would say that commitment, as we continue to evaluate and look at things, I'm sure they'll be willing to invest right alongside of us as much as we can possibly look at and acquire. And so I can't tell you how quickly we're going to fill up that $2 billion original commitment.

But I wouldn't be shocked if we did by the middle of 2026. And so we'll continue to focus and they're going to be focused with us alongside larger transactions.

And so we're going to be very focused on getting the right things, and we're going to work with them. We have very common ways of evaluating assets and the value of the deals.

And so it's a very efficient process with them, let's put it that way.

And Tim, if you just look back over the last 18 months, with the inclusion of this acquisition, we're at close to $2.5 billion of acquisitions. So yes, I'm just supporting Rusty's comment there that at that pace, if that pace were to replicate, then we could achieve that pace.

Okay. Okay.

I appreciate that. If I could sneak one final one in.

I know primary drilling is not your business. But looking at Canvas, most of their wells looks like about 60% are in the Meramec over the last few years.

Can you talk about what undrilled horizon sort of you're most excited about on this acquired acreage? And I'll leave it there.

Yes, I think it's -- some of the stuff that was -- had been recently drilled down in the SCOOP/STACK area. I think that some of those well results down there were pretty appealing.

So we'll probably focus on those first in terms of trying to determine how we want to drive value from that, whether that be through a JV similar to what we've done with Mewbourne or whatever. So -- but that seemed to be the ones that we really thought had the greatest upside and the best returns through the experience that we saw from them.

Rusty and Brad, I want to pick up kind of right where you left off with Tim there. So -- and my question is around if you could kind of -- a little bit more characterization of these assets.

I think you have in your press release that 23 of these wells are -- have been brought online in the last 12 months. And so it seems to me that's probably going to be, I don't know, half of the total production that you're getting with these assets.

And if that's the case, it seems like there's actually both a lot of concentration to these relatively recent vintage wells, but also that there's a lot of acreage out there that probably doesn't have much production. So I wonder if you could just elaborate on that and kind of give us a sense of the concentration and where some of the undeveloped potential for divestiture farmout is?

Yes. Well, the 23 wells that were drilled in the last 12 months, those do not represent 50% of the production.

That's -- it's much less than that. I'd say it's probably 25% to 30% of the overall production in the -- you got about 500 wells in this package.

Some of it's very -- is much more mature and much lower decline. So from that perspective, yes, these are newer wells.

We do have good data on them now where they have been performing. So we have good ideas of kind of how those would play out if you continue to develop that acreage position where these wells are located.

I think that, as I said with Tim, I think the SCOOP/STACK area where those 23 wells were kind of drilled over the last 12 to 18 months, that's really our high -- as we sit here today, that's our high-value area. And so we think that there's a great opportunity there to look at some organic type growth mechanism, whether it be through a JV, like I said, like we did with Mewbourne and Cherokee or someone else.

We're not going to stand up a drilling expense -- in our existing assets or in our existing operations, we're not going to set up a drilling program ourselves, but we do like to do and like the way that these JVs work out for us. And so I would say that, that's probably our top priority in terms of that organic growth that you're mentioning is to look at that area down there.

And we have several, what I would consider to be undrilled locations that could be JV-ed or -- look, and if somebody comes in and offers you enough money and it's going to be worth more than the JV itself, then you would all -- by all means, you take the cash and get the returns that way also. So it's one of many ways that we can benefit from undeveloped acreage that we didn't pay for.

Got it. That's helpful -- go ahead.

Well, Charles, I was just going to add. This is a -- this transaction is right in one of our existing operators where we have an outstanding team.

We're excited about our Canvas employees that will be joining us as well. So in addition to some of the optionality that we will acquire when we close this transaction, we also will have our Smarter Asset Management playbook and margin enhancement opportunities that we will start working on actually today.

So it's not just about the wells that were drilled or the optionality we have with new development partnerships. It's about the existing PDP, adding to our portfolio of assets in an existing operating area and driving improved margins once we consolidate.

Got it. That is helpful.

And then as a follow-up, since we're still in the early days of this Carlyle relationship you have, can you walk us through the mechanics of how this -- of how and when this ABS is going to be placed? And just a couple of things I'm thinking that may be relevant are, is it going to close before the acquisition?

Or does it close right after the acquisition? And also, I know there's been some -- there was some talk before whether these -- whether -- the accounting treatment of these, whether they're going to be consolidated on your financial statements or whether it's going to come through in a different manner.

So can you just talk about some of the mechanics of how this is going to work and eventually appear?

Sure. I'll hit a couple of those points, Charles.

Thanks for the question. So the transaction will close simultaneously with the closing of the acquisition.

So that will -- it will be contingent upon the closing of the acquisition. So it will be simultaneous.

We will go through a process -- well, let me talk about the off-balance sheet treatment that has been referred to in the past. This transaction, the debt will remain on our balance sheet.

Carlyle is going to be providing financing at the debt level for this transaction. The SPV that will be established to support the ABS, the equity of that SPV will be 100% owned by Diversified.

So this will be just -- this will look just like our other ABSs that we have on our balance sheet. We have talked to Carlyle about participating at the SPV equity level, and they are willing and would like to do that for the right transaction.

This transaction primarily for tax-related challenges, just was not a good fit for that. So they're providing the debt only for this one.

And then this will be really a straightforward process, very similar to our other ABSs. This will be a rated piece of paper.

We'll go through that process with the rating agencies. The primary difference from our other ABSs is that we will not go through a syndication process with investors.

Carlyle will be the primary and -- will be the investor in this ABS.

Got it. That is helpful detail.

Congrats on the deal. A couple of questions from me.

Just wondering whether you could give a sense of the scale of the synergies on this acquisition. So if we look at the Maverick deal, I mean, I think we're talking about $60 million of annualized synergies, which is around 15% of the acquired EBITDA.

Would we be looking at something similar here or less? So that's the first question.

Yes. Tim, I -- we don't really know exactly what the synergy dollars are yet.

Obviously, once we get in there, operate the asset for a period of time, we'll be able to communicate that back to the market in more detail. Of course, the G&A structure will be the main focus.

Obviously, we will -- for a transaction this size and for the number of wells and such, the G&A structure that we currently have, our existing platform will be more than sufficient to consolidate and integrate. So you can kind of get some sense around that.

Field synergies, we just don't know until we get in there and operate the assets, but we do feel really, really good that there are going to be significant areas to recognize those synergies.

Yes. And Tim, I would anticipate that upon closing of the transaction in the fourth quarter, we'll have some updated information related to that.

Great. That would be useful.

And just in terms of the corporate G&A at the Canvas level, are you able to let us know what that is or was last year?

It's roughly $25 million to $30 million of G&A.

That's useful. And then just a quick follow-on.

The vendor shares, I think roughly $55 million worth is a relatively sort of small component of the overall consideration, just wondering what the rationale was to include that in the consideration and not entirely with existing cash and debt?

Well, we just wanted to -- really, the main focus is to get some -- to make sure that we're keeping leverage neutral to going down, which is always very important to us. In this situation, with the Carlyle deal just being debt-only and not an equity position in our SPV, then we wanted to make sure that we kept that leverage at a level that's consistent with our stated desire to stay in that 2 to 2.5x.

So mainly that, it's 4% of our total shares. And for us, any time we can utilize our -- 4% of our shares to pick up 29% of free cash flow accretion, we look at that as being pretty positive.

Great. I appreciate it.

Thanks, Tim.

Congrats on a very accretive deal here. Just a couple of follow-on questions from me.

The first around the ABS. I mean this looks like one of your historic deals, given that they're not going to use the SPV structure on this occasion.

And just on that basis, could you give a bit more info on the expected interest rate and maturity terms of this ABS? And then there's just one more after.

Yes. So just one quick clarification, Sam, look we are going to have an SPV that the assets will be placed into.

My comments earlier was that, that Carlyle will not be purchasing a portion of the equity of this SPV so that will be -- so that's the similarity with our other structures and ABS notes that we have. In regards to the interest rates, I think that we've seen a decline here in the treasuries, which is positive for us because the majority of the debt will be priced off of the 5-year treasury so that's been positive.

And I think you'll see us have a similar type of spread on top of that with Carlyle. So I think our ABS X note that we printed earlier in the year, I would expect we would see similar type results to that, if not better.

Okay, brilliant. And yes, just a small point on the lockup.

It might be in the small print, but is there a timing on that lockup? Is it 6 months or so?

That's on the business and the shares...

The lockup is 6 months. Yes.

Okay, brilliant.

Post close.

Post closing.

Post close.

Post closing, Sam. So if we close at the end of...

End of fourth quarter.

End of the fourth quarter, it would be 6 months from then. If we -- whatever month we close in, it will be 6 months from that point.

Perfect, brilliant.

Yes. Thank you all for joining today.

We're really excited about the transaction and we look forward to sharing additional information with you as we -- once we close the transaction and start to recognize all the benefits that we discussed today. Thank you all very much.