Diversified Energy Company PLC (OTCQX:DECPF) Q2 2022 Earnings Conference Call August 8, 2022 3:00 AM ET
Company Participants
Rusty Hutson – Co-Founder and CEO
Brad Gray – EVP and COO
Eric Williams – EVP and CFO
Doug Kris – IR
Conference Call Participants
David Round – Stifel
Alex Smith – Investec
Mark Wilson – Jefferies
Operator
Greetings, and welcome to the Diversified Energy 2022 Interim Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Rusty Hutson. Please go ahead.
Rusty Hutson
Thank you. Appreciate it. Thank you, everybody, for joining this morning. We are going to spend a few minutes this morning walking through our midyear earnings for 2022. As you all know, we released those earnings this morning at 7:00 a.m., so those should be available to everybody by RNS and on our website. So you can access them there.
We’re going to take a little different approach this morning. I’m going to speak a little bit about our strategic objectives that we’ve laid out for the last five years, and we’ve spoken to a lot of the investors and analysts about. I’m going to talk about how we’ve – kind of where we stand, like the gauge on where we’re at on those, also speak a little bit how that’s translated into our shareholder returns.
And then speak a little bit about kind of how we are compared and how we look in – as it relates to the sectors and from a shareholder return perspective and metric perspective. And then I’ll give a quick overview of some of the first quarter or first half highlights and then turn it over to Brad and Eric to give you some specifics around the operations and the financials.
So with that, we’ll turn to Page 4 and start.
Five years ago, when we took the company public, little over five years ago, I guess, we’d laid out some direct strategic objectives. And we told our investors exactly what we wanted to accomplish and that we would stay consistent in our approach to that.
And so as we look at some of those objectives, first and foremost in that was prioritizing shareholder returns. We’re providing a sustainable dividend that would grow with acquisitions and as we grew the company. As we sit here today, we have the highest dividend yield among the upstream energy sector and 5x the S&P 500 average. So we’ve been pretty successful in accomplishing that.
We also said we would allocate our incremental free cash flow differently than some of the other companies in the sector. Instead of putting a lot of CapEx into the drill bit and completions, we would use our free cash flow to returns for our shareholders, to reduce our leverage and to grow the company in a non-dilutive way.
And so we’ve been very successful in doing that. Our accretive acquisition opportunities continue to be very robust, mainstay of our business model. We continue to be very successful in being able to accomplish that. We’ve obviously announced three acquisitions so far in 2022, and we’ll talk a little bit more about those later on in the presentation.
We’ve done 21 acquisitions since IPO, which I think is astounding as we sit here today over a 5-year period. 2022 and really all of 2021 was our new entry into the central region. That’s been a very successful venture for us. We’ve done a couple of acquisitions this year already, ranging at a PV17 to PV40 on a discounted cash flow basis and a 2x purchase price multiples. So we’ve been very successful and continue to maintain our ability to stay very disciplined in our approach to acquiring assets even in a high price environment.
Cash margins continue to be very robust. We ended the first half of the year at a 48% cash margin. And we’re – we continue to replace cash flows with organic cash – or replace those cash flows with organic growth, which is extremely important to the business model as we’ve grown it over the last five years. The latest acquisition that we announced recently from Conoco, added about $300 million of PV10 value with 70% cash margin. So we continue to add assets and add acquisitions that are very accretive to the business model.
We’ve – back in November of last year, as most of you know, we made a lot of commitments around our ESG initiatives and how we approach both the identification and the reduction of methane emissions. We said we’re going to get very aggressive on that, and we have. We’ve flown over 6,000 miles of pipeline year-to-date with our flyover LiDAR.
The program is on track to survey approximately 15,000 miles by the end of 2022, which is 90% of our midstream portfolio. More importantly, as we identify, we’re correcting those identified emissions very quickly, and Brad will get into some of the specifics around that.
We’ve also deployed our handheld emission devices across our Appalachian operation and continue to make a lot of progress. We’ve moved up our goals in terms of the number of wells that we’ll be able to visit by the end of September. Brad will get into some more of that. But we are utilizing those handhelds to see a very nice reduction in our overall emissions as a benefit of not only identifying them, but fixing them as we do identify them.
And then the last thing as it relates to our initiatives, we’ve said all along that we’re not going to put our balance sheet at risk for – just for the sake of growth, and that will continue to ensure the financial strength of the company and the business model as we move forward. You’ve seen us kind of migrate more to an amortizing debt structure being really the first company to utilize the ABS structures back in 2019, and we continue to use them over the last few years.
Now we’ve done five different ABS transactions. 100% of our debt is now on amortizing nodes, fixed coupon, fixing the cost of that debt so that we have a clear understanding of what it’s costing us.
But more importantly, amortizing that debt off over a period of time is the right thing for us to do because it matches our asset base so well, long life, low decline assets. We – and really at the core of that is the fact that we have the lowest PDP decline profile in the industry and utilizing our hedging strategy, which is core to our – also core to our business and maintaining visible cash flows that give us the ability to pay that debt down over a period of time. So really, as we look at those strategic objectives, we’ve really hit our goals of what we wanted to accomplish, probably a lot quicker than what we had anticipated back when we went public in 2017.
So moving over to Page 5. You can kind of see how this has translated to very, very aggressive returns for our shareholders. If you look at the – since IPO, we’ve returned to our shareholders 250% total shareholder returns. And you can see that we’ve accomplished that regardless of the commodity price cycles, you can see over the period of the last 5.5 years that even when the prices dipped in 2019 – 2020, we were still able to generate dividends that were in that 11% range and really continue to show that our – to our shareholders that we have a sustainable shareholder return profile that we can continue into the future.
You can see we paid over $492 million in dividends since the IPO. That dividend yield has averaged around 11% over that period of time. We continue to protect those cash flows with a very robust hedge strategy with the remainder of 2022 hedged around 90%. We’ve seen a 48% EBITDA margin in the first half of ’22, even in the midst of some of the highest commodity prices we’ve seen now in over 10 years and having a much lower hedge price.
We’ve seen those margins compress, but only 2% or 3% from their 2020 and early 2021 levels. So not a significant difference in – even with those high commodity prices. And we continue to see one of the strongest free cash flow yields in the industry, which we’ll talk about at 22%, which we’ll talk about on another slide.
Flipping to Page 6. Looking at – just looking at our overall trading metrics in relation to some of these other sectors, I think it’s important to show that – we have one of the highest free cash flow yields to enterprise value, not just the market price but to enterprise value at almost 13%. And when you really compare that to the other industries, much, much higher and outperforming pretty much every sector out there.
But if you look at the left side of the chart, you’ll see that on an enterprise value to adjusted EBITDA, we’re still from a trading multiple, still trading under all of those same sectors. So – and I’ve even noticed this even with it as it relates to the sector in general, it’s 1.5%. The E&P sector is 1.5% of the S&P 500, but represents almost 40% of the free cash flow to the S&P 500 as we sit here today. So there’s a huge disconnect, and we’re significant or trading at a significantly lower multiple when we should be – but trading at a much higher free cash flow yield. So it’s kind of disconnected in some ways.
And then flipping to Page 7. You can see we have one of the top 10 dividend yields in the upstream sector at almost 11% as we sit here today, which is higher than all the other peers that we have in the group, much higher than a lot of the other sectors and indexes out there, as you can see on to the right of the chart.
And then if you look at the free cash flow yield, we’re number two out of the top 10 peers at 32 points, and this is in relation to the market cap of the company on 2022 estimates, much higher than the rest of the sectors. But more importantly, and I think what’s really important to note in this slide is, as we talk about consistency, which has been the core of our business model. If you look at a 3-year historic average, the dividend yield has been at 10.2% compared to the rest of the upstream of less than three.
And then from a free cash flow yield, which I think this one is really, really important, we’re a 23.5% 3-year average versus the rest of the sector, which is 10.2%. It’s not just about a 1-year rise in commodity prices. This has been a consistent element of our business model over the whole 5.5 years that we’ve been out as a public company. So it’s all about consistency, doing what we do what we say we’re going to do and do it on a consistent basis.
And then on Page 8, as you look at our share price relative to natural gas prices, you can see that, that disconnect has really taken off and really increased as commodity prices have made a run the 10-year NYMEX strip from the year-end ’21, our future cash flows are just underappreciated. Now this is not just us.
Sector is similar, the rest of the sector. But with us, it seems like it’s a little more advanced compared to the rest of the sector. You can see that there’s a fairly large disconnect over – since the middle of last year as commodity prices have went up. And a lot of people will say, well, you’re highly hedged.
But if you go to the right side of this page, you’ll see our current share price trading at $1.48. There’s a 50% discount between that and what the share price should be on a PV10 less debt and affected for hedges. You can see that on that basis, it should be trading at around $2.82. So we’re still seeing a significant discount in our share price to the – to what we should be trading at on a PV10 basis even affected for debt and hedges. So there continues to be an underappreciation of diversified shares in the market.
And on Page 9, the natural gas macro obviously still remains very, very strong. The production growth in the market in the U.S. has really remained muted because of takeaway capacity and the ability to really to move the gas out of some of the higher producing regions like the Marcellus. And there’s just been a much more disciplined approach to production by the companies that drill and complete wells in these basins. The Haynesville continues to see some increases, but it obviously has access to those LNG markets, which are continuing to be very robust.
Freeport, which was our service from a fire, it’s going to – it’s scheduled now to be back online at the beginning of October, which will add to the supply-demand shortage or tightness. And with more LNG expected to come on in ’25, ’26 around 13 Bcf additional, it’s going to make this Gulf Coast gas, I believe, a premium price market into the future, and we’ll talk a little bit about that in a minute.
Heatwaves continue. We’ve seen a lot of demand – power demand in the U.S. and really internationally across the globe. Balances, global balances have become very tight, especially with the Russian pipeline situation. And just at the end of the day, the reluctance of the producers to add production and to stay disciplined in their cash flow approaches have continued to make the natural gas macro, I believe, very strong.
Real quickly, let’s talk on Page 11 about the first half performance. I think the first half was a great beginning to the year. We obviously have announced three acquisitions, one, $50 million East Texas asset from legacy that we believe is a great addition to our central region portfolio, The Conoco deal, obviously, which we announced last week, I believe, is a great Oklahoma transaction for us and will give us a lot of scale and size and efficiency opportunities there. So the acquisition strategy will continue there in central region.
Production about 139,000 BOE per day in June, up from that first half or first quarter trading update as we’ve seen some of those weather-related impacts kind of roll off and was a 20% increase over last year June. We’ve generated about $224 million in adjusted EBITDA. Cash margins, as I said earlier, around 48%, with a free cash flow yield of 22%. So we continue to be very strong from the cash flow perspective.
Leverage continues to stay in our stated range of 2.2. And we continue to see great progress in our ESG initiatives, which – we published our 2021 sustainability report, which I believe was first class and best-in-class in terms of the content and the disclosures. And then the ESG initiatives, which Brad will get into in his operations section.
So with that, I’m going to turn it over to Brad and let him talk a little bit about the operating highlights of that first half.
Brad Gray
Okay. Thank you, Rusty.
I’m really pleased to share some of the highlights and accomplishments and results that our teams delivered for the first six months of 2022. Not only have our teams delivered favorable financial results for this period, our teams are also hard at work each day to add future value to our shareholders by developing and executing numerous projects with our vast inventory of assets.
These projects include emissions monitoring and reduction strategies, production optimization as well as expense efficiency measures. And I continue to appreciate the commitment and diligence from our employees as they professionally manage and safely operate our assets and as they efficiently integrate our acquisitions. So I do want to say a job well done to our diversified team members.
I’m going to start on Page 13. And first, I want to highlight our continued progress and leadership with the E portion of our ESG programs. In November of 2021, we established a detailed plan to make positive impacts on the environmental aspects of our operations with specific emphasis on methane emission reduction, asset retirement activity as well as standardized reporting. We have aggressively implemented our upstream emission surveys utilizing our handheld detection devices. And as of June 30, we completed 49,000 well site surveys, of which 90% of those surveys indicated that there were 0 detectable emissions.
Although we’re pleased with such a low percent of emissions, we’re really not surprised due to our 0 tolerance emissions policy that has always been in place. We anticipate that emission surveys for all Appalachia wells will be completed by the end of our third quarter. And for our central region assets, we’re already making plans to implement these emission surveys in the first quarter of 2023.
Our partnership with Bridger Photonics to fly our Appalachia midstream assets is going very well. Bridger is a great partner, and our teams are fully integrated and executing a terrific program. We have flown approximately 6,000 miles of pipeline, which represents about 40% of these pipeline assets in Appalachia. We’ve successfully repaired 75% of the confirmed leaks. So when we fly the pipelines, we determine the leak, we go confirm it, and we’ve been able to prepare 75% of those. We’re continuing to deploy our assets for the second half of 2022, and we’ll do so until the weather impacts our ability and effectiveness.
We’ve been very active with increasing the capacity of our asset retirement programs. Through the end of July, we completed three acquisitions of plugging companies in the Appalachia Basin. We acquired NextLVL Energy first in February, Nick’s Well Plugging in May, and most recently, one of West Virginia’s most respected plugging companies can serve in July. We’re operating our plugging company under the name of NextLVL Energy. Our plugging teams have grown from one internal team in the fourth quarter of last year to now we have 15 plugging rigs, which include three larger derrick rigs.
And we have a vast inventory of supporting equipment of wireline trucks, cement trucks, yellow iron earthmoving equipment as well as transportation assets. We’re on track to achieve our objective to plug 200 internal wells this year, while at the same time, we are positioned well to generate external revenue by plugging wells for the Appalachia states and other regional operators. We’ve added some very experienced team members, and we’re excited about the contribution our new plugging team employees will bring to us.
We’ve successfully submitted our application with the Oil and Gas Methane Partnership program of the United Nations. This program is also known as the OGMP 2.0, and this program is quickly becoming a standard certification framework for emissions detection, monitoring and reporting.
We are actively working with the United Nations to further our program as we strive to achieve their gold standard certification in 2023.And finally, we’re also well on our way with the conversion of the energy source of our pneumatic devices from natural gas to compressed air. Our focus has been on our large unconventional wells in Pennsylvania and our multi-well pad sites in our Barnett assets. This conversion project, which involves installing air compressors is reducing emissions at our well pads and also at a lower cost than we had initially anticipated.
Moving on to Page 14. As I highlighted on the previous page, we made the strategic decision to grow our asset retirement program during 2021, and we are pleased with the progress that we’ve done in the first six months of this year. What I also want to highlight is our intentional efforts to responsibly manage our asset retirement obligations started many years ago. We proactively engaged the four states with our largest well counts by entering into defined plugging agreements that go back to early 2018. We continue to work with these states and extended our commitments and now we have agreements with terms of 10 and 15 years in place.
In 2021, we made the decision to stand up our internal plugging team in West Virginia, and we committed to the well plugging goals of 200 wells by 2023. As I’ve already mentioned, we’re on track to achieve this goal, which is one year ahead of the original schedule. And also, as I highlighted, we have aggressively grown our plugging capacity this year with three successful acquisitions in our Appalachia operating area. Not only have we significantly increased our plugging capacity, we believe that we will continue to gain cost efficiencies while also generating revenue from third-party operators and state agencies.
Moving to Page 15. We’ve got a very good team that are focused on finding acquisitions, negotiating acquisitions and funding acquisitions. But equally important is what we do after the acquisition is complete. And we also take a very disciplined approach to our employee onboardings, asset integrations and system conversions.
For new employees, we want to provide a great transition as well as communicate the opportunities they have with our company. For asset integrations, we want to deploy our smarter asset management philosophy, which is focused on optimizing production and driving expense efficiencies. And for our system integrations, we are committed to safe and secure networks while deploying our One DEC philosophy for all technical applications.
For our 2021 applications, we have completed our integration and conversion processes and our smarter asset management programs are fully engaged. For our 2022 acquisitions, our teams are working our processes to ensure that we achieve our time lines and our goals. All three acquisitions thus far in 2022, we believe are great opportunities for us to increase our scale and drive improved operating margins.
Moving to Page 16. Our Smarter Asset Management programs continue to deliver value to our operations. We constantly challenge our teams to successfully achieve our four daily priorities, which are safety, production, efficiency and enjoyment. Our Smarter Asset Management program is fully aligned with these priorities. And we’ve always said that our SAM program consists of many small victories adding up to big wins for our company.
And on Page 16, we’re highlighting some of our larger successes within our Appalachia operations this year. We continue to implement low-cost projects to return wells to production. We are always challenging our vendors to optimize cost which we were able to achieve with our water hauling and our lease compressor programs this year. We also successfully completed the divestiture of some noncore wells in our Ohio operations, which generated about $1.5 million in proceeds and also eliminated future plugging liabilities.
Our marketing and midstream teams have successfully increased the profitability of our natural gas storage assets by signing a new $2.5 million revenue agreement. So our Smarter Asset Management program has always been a value driver for us. And during these periods of inflation, our philosophies and practices become even more beneficial.
Moving on to Page 17. Our expansion into the central region has created many value opportunities. And we’ve successfully executed numerous transactions and projects with our new assets that we believe – and we believe that more value is available to be achieved. We have returned 150 wells to production, and these wells are contributing to positive cash flow. The acquisition of midstream assets in Louisiana has lowered our gathering and transportation cost, while it’s also positioned us for numerous future revenue opportunities.
We’re very active with our central region workover program. Our production engineering team is doing terrific work with our field teams, and we have completed approximately 120 profitable workover projects. The average cash-on-cash payback period for these projects is two to three months. And finally, we’ve completed the drilling and completion of eight wells that came with our Tapstone acquisition. These wells generate crude oil, natural gas and some NGLs and their contribution has been very favorable. The success of these projects has added value to the central region acquisitions, which effectively allows for improved economics on our acquisition price that we estimate to be approximately a 15% multiple improvement.
Moving to Page 18. With the favorable impact of our central region acquisitions, our production rates continue to increase as do our PDP reserves. I’m pleased with our production volumes, but I’m really excited about the value of our future reserves. With the strong demand for natural gas predicted for many years to come, the increase in our future reserves provides great value to our shareholders as well as to our employees.
Our pro forma production rate after including the impact of the recently announced ConocoPhillips assets, is 147,000 BOE per day, and the PV10 of our PDP reserves has grown to $4.2 billion. Additionally, with our industry-leading corporate declines of approximately 8.5%, our reserves to production ratio is at a very healthy level of 15x.
And finally, I’ll wrap up on Page 19. We’re highlighting the comparison of our industry-leading and low corporate decline rate of 8.5% versus six other peer companies. As you can see on this page, our corporate decline rate for our producing inventory is 3x lower than our peers. This low decline rate, coupled with our disciplined hedging program allows for stability and predictability of cash flows. A unique characteristic of our production profile is the low capital requirement we need to maintain this corporate decline rate.
We have an efficient capital spend for our upstream production optimization programs, and this upstream capital spend along with our Smarter Asset Management programs have a very favorable impact on maintaining our low corporate decline rate.
So with that, I’ll turn it over to our Chief Financial Officer, Eric Williams, who will discuss our financial results.
Eric Williams
Thanks, Brad.
Turning to Slide 21. We begin with a quick snapshot of some IFRS and alternative performance metrics or APMs. I encourage everyone to read the entire half year report we released earlier this morning and that we’ve made available on our website. Our presentation appendix includes supplemental information beginning on Page 46 that includes our unaudited financial statements and reconciliations of our APMs to IFRS measures.
We reported record revenues totaling nearly USD 1 billion and gross profit of nearly of over $600 million. Though, of course, these amounts exclude the $469 million of hedge payments we made during the period as commodity prices rose meaningfully above the prices at which we’ve hedged. Inclusive of these hedge settlements, our hedge adjusted revenue was still an impressive USD 465 million.
We did report a net loss of $935 million that was predominantly driven by a $1.2 billion pretax noncash loss that we recorded to adjust our long-dated hedge portfolio to their fair market values. Because we use long-dated hedges to secure prices at which we earn healthy cash margins, we have a large multiyear portfolio of hedges and accounting rules require that we move them to their fair values each period with a charge to current earnings.
While these noncash charges are large, higher prices are certainly very positive for the company. And as Brad described, increased the value of our proved reserves and future cash flows. Fundamental to our strategy is using hedges that when matched with their integrated cost structure, generate healthy cash margins that provide visibility into our ability to repay our borrowings and sustain our dividends [technical difficulty].
Operator
Ladies and gentlemen, we have been rejoined with Brad and Eric. Please. We have been rejoined by Brad and Eric. You can go ahead.
Eric Williams
Okay. Let’s see. Doug, on your side, where did we go with this as I’ll pick up where I left off.
Doug Kris
Yes. Basically, you were wrapping up on Slide 21.
Eric Williams
Okay. Well, then I will pick up on Slide 22.
So turning to Page 22, we’ll dive a little deeper into the elements that drove our high realized cash margins, mainly our unit realized price and expenses. The graph includes 100% of our operating and corporate overhead expenses that include base LOE, including all of our well maintenance and payroll costs, our midstream system costs, our cost to transport our production on third-party systems, production taxes and G&A.
If you progress a step further to include debt service, our interest expense adds just about $0.20 per Mcfe, thanks to our low coupon, largely investment-grade rate financing with a blended rate of about 5%. As the growth, we structured our debt to decline as we make disciplined systematic principal repayment. And these principal repayments drive that $0.20 even lower as we drive down that principal balance.
For those interested, we continue to include the component level detail of our expenses on Page 37 within the appendix and within our half year report. You’ll recall that our entry into the central region provided effects to premium pricing markets like the Gulf Coast. This access will become increasingly valuable as the U.S. resumes LNG exports with the Freeport LNG plant expected to resume operations ahead of schedule. While we enjoy higher prices in the region, we do incur higher largely variable operating expenses like gathering, transportation and production taxes.
While cost structures differ a bit between Appalachia and Central, we enjoy similar margins in both regions. You’ll see that our realized price increased by about $3 from $16 to $19 per barrel of oil equivalency while operating expenses rose to about $2 from $8 to $10 per BOE. While we realized a slight 2-point reduction in our cash margins moving from 50 to 48, I’m encouraged by a couple of points. First, the significant increase in unhedged cash margins increasing to 76% from 53%, means that we’ll realize higher margins on our unhedged production.
Second, higher commodity prices means that we can hedge future production at prices that better match our price line expenses like production taxes. While hedging is a large part of our – while hedging a large part of our production in a sub-$3 price environment caused some near-term modest margin squeeze, I expect margins to rise as our older hedges roll off and we begin to realize higher hedge and market prices. Ultimately, we believe our simple strategy creates meaningful value for shareholders and the 5-year track record that Rusty discussed earlier supports that belief.
I’ll move quickly through Slide 23 with its quick refresher on our hedge strategy, focused on two key objectives: First, we hedge to ensure that we generate stable cash flows from our stable production. We use these predictable cash flows to support our debt repayments and dividend distribution.
And secondly, hedging is integral to our financing strategy of liquidity-enhancing low fixed coupon amortizing ABS. Broadly, we’ve established the hedge coverage targets you see here. There are eight ABS notes will affect the duration of our hedge book and coverage levels. To obtain an investment-grade rating, ABS generally requires that we hedge around 85% of the assets productions for a 5- to 7-year period. Our credit facility does not require these hedging levels. And so assets secured on that line served to lower our blended hedge duration and coverage.
Slide 24 features a few points. You can see that from 2017 to 2022, we’ve held our leverage ratio stable within or below our stated range of 2x to 2.5x. We’ve achieved this while growing our business and its associated free cash generation significantly, which demonstrates our commitments to never risking the balance sheet for growth.
We’ve migrated our borrowings into fixed rate, fully amortizing notes that better match the center of our assets. This shift is important since credit facility borrowings include no scheduled principal amortization, come with a variable rate and add uncertainty with a borrowing base that the bank syndicate redetermines at least twice a year.
Conversely, ABS notes fully amortized provides low fixed rates reflective of their investment grade and ESG linked structures. Additionally, ABS unlocks liquidity from our assets. Having closed nearly USD 1 billion of ABS financing since February, we not only enjoy the benefits I just mentioned, but we increased our liquidity by 80% from $261 million at the end of 2021 to $469 million at the end of June, and that’s inclusive of the $64 million we invested in our East Texas and central region midstream acquisition.
Ultimately, we’ve secured our debt for an average fixed rate of just 5% that fully amortizes decades ahead of the assets expected producing lines as affirmed by independent engineering. We’ve unlaunched significant liquidity and consistent with the broad commitments we’ve made to Stewart Bees assets into the future, the vast majority of our financings today, including our credit facility, our ESG linked and aligned with our ESG targets.
Slide 25 frames the appropriateness of our leverage target, given the nature of our assets, cost structure and hedging. Having more card to solidify our access to the ABS markets with five issuances since 2019 to a growing investor base, we have become a respected issuer in the stable debt market, largely invested by conservative investors like insurance companies. Importantly, ABS offers investment-grade rates and eliminates the risk at a bullet maturity since the notes fully amortized over their lines and benefit from stable hedge protected cash flows.
Moving to Slide 26, consisting years a bit, I wanted to provide some financial insights related to the update Brad shared about our acquisition of asset retirement companies. Core to our integration strategy is to improve stakeholder visibility into our ability to satisfy end-of-life obligation. And to do so, it costs consistent with or better than those we use in our financial statements. I shared with you on our last call, my excitement about the tremendous progress we’ve made here, and I’m pleased to report another period of low average well retirement cost.
On a blended basis, within both third-party and internal crews, you can see that we’ve reduced our average well retirement costs by approaching 20% over the past two years, largely from transitioning away from third-party services and relying more on our own teams.
As we integrate our recent plugging company acquisitions, I expect us to drive retirement costs even lower. And when you consider the margin that we earn on the retiring wells or other operators and the state government that they manage their working well, our net cost can go even lower, ultimately, unlocking significant value for shareholders by leaving more cash flow available for dividends and reinvestment.
I’ll end on Slide 17. Since 2019, we’ve grown our adjusted EBITDA by 60% from $273 million to $448 million, assuming an annualization of our midyear value. This growth has allowed us to increase our dividend per share by more than 20%, in a rate demonstrating per share adjusted value accretion. While our dividend yield has persisted in the double digits, ranging from 11% to 13%, we remain focused on continuously improving our operations that generated stable cash flows and maintain a strong balance sheet. We believe these simple goals will give investors the confidence to price our shares to a yield more reflective of our unique business model.
And with that, I’ll turn the call back to Rusty for some final comments.
Rusty Hutson
Thanks, Eric. And so I’ll just wrap it up with some outlook into the remainder of 2022 and really past that. For the rest of the year, obviously, with the acquisitions we’ve announced, we’re still focused on optimization, obviously, the conversion of those acquisitions. But we’re going to be laser focused on our operations and optimizing the expense efficiencies that we see in the portfolio enhancement of existing production. We’re going to be laser focused, especially in that central region on some of those smarter asset management opportunities.
We’ll aggressively and continue to aggressively drive reductions in our absolute emissions. We told you that this was going to be of the utmost importance to us and that we were going to spend a significant amount of our resources and time focused on that, and we continue to do that. That will continue to be a big part of the second half of this year and continuing to hit those targets that we’ve set for our investors. Continue to look at ways to optimize pricing in the portfolio. We’ve come out of a period of time where we’ve seen a significant increase in the price of natural gas specifically.
And we’re looking at ways to optimize into much higher pricing on a going-forward basis as those continue to roll off, and we said they would over the next 18 months when we’ve talked about this at the midyears or at the year-end numbers for ’21 that we would continue to leg into the little higher pricing and continue to expand those cash margins as we move forward and take advantage of the higher prices in the forward curve. Continue to look at ways to enhance liquidity. We’ve been, in my mind, pioneers and trailblazers and coming up with new ways to find additional liquidity outside raising equity. And so we want to be able to grow the company in every way that we can without – in a nondilutive way.
And so we’ll continue to use ABS, but we’ll also continue to look at other ways to increase liquidity and reinvest the robust free cash flows that we have. And then finally, the – we’ll continue to look at and evaluate transactions in the market and look at ways to vertically integrate – continue to vertically integrate the business as we have now with the asset retirement companies that we’ve acquired and really taking control of that cost, we’ll continue to look at ways to increase our scale and size in the central region.
I think it’s pretty clear that I have a fondness for the East Texas, Louisiana area, in terms of the Gulf Coast pricing and ability to see a much better premium priced natural gas commodity price going forward. And so we’ll be evaluating opportunities to acquire with the enhanced liquidity that we have and look to grow the business on a going-forward basis in a way that will continue to return – to produce returns that we have through these first 5.5 years for our shareholders.
So with that, I’ll turn it over back to the moderator to open it up for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question is from David Round of Stifel. Please go ahead.
David Round
Great. Thanks for the presentation guys. Can I start with declines, please? Obviously, a good achievement to maintain that at 8.5%. Is it possible to say your – or to split out what your declines would have been without Smarter Asset Management, even if that’s just at a high level to give us a better sense of the impact that is making to your, I suppose, your current production levels. Also interesting to see the latest deal came with more modest decline, which was a bit of a change. Really just interested in whether you’re finding more competition for those low-decline asset packages.
Rusty Hutson
Yes. I’m going to let Brad speak to the Smarter Asset Management. I would say related to that question, though, David, that it’s – the portfolio has become so much larger now being able to – – when it was just Appalachia, it was pretty easy to calculate that out by itself and come up with a rounded number as to what we felt those decline rates would be or how we were moderating those decline rates using Smarter Asset Management. It’s becoming a little harder now because the portfolio is so big and so widespread. But I’ll let Brad speak to that in a second.
But going back to the Conoco acquisition, what I have determined related to Conoco is that it’s an Appalachian type asset. And what I mean by that is it’s very well maintained, obviously, being a Conoco asset. But it is vertical, long-life production kind of just steady-as-you-go type deal. It’s not a lot of new drills or some of the wells like we’ve seen in the central – in the East Texas and Louisiana area that are more horizontal.
These are just vertical well bores that – we’re really starting to using the term we use in the U.S. Licor chops on because we think that it’s going to give us the ability to go in there and do some low-cost swabbing and cleaning up of wells, some additional compression projects that should bring up some production and really fits our bread-and-butter type asset that we like to operate.
And so we’re really encouraged by what we’ve seen so far on Conoco as it relates to our field visits. We still don’t see a lot of competition as it relates to some of these assets, not because people don’t want them. I just don’t think there’s a lot of capital available. What we’re seeing is our biggest competition for any asset right now is more the hold that people can – that the returns they can keep by just holding on to the assets or the ABS market.
The ABS market is now becoming one of our biggest competitors because people are looking at that product as a way to monetize and trying to get a little higher advance rates on those assets. So that’s probably it. Brad, did you want to speak to Smarter Asset Management?
BradGray
Sure, Rusty, I’ll add a couple of comments. Rusty is right. We do have a vast inventory of wells and opportunities to optimize production. So it is challenging when you’re working on a well-by-well basis. But what I will say is that our Smarter Asset Management and optimization programs, it is absolutely helping us maintain that low corporate decline.
And in some cases, it can help offset when we have production disruptions from pipeline maintenance projects and things like that. I think it’s somewhat academic to say, David, I know you understand this, that production would have been lower, absent these projects and all this work.
But in addition to the production improvements it’s providing, it’s also adding future reserves. And it’s adding – it’s extending the life of the wells that we have. So it’s an overall very positive program, but also just from a employee perspective, it’s very morale uplifting to allow our teams to get the wins on a daily basis. So we’re committed to it. We like it. We’ll continue it.
Rusty Hutson
And then lastly, and then we’ll turn it to the next question. But the best gauge we have is comparing our actual production on a acquisition by acquisition or operating area by operating area to our engineered decline rates. And if we can do better than our engineered decline rates, then we know that our Smarter Asset Management and other projects are making an impact.
BradGray
Yes. And to that point that you made, that I think is illustrative of that, we talked a lot about our securitizations. And part of that is that we track asset performance and report that to those investors. And we are outperforming the engineering declines, which you’ll recall also, I said that we’re on issuance number five. And the reason that we’ve done well in that market is that we do have a really strong track record of not just asset performance, but also cost controls and the other things that come our vertical strategy.
So – and then if you turn back the clock a little bit further, for two years, we held production flat across that Appalachia low decline asset base. And we used to quantify that, and it had grown to over $75 million. And if you think about it, by having rebased or deferred that production decline for two years, that’s a permanent adjustment that keeps paying a dividend that’s not intended not on a go forward. So sand is real, and I think it’s a byproduct of being a company that does major on operations rather than majoring on development.
David Round
Very good. Thanks guys. I’ll hand it back.
Operator
Our next question is from Alex Smith of Investec. Please go ahead.
Alex Smith
Good morning, guys. Thanks for the call this morning. Rusty, could you speak a bit about and give an overview of the current landscape of the M&A market? I guess, you picked up a lot of distressed assets over the years and at given current pricing. But what are you kind of seeing in the market and what’s available? And also, given the current strip, is it more compelling to pick up assets now so you can kind of layer on higher hedges to bring up the current floor price that you have for your hedge portfolio? And lastly, can you confirm how much left of the Oaktree deal and how that relationship is going at the moment? Thank you.
Rusty Hutson
Sure. Yes. Well, I’d say the acquisition market is very robust. There’s still a lot of assets that we are evaluating day-to-day. Distress is less of a emphasis now. Now it’s more along the lines of private equity and other companies looking to divest in a much better priced market.
So we’re seeing more and more of that. I will tell you this is that it’s – we have been very focused on staying disciplined in our approach to that because, obviously, we don’t want to pay more based on a higher commodity price. But we’re able to do that because as I said on the other – on the other answer to the other question, is that there’s just not a lot of capital availability out there. And so companies are having a lot of trouble accessing capital to do deals.
And so we’ve talked to two or three different transactions now where people are focused on execution capabilities, more so than price. And so – I mean, literally to the point where one told us that they would take a much lower price than what some of the others were offering because they knew we would be able to execute. And so these are the things that are really driving the ability to do deals now. And really, the biggest – – as I said, the biggest competitors are the hold and then the ABS transactions and the ability to do those. So the market remains robust, and it’s just not around distress anymore as it once was.
As it relates to the Oaktree agreement, we obviously continue to evaluate deals with them. I would tell you that based on our presentation and what I was showing earlier in terms of the discount that E&Ps are trading at the sector itself as it relates to the forward strip and the discount to forward strip that companies are trading at has got them a lot of – has them focused a lot more on public equities right now.
And so they are heavily focused on the companies that are out there that are trading in their minds at a significant discount to the future curve. They continue to look at deals with us. We still have around, I think, $0.5 billion – I’m sorry, $0.5 million – $500 million of additional capacity with them, and so we’ll continue to evaluate deals with them as we move forward. But they still have capacity, and we’ll continue to look at deals with them. What was the other part of the question? I’m sorry, I missed it, the second.
Alex Smith
It was more that given current strip, is it more compelling to look for more acquisitions at this period to kind of speed that process up given – that your hedges from moving today?
Rusty Hutson
Yes. Alex, absolutely. In fact, we’re looking at deals and for that very reason, obviously, in ’22, we’re about 90% hedged, less so in ’23. So ’23 has some additional upside. But as we’re layering on, for example, Conoco, leaving some of that gas exposed is probably a good thing when we closed it in September because at the end of the day, it gives us some additional upside that we don’t have in the portfolio as we sit here today.
So absolutely, as we look at deals now, we’re not going to pay top line strip price for the deals. We’re going to discount them to some degree and try to acquire all these deals at a discount to PV10 value or NAV value. So that’s always going to be the first and foremost charge as we look at every deal. But I do believe that it is compelling. I can’t emphasize this enough. East Texas Gulf Coast gas looks like a really, really good deal for us. And we’re going to be heavily focused there.
Alex Smith
Great. Thank you.
Rusty Hutson
Sure.
Operator
Our last question is from Mark Wilson of Jefferies. Please go ahead.
Mark Wilson
Okay. Good morning, guys. I’d like to ask around growth expectations here and particularly the shareholder remuneration side of things as well. You rightly pointed out the 11% yield you’re seeing. It’s ranged 11% to 13%. At the same time, you talked about capital constraints in the market for people who are looking to transact and you’ve got an advantage there with your structure. But your currency, your capital in that market, I would argue is your adjusted EBITDA and the $224 million in the first half is what you – how that looks going forward is what you bring to the market. And part of that is for distribution, part of that is for financing costs and part of that is for M&A. So how would you look at the evolution of that going forward, Eric, Rusty? And do you think the scope for higher shareholder distributions alongside the growth capital that is required to be deployed? Thank you.
Rusty Hutson
Yes. So it’s a great question. I appreciate the question. Yes, I mean, honestly, as we look at a going-forward basis, we obviously always want to be able to maintain – we talked about this, the first few years of our public life, we had to raise more equity as we were trying to grow the business to a scalable size where we could do what we’re doing today, and that is utilizing existing organic cash flow to have an impact on the growth.
And so that we could cover – at least cover the declines in our revenue stream through organic cash flow. As we move forward, you’re right, there’s nothing going to change as it relates to the split between shareholder payouts, dividend – or I’m sorry, debt reduction and coverage and then having some amount of cash flow to organically grow.
What I would say is, and we’ve said this clear back at the end of last year is that the dividend will continue to not only be sustainable at its current level. But we’re probably going to continue to grow it with deals, but it will be growing at a much moderate amount than it has in the past. And what I mean by that is we’re trading at 11%.
We’ve been trading at 11%. It’s a sustainable dividend. We’re never going to cut it. But as we add additional acquisitions and grow the revenue stream instead of maintaining that 11% to delever and create liquidity that we can then grow the business and sustain the business over a much longer period of time.
I’m in the process of setting up and we’re going through and doing some 3-year strategic plans and reviews and coming up with different ways and looking at all the different alternatives to fund and grow the business going forward, providing liquidity and capitalization. And so all these things are going to be taken into consideration. But what I will say with a definitive voice is that our existing dividend is nonnegotiable. It’s sustainable.
And as we grow the business going forward, we will continue to focus on those shareholder returns, but we’re going to moderate the growth of the cash outlays to show that the 11% dividend yield is – it’s just too high right now, and we need to bring that back down to a level that the market will price appropriately. And Eric, I don’t know if you had anything you wanted to add to that?
Eric Williams
No, I think that’s really well said. And I think it’s why we ended in my comments around working to demonstrate visibility into the results of our business and the low-risk nature that as we have conversations this side of the pond, really is differentiated and should trade – should compel our shares to trade at a level that compresses that yield. And an important part of that, we fully own has been to create scarcity in equity. And Rusty is right.
We were willing to issue equity along the way to quickly accumulate assets that you’ve seen us operationally execute flawlessly, thanks to the strategy of retaining the operational talent with those assets. But we’ve been able to drive cost out of the system, improve margins. And along the way, every time we issued equity, you saw, we’ve increased our EBITDA per share over just the last two years, 20%. And again, that’s per share.
But now when you look at the significant cash that we can generate organically, the low reinvestment needs that we have and the multiples at which we’re paying, I mean, we’ve just announced deals this year that were all under 2x at the multiple.
Last year, the average was 2.5x. And if we say that we feel that this business model can comfortably carry two to 2.5x leverage, there’s no need for equity to maintain a healthy balance sheet and continue to grow. And all of that as solidifies that dividend and puts us in a position where we can continue to increase it as we stay on a strong foot, creating scarcity in the share. So I echo what Rusty said entirely that we want to make sure we’re reinvesting into the business and growing responsibly and positioning ourselves for safe and growing dividend.
Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session. And with that, we conclude today’s conference call. Thank you for joining us. You may now disconnect your lines
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