Decarbonization And ESG Pressures Will Erode Natural Gas Prospects

Key Takeaways

• Rising renewables adoption and stricter decarbonization targets threaten natural gas demand, pressuring Diversified's revenues, pricing, and long-term asset value.
  
• ESG pressures, tougher regulations, and remediation costs could elevate expenses, restrict financing options, and challenge the company's profitability and future growth.
  
• Strategic acquisitions, diversified revenue streams, and favorable macro trends uniquely position Diversified Energy for sustained margin expansion, earnings stability, and long-term shareholder value growth.

Catalysts

Operates as an independent owner and operator of producing natural gas and oil wells primarily in the Appalachian Basin of the United States.

• Accelerating global adoption of renewable energy alongside more stringent decarbonization targets threatens to permanently erode long-term demand for natural gas. As clean energy and storage technology becomes more competitive, Diversified's core business will face structural declines in volume and pricing, leading to falling revenues and increasing risk of asset impairment.
  
• Rising ESG pressure and evolving carbon policies-including the possible introduction of carbon taxes-will likely increase compliance costs and limit Diversified's access to low-cost financing. This growing investor reluctance to support fossil fuel assets could compress net margins and increase the company's overall cost of capital, impacting both profitability and future investment capacity.
  
• The company's reliance on acquiring mature and often declining assets may soon face diminishing returns as the pool of attractive acquisitions shrinks and competition for remaining assets intensifies. This would strongly constrain future revenue growth and expose the company to potential write-downs if long-term natural gas prices disappoint or environmental liabilities rise.
  
• Technological advancements in alternative energy and grid-scale storage are expected to undermine the competitiveness of natural gas in baseload and peaking power, resulting in downward pressure on both production volumes and market price realization for Diversified. This secular decline will drive volatility and unpredictability in cash flows and EBITDA.
  
• Increasing regulatory scrutiny over idle and orphaned well liabilities could lead to sharply higher remediation costs and stricter abandonment timelines. This structural trend would raise Diversified's asset retirement obligations, directly impacting free cash flow, increasing expenses, and weighing on long-term earnings stability.

Diversified Energy Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Diversified Energy compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Diversified Energy's revenue will grow by 2.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -12.0% today to 12.2% in 3 years time.
• The bearish analysts expect earnings to reach $149.1 million (and earnings per share of $2.19) by about August 2028, up from $-137.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.7x on those 2028 earnings, up from -8.6x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 11.7x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.18%, as per the Simply Wall St company report.

Diversified Energy Future Earnings Per Share Growth

Risks

• The ongoing underinvestment in global energy infrastructure coupled with increasing global demand for natural gas, particularly as a cleaner transition fuel for regions such as Asia and Europe, is likely to create a sustained favorable pricing environment, boosting Diversified Energy's long-term revenue and free cash flow.
  
• Diversified Energy's strategic focus on acquiring mature, low-decline, cash-generating natural gas assets, combined with operational scale and efficiency gains from successful integrations like the Maverick acquisition, has led to substantial EBITDA growth and margin expansion, supporting higher earnings and long-term shareholder value.
  
• The partnership with Carlyle Group grants access to up to $2 billion in non-dilutive acquisition funding, positioning Diversified to further scale its asset base and optimize its portfolio in a robust market for well-divestitures, enhancing future revenue and portfolio growth potential.
  
• The company's proactive asset optimization, such as high-return workover programs, land sales at premium values, and expansion of third-party services like well plugging, creates additional, diversified revenue streams while extending the productive life and utility of its asset base, leading to sustained or improved cash flow and margin resilience.
  
• Secular macro trends, including rising U.S. demand from data center expansion and increased emphasis on domestic energy security, position Diversified uniquely in regions like Appalachia to benefit from higher natural gas demand and improved local basin pricing, supporting stronger top-line revenue and enabling more effective long-term hedging strategies for earnings stability.

Valuation

• The assumed bearish price target for Diversified Energy is £11.01, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Diversified Energy's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £29.68, and the most bearish reporting a price target of just £11.01.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $149.1 million, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 10.2%.
  
• Given the current share price of £11.25, the bearish analyst price target of £11.01 is 2.2% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.