Yet Another Value Podcast - Andrew Carreon from Emeth Value on Diversified Energy $DEC

Episode Date: August 22, 2022

Andrew Carreon, founder of Emeth Value, discusses his thesis on Diversified Energy (DEC; trades in London). Key points include how the company can get such good deals on acquisitions, if the company has an edge in handling asset retirement obligations, and why the company pays such a big dividend.My bull thesis on DEC: https://yetanothervalueblog.substack.com/p/tegus-sponsored-deep-dive-4-natural-198Andrew's first podcast appearance on BSM: https://twitter.com/AndrewRangeley/status/1402967314233008129?s=20&t=8N1sKfcgkx0mbRjNkJxL6wBloomberg article on DEC: https://www.bloomberg.com/news/articles/2021-10-20/gas-producer-diversified-energy-said-emissions-fell-now-it-says-they-didn-tChapters0:00 Intro2:15 DEC overview9:45 How is DEC getting such good deals from sophisticated sellers17:10 Hs the current energy environment changed the ESG market for energy?19:30 DEC's route density model and acquisition synergies27:30 Asset Retirement Obligations (ARO)43:55 Even more on AROs54:00 Is DEC just kicking the ARO can down the road?58:20 Discussing the "Bloomberg" article1:06:40 Does DEC have a regulatory edge in handling AROs?1:09:10 Why is DEC paying out a big dividend instead of buying back shares?1:15:45 Comparing the opportunity cost of DEC to BSM

Today's podcast is brought to you by Delupa. Delupa's database of over 2,500 models contains the most KPI's for each company, along with non-gap adjustments and guidance specific to the business and the quarter. Clients use Delupa's existing data to construct their own models faster and ramp up on new names more readily. Coupled with Delupa's plugin, which automatically updates numbers and formatting within your model, you'll never need to input numbers manually again. All of the LUPA's data points are contextual, audible, and accurate. Their AI algorithms allow them to collect the most data on their companies at the

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a lot if you could rate review subscribe wherever you're listening uh with me today i'm happy to have on for the second time my friend the founder of emmeth value capital andrew carron Andrew how's it going it's going well thanks for having me back on i really appreciate it hey i've been looking forward to this one for probably two months now Now, but let me start this podcast the way I do every podcast. First, the disclaimers, remind everyone, nothing we're going to talk about here is investing advice. Please do your own due diligence, consult a financial advisor. We're going to talk about diversified is a pretty big company, but the podcast is going to focus on diversified, which trades international. Obviously, that comes with all sorts of extra risks and concerns and everything. So please consult a financial advisor. Second, a pitch for you, my guest, this is your second appearance. People can go listen to the first appearance on BSM. include a link in the show notes if they want a full pitch for you. I mean, BSM was an absolute banger of a podcast that's been an absolute banger. But bottom line, I think you're a super sharp listener, super sharp thinker. Every time I can talk to you, I learn something new and I just really

excited to have you back on. So all that is the way. Today we're going to talk about diversified energy. The ticker is DEC. They trade in London. And I'm just going to stop rambling to ask you, Andrew, what's diversified and why are we so interested in them? Yeah, well, I really appreciate the kind words. It's great to be back on. I'm a huge fan. So, yeah, so Diversified is a London listed oil and gas producer that is actually the largest well owner in the United States by well count. They have a footprint of about 70,000 oil and gas wells, primarily natural gas in the Appalachia Basin and what they call the central region, which is Texas, Louisiana, Oklahoma, and Arkansas.

And something that's, you know, a little bit unique about diversified is that they actually do almost no drilling. So a bit different than a typical EMP model where, I guess, you know, for the listeners benefit, you know, a typical EMP, maybe you own a couple hundred thousand net acres and, you know, what might be a good location and you're certainly telling your investors, it's a great location. It's X percent developed and you're telling your investors it's half X developed. And you know, every year you go out and drill however many wells to both offset your embedded declines and then potentially grow production as well. And so you're very focused on the drill bit.

Many of these companies have, you know, up to hundreds of millions of dollars of drilling program costs per year. So in that model, you know, you're cost to drill, your quality and quantity of future inventory locations, you know, takeaway capacity, commodity prices, you know, lots and lots of relevant factors. On the other hand, what Diversify does is they're what's known as a PDP buyer. So they're looking and PDP meaning approved, develop, producing. And so they're looking to go out and buy wells that are, already producing and have a very long tail of economic production ahead of them. And generally speaking, while economic, these are wells that, because of the natural shape of a decline

curve, these wells have declined to, you know, a small fraction of their initial production rates. So if you look at, you know, a shale, a typical shale well or even a conventional well, you know, a shale well in a Hainesville, let's say, might produce 70 to 80 percent of the expected total recoveries in the first year or two of that well. So if you look at kind of vintage by vintage across oil and gas companies, you know, wells drilled by vintage, their production stack is very heavily tilted towards, you know, those most recently drilled wells. And so that's what their focus is. You know, all of these, you know, what diversified likes to say is, you know, most EMPs are

set up to optimize the first 40 days of a well, were set up to optimize the next 40 years of a well. And so that's their focus. The business was, was founded, a co-founded by Rusty Hudson, Jr., who founded the business in 2001. He's a West Virginia native, so Appalachia, focused, you know, bought his first package of wells in Doddridge County, West Virginia for $250,000, really as kind of a side hustle while he was in banking. His family is, He's fourth generation on a gas family. It's a very casual $250,000 side hustle, oil and gas, well, a foreshadowing of the capital allocation progress.

He, he re-mortgaged his house. He took out a second mortgage on his house to pay for about a third of the purchase price. And then the other two-thirds was seller finance. So he really liked the assets. They were brought to him by, by his dad, actually, who, who knew the seller personally, I think. And so just, you know, it got his hands dirty early and, you know, saw, you know, what you

could do by just keep keeping these wells producing and actually kind of, you know, tending to the wells, so to speak. And so they've been acquiring assets ever since. And, you know, today they've obviously branched out from what their roots were in, you know, bread and butter acquiring conventional vertical well boars in Appalachia. And really the paradigm shift there being, and we can get into specifics, but basically when the shale revolution happened in the early 2010s, a lot of operators pivoted to saying we got to get in on shale.

How do we, you know, we need to go start leasing up, you know, the more attractive shale acreage. and who can we find to offload our conventional assets to so that we can have capital to drill, but also somebody that's reliable enough to, you know, make sure that you keep those assets producing because one of the things is that a lot of these conventional well bores sit at like, you know, the four to five thousand foot depth range right above shale, which would be more in the eight to 10,000 foot range. and in order to maintain, you know, holding that lease by production,

you really have to trust that operator who you're giving those conventional wells to because if they screw up, you lose that lease. And so that was kind of their initial bread and butter is, hey, so many operators are trying to get rid of these conventional assets. They're going in, all in shale. We'll take them and we will just cash flow them and be kind of the right home for these assets. And, you know, happy to kind of go any direction from here.

No, that's great. So just to summarize, like, what they're doing is they're going out and they're saying, look, company X, you're focus on making these big wells. They're going to make most of their cash flow in the first year or two. You know, if you think in the first year or two, it's going to produce 100 barrels of they do gas, but I'll just say oil, 100 barrels of oil today. And by year four, it's only 20. And that's on its way to 10.

And then it'll probably be like 10, 10, 10, 10, 9, 7. they say, look, we'll take these old declining wells off your hands and we'll manage them. And an older well, because it's not doing 100, it's doing 10, it needs a different cost structure, right? You need to be much leaner, much more focused. So that's everything they're doing. That makes sense. So I think that's great.

I want to talk about their acquisition strategy a little more, right? So this is the most controversial thing about them. And we can talk about the ARO, which ties into it. But, you know, a lot of people when I look at this, and I think we, you hear it. You say, oh, DEC, they're going to go buy from some of the best operators in the world, right? Their recent deals. I was saying it was Chevron, but it was Conoco Phillips. They did deals with Conoco Phillips. They deals with EQT. They did deals with CNX, you know, C&X, the person who wrote the outsiders, which I think is the most popular book among value investors currently. That's their

chairman, right? So they bought from the dude who literally talked about how to do financial engineering and financial and capital allocation. They bought wells from him. And they're saying, hey, we're buying from all these sophisticated sellers, and we're getting great purchases on them. You know, the PV, PV10 would mean discounted cash flows back at 10% per year. They're saying we're buying from sellers at PV17, so 17% IRAs, PV20, a recent deal was over PV40. So I think a lot of people look at them and say, how are they getting these prices on this? Like, how does this make any sense? So I threw a lot out, actually, I'll just kind of pause there.

No, yeah, that's a really great question. And so there's a lot of different elements at play here. So while the recent deal was from Conoco was a $200 million acquisition, they have bought assets from CNX. They have bought assets from EQT. Not all of their acquisitions have taken, you know, they bought assets from Titan or Alliance, Petroleum or Core, Appalachia. So at Seneca resource, you know, companies you haven't heard of also.

So that's not the shape of all of their acquisitions. But so over the past, you know, since inception, they've made about 26 acquisitions. They've put about $2.7 billion to work at an average cash flow multiple of call it three times. And I think you, you know, one thing that I hear often is saying, man, you know, they bought this asset for two times, that for three times. This is too good to be true. you know, trust the simple narrative and the simple narrative is, oh, they're getting sold, you know, these assets because they're not actually asset, their liabilities. Yes.

And that is a simple narrative. But in reality, when you look at a three times cash flow multiple, the reason that it's three times is because that is really what's required to pencil in, you know, amid teens to high teens, IRA. And so one of the things that is attractive about diversified's business model being a PDP cash flow focused acquirer is that it really works across commodity environments. So take like right now, for instance, the strip for natural gas is extraordinarily strong. You look at an asset like Conoco and say, holy smokes, they bought this asset for PV-7. or, you know, and two, two and a half, a little under two and a half times multiple, like,

how is that possible? Conoco's super sophisticated. Well, the flip side is, yeah, they're buying it at a 17% IRA, but if you go take those dollars and put them to work in the Permian at this strip, put them to work in the Haynesville at this strip, the marginal economics of drilling a new well in Tier 1 acreage, you know, it isn't like the near triple digits IRA. on some of the best locations. So that's one, that's, you know, one kind of component. Let me just push back on that because the Conoco one is, this is the one they just did, right? They did it within a month ago.

So this is really fresh in people's minds. They bought 82 million of EBITDA from Conoco for $240 million. I think the net price was 210, PV-17 and everything he talks about. And I don't disagree with you, right? Like every company I talk to, I've talked to a lot of oil and gas companies. says, hey, if we go into the Permian right now, like with that gas at $9, $6 next year, wherever it is, like the IRS in these wells, we're getting paybacks within nine months on any wells we drill. And obviously, there's a risk of wells going to not produce what you

expect or something. But, you know, you've got pretty good engineering and stuff on the Permian at this point. So they're saying we're getting paid back within nine months, which I hear you. Take an old declining asset, sell it for PV17 and go plow it into that nine month payback well all day. But this is kind of. Conoco, this is a $100 billion company, unlimited costs of unlimited funds, costs of capital, probably, like, their debt, three to four percent. It's basically U.S. Treasuries, they're such a good of credit. Why does Conoco need to sell assets at PV17 to go fund some drilling? Like, they can just stuff these on their balance sheet and just it's better than the debt that they take out, you know? Yeah. So, I mean, every deal has its own dynamics for Conoco and specific and for the major. I mean, once, and, you know, Conoco has been aggressive and, you know, going into the Permian as kind of like that being a very major focus for them. And, you know, frankly, I think it's just simplification.

They've got, I think if you talk to the folks at Conoco, this asset went on the non-core asset list that we're looking to the best. And it is not coming off until we sell it. And there is a team of people that is on that group, and their focus is selling these assets. And they have other marketed deals right now that they are just looking to sell. And so, you know, I think the majors are their own beast. They come with bureaucracy. They have a lot of things. You know, like indigo minerals is exactly what I kind of penciled out.

So they bought these Cotton Valley assets last year from indigo. And that was exactly to take those, you know, to take those funds and just plow it into the Hainesville acreage because it was just such attractive. Yep. Such attractive acreage. But there's, you know, this is not, this is not like a one size that's all, right? So a ton of, you know, and they've bought from many of these types of players before, you have typical private equity 10 to 15 year life funds. And the trick is that they might have, you know, develop. developed a certain leasehold with this private equity fund capital. But oil and gas wells

don't last 10 to 15 years. They last much, much longer than that. So they get to the end of this and they have to figure out what to do with it. And it's even more complicated by the fact that, and as you know, I used to be on the LP side of the table at the University of Notre Dame endowment. We had a number of oil and gas partners. And that number is, you know, be line to be line to limit approaching zero, right? I mean, it won't be zero, but it is extraordinarily hard to raise additional capital as an oil and gas private equity fund right now. I have very close with, you know, a number of groups, obviously still many of my friends who are at large pensions, endowments foundations. The only calls that you have these days with your GPs on energy private equity is when are we getting

our money back and go take these to market and, you know, don't call us unless you have a sale. Has that changed in the past, let's say, six months since like Russia, Ukraine, both because energy prices are skyrocketing and I think people are starting to see, especially gas, which diversify does, but even oil, people are starting to see energy security is important. gas is getting labeled kind of ESG has that changed at all or is it still hey let's just get out of these dying fossil fuels i think it's hey let's get out of these dying fossil fuels i mean it all into shopify yeah yeah what a what a better time to be taking some some risk in equity markets right now right i mean like in other places right i think you could always make the argument

it's like hey you know are we really going to sign up for another 10 year lock vehicle and energy like we've lost our shirt like now we're getting a chance to actually get out with some kind of semblance of, you know, decency at today's price levels, just sell it and let's, you know, take what we can and run. But it was a combination of obviously from an ESG perspective, things really moving the opposite direction. And we, you know, there's a lot to talk about there. But also just the experience of every LP in these private equity funds has just been treacherous. I mean, they've lost a lot of capital up until recently. And I think people are just, you know, it's not worth a headache.

So I think it was diversified who had a line. You mentioned two things there. They had a line in their last call where they're like, hey, the current strength of commodity markets has actually lured a lot of sellers out, right? Like people when gas at 250, you're like, oh, let's just hold on. Gas at 9 and they're like, all right, we got our chance. You know, we got our debt cat bounce. Let's get out of here while the getting's good.

But I did, you know, so one side of the asset sales equation is why is, and I hate to sit one thing, but Conoco was a big, it's a big company, and it was just a very nice illustration that one side is why are sellers selling at such nice prices? And I think you address that. The other side is why, you know, it should be a competitive market for assets. Why can diversified by the deal before Conoco was at a 40 PV10 or something, right? Like, why can they get 40% IRA? Why isn't there someone, why aren't you and I throwing funds together and saying, hey, we'll bid 35, hey, we'll be bid 30. And I think one aspect of it is what you just addressed. There's not a lot buyers left out there. You know, you need to have operational experience. You need to have

all that. So there's just not a lot of buyers. But the second one, which I want to talk to you about, and we can use this transition to AROs is kind of the synergies, the operational skills, and especially the retirement, the asset retirement obligation management. So do you want to start talking about that? And then we can talk about, I think you know where we're going with AROs. Oh, yeah, for sure, for sure. Yes. So I guess one thing I would pencil out here too is that, there are absolute synergies in this model that, you know, do allow you to purchase assets for a different price than a competitor who doesn't have, you know, a footprint nearby. It is a route density model, and we can get into that.

And so if you... Can I just... It is a route density model more so than just your average generic oil and gas person buying. Like obviously every oil and gas person would like to buy the field next door. There'd be synergies there. But Diversified has particularly particular synergies to their route density model. Well, the route density model in terms of like the route density model for a typical MP is how do you get the most efficiency possible out of your drilling rigs? Yes.

How do you get the laterals as long as to have continuous acreage? How are you running these things like effectively 24-7 to just. squeeze every single efficiency dollar that you can out of your drilling rigs, this is totally different in that it's route density in maintaining your wells, operating those wells. And so, you know, if you look at the diversified's current acreage footprint in Appalachia in a certain, you know, 50-mile radius where they have only DEC employees now, there were employees scattered from five or six different companies, not necessarily, you know, efficiently, you know, one company might have had a footprint on, you know, one well way over in one side

of that 50 mile radius and then another well. And just the amount of what they call windshield time, just driving from one well to another and making sure that things are, is a huge part of this business model and taking that out. So now you could say, okay, well, now you don't have to totally cross this 50 mile radius, you take these wells that used to be owned by this company and now you're focused on this group and we're going to take these and flip them to this person. And all of a sudden, you're saving a huge amount of time. So there are some unique things there. And, you know, synergies are really important to that. I think the other thing I'd call out, and this is kind of maybe bringing in oak tree a little bit, is that one of the challenge is that, you know, these aren't

just financial assets. You have to know how to operate these assets. And so you can't just come in and buy them as a financial buyer and expect to produce a good return. Really diversified's business model is built on we're buying these assets and we're going to operate them efficiently. Like that's the, you know, private equity companies come in, buy a business and try to turn it around, it is very similar here, but you're just trying to stave off, you know, something that you bought from a 9% decline and how do you get that to a 7% decline? Yep. And so the thing that people don't often think about, and this is like, you know, the EQT assets that they bought are just an absolute prime example of this is that if you buy a package of assets that's, you know,

let's say in this instance, producing X amount of cash flow, and you model that in at a 7% annual decline. And for those first, even five years, let's say, you can stave it off to a 5% decline or a 4% decline, or this case, they held them flat for two years. The production wedge that you just created in the first five years is going to hold you know for for many many years you know 20 years thereafter and and sorry go ahead oh no it's the difference between if year zero is 10 and on the current decline it was eight so then you know you're starting year three your decline starts from eight if you save that off year three you're starting from 10 right so not only you're starting 25 percent higher but it's 25 percent higher on the whole

downturn yeah you're rebasing the production yep and what you'll find is that even if in the first couple years you can do something to rebase the production on a 20-year asset or a 30-year asset, I mean, they're looking at 700 million of like cumulative excess revenue from that single deal that was, you know, I mean, a monster amount of additional cash flow from doing things that in the immediate term and in isolation seem like very small things. And so that's another thing is just being scrappy they're very scrappy and they're very you know they're they're very and i only know it's because i've spent so much time with them but um you know they're very scrappy they're very returns focused and their whole model is really built on buying things that

are non-core and so these assets that have declined to such a small percent of production that you know at this point might be less than one percent of conoco's production volumes, they are non-core to Conoco. They have forgotten about these assets. They just want them gone. And I'm just going to jump in here. So I think another pushback would be their EQT are like the best guys in natural gas, right? It's run by the Rice brothers like they've got a huge history. They're really great at, they're really good at this stuff. And I think people would say, why can diversified go and get a well to stop well declines that EQT literally the best guys in the natural gas business can't. And the answer, and you can tell me if I'm wrong, but the answer is in

what you just said. Look, these are a small piece of EQTs overall assets. EQTs focused on going and drilling new wells that are going to be gushers. They want access to LNG. They're talking about doing equity investments into $9 billion LNG things that, you know, selling 50 million of non-core low production gas assets to diversified. The management team can't even spend time thinking about how to get those assets producing better. Yeah, that's exactly right. Right. So, I mean, an EQT is phenomenal, too. So this is a very fair question. I mean, Toby Rice is the guy. They are great, great operators. They bought those assets in 2018. So another, you know, the flip side of giving somebody capital to plow in at 100% IRAs on a tier one well is a lot of these players were very over leveraged in, you know, in 2018. They bought a couple assets out of bankruptcy in 2018 and 2017. So, uh, On the flip side, they are scooping up assets when people are in distress. And so depending on the environment, it's different assets that come to market.

It was a $500 million or so deal for EQT, which was pretty helpful to bring their debt costs down. Yep. Or not debt cost, their debt, you know, the amount of debt that they had down. And undoubtedly, I mean, they got to give somebody else the AROs, which was diversified. So that is absolutely a benefit. You're giving up costs, you expected future costs to somebody else. So that transition is great. The most frequent pushback I've gotten a diversified.

And the thing, I just did a long series on diversified. The thing that stuck in my mind was the buyer-seller issue, which we've already addressed fully. But the toughest thing with diversified is they acquire these old wells. And with old wells come ARO's asset retirement obligations. You've gotten old well, it emits methane, it makes basically pollutants, and you have to handle that. And the most frequent pushback I've gotten is, hey, diversified, they buy these things. And a lot of people think they're playing kind of a shell game with the asset retirement obligations. I'll just give a quick example.

It was in 2020, they bought assets from CNX. And CNX, if you look through their 10Q, and I clip this in one of the articles I posted, CNNX reported a gain on sale. because I can't remember the exact numbers, but basically he said, hey, we had a hundred million in asset retirement obligations. We're getting off our books with this. We sold it. We're getting a small gain on sale because the cash is greater than what we had in our books and the asset retirement obligations, all that, right? And then if you went through diversified financials, you can see they booked a bargain gain on purchase and buying these assets. And they say, hey, we think it's only going to cost $14 million in AROs and asset retirement obligations. So, you know, both sides,

two very sophisticated salaries. Both sides are kind of in their financial saying, we pulled one over on the other side, right? And you look at that big difference and both sides cannot be right. Well, both sides could be right if diversified's cost of managing these liabilities are way lower, which might be the case. But a lot of people will just say, look, they're just playing a sell game. The AROs don't come due for eight years. And eight years, they're going to have a massive liability issue with AROs, or it might be longer than eight years. But, you know, they're pushing the problem out. They're pushing the problem out. And eventually it's going to come back to haunt them. So I threw a lot out.

there we're going to talk all things about arrows but just high level how would you think about what i just said yeah it's a great it's a great question and um yeah i guess just to like previs i've known this business since 2017 and it took me to 2021 to get comfortable with a lot of these same exact issues so i've been studying it for about a year since you said it to me and i'm still trying to get comfortable so they are very good questions and uh i will do my best um so so one of the the things that you mentioned is the bargain purchase accounting. And this is something that I think if there's a handful of short reports or pretty much any. Can I just let you.

To me, please go, but to me, the gain on bargain itself, I don't care about the accounting. But I do care about CNX says, I get a, I've got a gain on sale. And then diversified says, I've got a gain on bargain purchase. Like that, that's where I start getting worried. I don't really care about the accounting games of a gain on bargain purchase or not. Okay. Okay. I mean, just to clarify there for people, there are two ways that you can classify an acquisition.

One is an asset acquisition. One is a business combination. Depending on how many employees they bring on, if there's midstream, lots of other factors, they basically have to go through with their auditors and determine, is this an asset acquisition or is this a business combination? If it's an asset acquisition, you never have a bargain gain on purchase. But if it's a business combination, you have basically, two options. One is to put goodwill in or the other is to put either a gain on, you know, a gain on purchase. And because they are effectively acquiring commodity producing oil and gas

wells, you know, putting goodwill in for for these purchases really doesn't make a whole lot of sense. So they go through, they value the assets of what they think they're worth. And then they occasionally come out with a bargain gain and purchase largely because, again, this is an attractive environment to acquire these wells. So if you actually believe that, it is reasonable to understand. The company reports metrics that strip all of these out, and that is what they kind of beat home to investors. They're, you know, like when you think about a bargain gain on purchase, typically you're thinking about a CEO or a management team that is inflating earnings. It's not backed by cash. And they're using it to pump the stock to potentially sell their own, you know, monetize

their own share and, you know, pull one over investors. Rusty has literally never sold a single share of diversified. And neither has his co-founder, Robert Post. So I think, I think that one's pretty easily put to bed. It would also be, as you said, it would be a company, it's reminiscent of the Enron WorldCom Days where be a company that's reporting huge earnings per share and they're going out and saying, look at our earnings for share. And then you would go down to the cash flow line. And, you know, The Enron thing was they wouldn't, they wouldn't even report a cash flow statement until the 10Q came out, right? They'd have zero cash flow from operation despite billions of dollars in EPS. And here, like, they are printing cash flow.

They're paying out a big dividend, which we're going to talk to it in a second. But like, they're not, maybe they're playing games with the accounting, maybe they're not. But it's not because there's no cash flow behind this, right? Like they are, and they're never really pointing to the gain on bargain purchase. So 100% there with you. Yeah. So for the CNX acquisition in specific, um, you, there's not a exact template of a way to account for AROs. And for many of these companies

that are very focused on drilling wells, the way that they will account for their AROs is they will drill a well and then they will set a fixed, fixed time, say, we expect this well to last 25 years or 30 years. And then 25 years later, 20 years later, you, you might look at that well, which Diversify did, and go through with third party reservoir engineers and say, actually, this well has, in our opinion, another 30 years of production left. But on CNX, since they drilled that well so long ago, and they've never changed that date, it's like, we're going to plug this tomorrow. Or we should have already plugged this, you know, that exact type of thing. So they will very often go to,

to the table with sellers and look at assets that are producing at levels higher than assets that they're already profitably operating. And those sellers will be saying, based on when we drilled this well, our set date is this, and that's what we have the ARO marked at. Yep. So that's, that is the largest component by far is that you have just static assumptions that a operator uses. and they're not necessarily, and again, I think there's a difference between being conservative

and being accurate. And you want to be conservative, but you don't want to be conservative to the point where you're completely inaccurate, right? So, and that's the, that's the diff here of like, what is actually correct. And so that's the biggest component. The other component, which, again, I, highly encourage everybody to just think about these on an undiscounted basis because you get so much weird stuff. There was a small difference between the undiscounted values between what

CNX thought and what diversified thought, but it was pretty small. So if you just thought about these on an undiscounted basis, they were effectively saying the same thing. But the other, besides those two, the other portion was diversified at the time was a much smaller. business, they had a higher cost of capital. And the weird thing about these is that you use your cost of capital to discount Aeros. So, yeah, the ARO flip from a low single digit to like a mid-high single-digit discount because diversified is a higher risk. Like, that didn't make any sense, right? But it's just how the accounting works. And that doesn't make any sense to me either. And they will tell you that. But that's why I just encourage everybody to think about them.

you know, think about them in undiscounted values. And then, and then we can talk about, like, maybe going to, like, you know, well, well, life, longevity and some of these other questions, if, unless you want to take it in a different direction. No, no, please continue. I'm learning a lot and having fun, so please continue it. Yeah, yeah. So, I mean, I think another pushback that you hear a lot, and I think we'll spend this whole podcast on pushbacks, but another, you know, The bullcase is really simple, right?

They're buying assets at PV20 plus. They trade for half of their PV10. They're paying a 10% plus dividend yield. Like, boom, bullcase, done. Super cheap, accretive acquisitions were good. Yeah, I know. This is what we should be spending our time on. So the way that I think about it and the way that the way that Diversify thinks about

as well is like just think about the union economics of Diversified, right? you have a well tender. They've got, Divert's got 1,400 employees about, you know, I think around a thousand of those are in the field. A bunch of them are well tenders. There's a couple different things that determine, you know, the load, the capacity of a single well tender. So how, how, like, difficult the geography is, how densely, you know, routed the wells are. Sometimes you have, you know, multi-well pads where you have 10, 15 wells on a single pad. And also just the amount of moving parts is there a pump jack, you know, how much fluid is on the wells, lots of different stuff in determining, you know, how complicated are these and how much time does each well tender need to spend at each well site to properly maintain these assets. So if you look at the Appalachia footprint, which is the vast majority of their well count, it's about two-thirds of their production, but the vast, vast majority of their, you know,

65, 70,000 wells. And the density for a well tender is somewhere between 50 and 150 wells per well tender. And so if you think about, you know, go read any given kind of like diversified energy hit piece. And, you know, they'll say, oh, my gosh, these are all stripper wells, which is defined by less than 90 MCF of gas per day of production. And absolutely true, that is vastly, vastly lower than, you know, these wells coming on and millions of, you know, cubic feet a day when they are initially producing and,

you know, five to seven BCF of production for a single year in the beginning. And this, you know, this well maybe will hit, you know, a hundred thousand cubic, you know, It's very, very different, right? But think about that one, let's just take a stripper well, 90 MCF a day. Yep. That single well, you know, at a $4 strip, will produce about $140,000 of cash flow of revenue, of gross, of gross revenue. The biggest fixed expense is these well tenders who get paid $75,000. $70,000 per year. So a single stripper well, of which is maybe one of 50 or one of 150 and a single

well tender's portfolio, can more than pay for the whole salary of a well tender, of which the remaining 49 or 99 or 149 wells are extraordinarily high margin gas wells. And the beauty of these assets is that they decline. So, you know, they're very, very, so the beginning initial phase of a well is hyperbolic declines. The diversified focuses on buying assets, they're in the exponential declines, which just means that it's a set decline rate. So that, you know, 7%, 5%, whatever it might be. And this is, you know, based on the geology, based on a lot of different things. And so diversified's average well is a lot lower than 90 MCF. It's more like 10 or 11 MCF a day. But even that well, you know, like you have people kind of quip like 10 MCF a day,

you know, that that'll buy you lunch maybe or something. I don't know. And it's like, yeah, it'll buy you last year's pricing, but today that'll buy you a fancy lobster. Yeah, that'll buy you a nice lobster lunch, power lunch. But yeah, I mean, I think what people what people don't appreciate is that what they are trying to do is to build density into an efficient way to take care of these assets. And when you're able to take care of 50 or 100 wells, something that's producing $10,000, $12,000 of cash flow a year, like, that becomes very meaningful. And, you know, on the other hand, the other biggest expense that you have besides that fixed is transportation costs. And the beauty of Diversified is that they own a lot of the transportation

in in Appalachian specific. So truly, you know, you're talking about covering the cost of a well tender and then some SG&A. But I always just kind of chuckle when people talk about how could these be unprofitable. For one, just go read their financials. It's not that challenging. But, you know, especially in this environment. But the other thing, It's just, just think about it on a well by well basis, right? Like, these wells are producing a lot of cash flow. And so that's kind of the attraction. One of the interesting things to me, so one of the experts I talked to, he said something like, look, these are really low production wells, but like some of the things diversified does is they'll only run the wells for like two hours a day or they'll run it for two, then they'll shut it off for 10, then they'll run it for two more.

And they're like, look, doing that, like, these rolls are producing so little, doing that and saving the power costs on that. And, like, you might keep the same production, but with 10 hours less of power costs. And like, I'd never heard of a well shutting down for 10 hours and then coming back for two or stuff. But, you know, it's just little things like that that add up. And obviously, everything you're talking about is more important. But that was just one of those little nuggets that jumped out to me like, oh, you know, I'm guessing a company focused on, feel on things that are producing 100,000. MCF, or like, they're not going to think about, hey, let's shut this thing off for 10 hours to save 20 bucks of power costs or something, but it's meaningful at this scale.

Yeah. So, and again, one of the things I think is, like, I just encourage everybody, go spend time with the company because they're very open book and they're great people. Bobby Clayton is the head of upstream operations for diversified, and he is kind of like your very old school oil and gas guy who like conventional wells in and out is his thing. And he just knows, you know, exactly what you're talking about. You don't think about some of these things or equipment that was once used on a well that just shouldn't be used on a well anymore. And, uh, you know, what is this doing here? The amount of cost that they're

able to save by just right sizing wells and taking compression off of wells that shouldn't be on wells or adding compression that should be on wells. Um, Wells that might be producing too much, but then are producing too much water. And then you're, you got expensive water cost hauling, um, adjacent wells that aren't producing anything, but you need them to stay open so that water can go into those. Well, I mean, it's a lot more complicated than it's, it's not, it's not, uh, oh, they're buying a bunch of holes in the ground and they're claiming they can, you know, there's a lot to it. And, and so, uh, you know, go spend time with them because they will do a better job than I will

explaining a lot of these things. But, well, I think you're doing a great job. But let me ask more on the asset retirement obligations, right? So, again, this is an area of sticking point for a lot of people. And one of the things they say is, hey, we have an advantage with asset retirement obligations because we are focused on these. We're in-house in our crews. We've got some of the kind of local economies of scale you talked about.

And I think I can't remember exactly. I'm looking at a couple different slides. But basically, they say, look, our peers, we think it costs them. $25,000 or more to kind of plug and retire well, it's costing us these days under $20,000, right? So that is a massive, massive difference, especially when you're talking about wells that right now are producing, call it $70,000 in cash flow or something, right? So if you can take the ultimate retirement obligation from $25,000 to $20,000, that is a huge increase in your IRA on this well. I might not have said that perfectly, but I think that makes sense. So my question is

like, do you believe them on the arrow, right? Like, why do they have an advantage, a cost advantage against, they just bought assets from Conoco to go back to Conoco, EQT, one of the largest gas rollers in the entire world. Like, why does Diversified have an advantage at plugging wells versus all of these guys? Yeah. So the first and most simple reason is that none of those companies, including Diversified up until very recently, plugged their own wells. They all used third-party contractors.

those contractors have on average, like a 30% margin. Yep. So, yeah, diversified saying, hey, we're going to, we save 25% by in-housing. But reality, they're just saving themselves on the margin that the third-party contractors were, it's, that's not entirely, you know, the explanation, but that is a big part of it. Is that fair? Because I don't, I don't want to push back too hard on that, but like, you know, if I said, hey, I'm Ford. I went and bought my seat manufacturer and I'm taking their margins out of the

seat. All of us would say, no, you're just adding complexity of your timeline. That was kind of just cost of capital. You're just increasing your capital. You're kind of just making it back on your cost of capital, I guess. I'm throwing a bunch out at you. But is it fair to say, hey, just by in-housing, we're taking out the third-party margin? It is because 80 plus percent of the cost is just time. It's cost on time. So cement is your other material. and so you have some cement costs where you could say like in the in the seat example you would be saying okay well am i going to am i going to benefit by ford by in-housing you know making my own seat since this seat manufacturer makes 10 times the amount of seats that i would make in house

you wouldn't save because they're passing on some economies of scale that they get to you and thus is that is that kind of what you're saying yeah i think so i think so and so in this case it is just a crew with a with a plugging rig and you are paying for the time that it cost that crew and then they are marking it up 30% on time. And so if you are able to have the same time or better time and bring that in-house and not pay the markup on time, assuming you're not getting taken to the cleaners on the 10% you're spending on cement, you're going to save money. I'm going to think about that because another argument would be, hey, we hire a lawnmower guy to go, to go quite our corporate grass. Like, are we going to save money if we in-house the lawnmower

guy? Like, yes, it's silly because that's such a small expense. But no, you're really not going to save money. I think it would come out to the same thing because the lawmower guy's not, he's just charging you for your time. Anyway, I'm going to think about that one, but that's an interesting one. I guess in that case, it depends on how you value your time. But, The other thing to consider here is that if you're a third-party plugin company, and for one, this is a fairly small industry, which is, you know, these wells, one of the things is that they last so long as it is. And the industry on the whole undoubtedly has some issues with not properly addressing these AROs and time. And we can get to that if we need to. But basically, we have not plugged. that many wells as a country. And part of the reason is because many, many of the wells have lasted

so long that we're now getting to the point where we really need to start addressing this and start ramping up plugging. And so it is still a fairly small industry. I expected to grow a lot, especially with the federal money that's coming to space. But the other thing to consider is that if you're a third-party plugging contractor, you're just focused on getting other people's business. And that takes time and that takes effort. And the beauty of insourcing for diversified is they are going after third party business, but they always have the option to just do their own well. And so the ability to keep your crews busy is a huge advantage. And to add on to that I think like that it comes back to that local economy is a scale, right? If you're going out there,

maybe if there's plot A, B, C, D, E, you only land plot A, C, and E. So there's lots of driving time in between. But if Diversified owns them all, they can just say, hey, you go to A on Monday, B on Tuesday, C and D on Wednesday, and you can save a lot of the kind of driving and hassle time and all of that. Exactly. And when you're bidding on a third-party project, you can strategically just bid on the ones that are already close to your own wealth. Yep. Yep. Yeah. Yeah. And so they've had a lot of success with this.

In terms of addressing, you know, I think a lot of people have the concern about saying, oh my gosh, 70,000 wells, 60,000 wells, pick your number, you know, that they're going to have to retire, how on earth are they going to meet these obligations? So they've already plugged, you know, over 400 wells as diversified, less than $25,000 cost across all of those wells that they've plugged. When you include the wells of the companies that they bought that they've plugged, it's more like 1,1,100 plus. So they have a very big data set of what it costs them in Appalachia to plug a 4,000-foot

conventional well. Yep. And so they have a very good sense for that. The other thing is that, okay, so you take the 25,000 per well, ARO costs. The first opportunity is, what do you save by in-housing that? Okay, maybe you save 5,000 a job. by insourcing that in-house and, okay, that knocks X off your arrow. The other thing is that, as I mentioned, they've got the capacity right now with 15 well-plugging crews

to plug 600 wells a year. I kind of expect that their average margin on a well-plugging job would be somewhere between 15 to 20,000 for the margin. And right now, that's because there is a, very high demand, particularly because of the pool that just came from this huge federal package to plug wells, and there's not enough capacity. Yep. And so if you didn't have your team's in-house, you were fighting uphill because your

costs just went up a bunch. Thankfully, they have the in-house ability to plug any of these wells. But, you know, you can do the math on saying, well, what if we plug one third party well at $20,000 margin for every three wells or every two wells, I think it's likely that they could come out with a net plugging costs of $10,000 or less. And if that's the case, then you're looking at an extra billion dollars of cash flow for shareholders. But all that aside, I think that if I were a non-shareholders, you know, interested party that was worried about these environmental liabilities, the thing that I would say

to comfort those worries, and maybe this is not what they would want to hear, is that you should absolutely be cheering them on for every acquisition that they do in Texas and Louisiana, because on the whole, those are very different types of well packages that the ARO is much smaller. Typically, they're taking, you know, like the Barnett, they're taking unconventional wells. And on an unconventional well, in the tail exponential decline, it's very similar, very predictable, maybe a bit higher like a 7% decline instead of a, or 7 or 8% decline instead of a 5 or 6. But it'll produce 30 to 40 times the production as a conventional well in those terminal years, but the ARO is only three times higher.

So you get a huge amount of operating leverage on. on those wells and they're throwing off a ton of cash. So you should really be cheering them on to do as many of those central region acquisitions as they can because that's just more cash flow that they're going to be able to have to plug, you know, Appalachia assets. And I just want to give people an idea. You said, hey, if it ends up costing them $10,000 net per well to plug all these wells because they're getting margin from third parties and all this sort of stuff, that's an extra billion dollars just to give people an idea this is a one point four billion dollar market cap company another 1.3 1.4 billion dollars of debt so we're talking about an under three billion dollar enterprise value company right and you just said a billion dollars of excess cash flow you know to ex on mobile that would be nothing but to these guys obviously that comes over years and years but to these guys that is a very meaningful amount of excess cash flow let me let me stick with a ROs and ask you another question you were just You were kind of mentioning it or alluding to it when you said, hey, when they acquire wells in Texas and Louisiana, lower AROs, that's more cash for that to cover all the other arrows.

But a frequent criticism you will hear of these guys from a bear is these guys are actually doing a kind of a very clever, but very cynical form of financial engineering. And that is this. We buy assets with big AROs. We juice them for as much cash flow as humanly possible. possible in the near term. We dividend it all to shareholders and interest payments to debt and stuff. And then in the end, when that bill for the arrows comes due, we're going to file for bankruptcy or file that asset for bankruptcy and hand the keys over to state regulators. What would you say? And this is a very, very frequent form of criticism you'll hear. And this will

probably bring us into the Bloomberg piece, but what would you say to people who said, hey, the whole trick here is undersell AROs, pay everything out to shareholders, and leave someone else with the back? Sure, sure. Yeah. So, I mean, I think the first thing I would say is that there's zero evidence that that is happening. They've never, you know, they've never turned over the keys and walked away from an obligation that they have acquired. They did, you know, if you look at their two really big acquisition windows, it was 2018 and 2021, they bought a huge amount of assets in 2018 and they went through COVID, you know, I mean, and they didn't turn over the keys to any assets. So I would say that's point number one. Point number two is

that they historically have paid a flat 40% of cash flow as a dividend. And now it's even less than that. So their 10% dividend today is, you know, maybe not a third, but somewhere between 40% and a third of cash flow. And so it's cheap. But what I would say is that, especially with where the strip is right now, I mean, this is an argument that really is just, you know, you have to have kind of your fingers and your ears and be singing la la la. I mean, there's no way to, it's very hard to reconcile that unless you say, and this is absolutely like, and we can get into theoretical examples here, but hey, if natural gas falls to 150 tomorrow and stays there forever, is there going to be a problem here? I would say probably yes. But that's a problem.

not a diversified problem, it's a diversified problem, but it's a diversified problem caused by an industry problem, right? Like, that's just general industry risk, whereas what people are talking about is Nat gas is seven, but diversified's been lying about AROs for years and the bill eventually comes due. Yeah, that's just that that argument doesn't really hold water. So, I mean, I think the other thing here is that the way that I think about it. And let me be very clear. Again, like I said to set out of The reason that I like Diversed Right so much is because I've spent a lot of time with them. I think they're exceptionally high integrity people. Again, a guy named Rusty that owns a bunch of Wells.

Like, what a better story to write. A bunch of old declining wells is critical with Rusty. You know, decrepit Wells. You know, I mean, there's no better story. It's very juicy. But in reality, I really strongly believe that they are doing everything that they can to do. the right thing. And by the way, let me just say firsthand that like this Bloomberg piece, while I didn't agree with a lot of the things that were in it, I do think every incremental

thing is a kick in the seat of the pants. And like right after that Bloomberg piece, they deployed 600 field, you know, handheld sniffing devices to all of their tender, like well tenders. That's a great thing. And like while it was uncomfortable to have that piece out, I do think that that was probably the catalyst for that. And I think things will continue to get better because they actually care. We've alluded to the boom group piece a lot and you just talked about, why don't we just quickly say what the, I'll include in this show notes,

but why don't you just quickly say what the Bloomberg piece that we keep referring to is? So we're not making this mysterious illusion. Yeah, yeah. So there was a, there was a Bloomberg green piece that came out in October of last year. I think that the majority of the well visits in that piece was like mid-summer, maybe early summer, something like that of 2021. There was a group, two reporters that basically went around to 44 wells, largely on state land because there was mostly state game land because they couldn't get approvals to go on to private lands, is my understanding. And they visited 44 wells.

So 120th of 1% of diversified wells and used a handheld sniffer and a Fleur, you know, imaging camera to basically look at a lot of diversified wells. And across 60% of the wells, they found that in some, you know, when you use the thermal imaging camera or the Fleur, sorry, the Fleur camera, you could see that some amount of methane was leaking from these wells and and so there was a big you know piece that came out that basically was you know speaking to what is surely a real problem which is that a lot of these old wells do leak methane and there is an environmental issue with particularly neglected old oil and gas infrastructure some of which is completely abandoned.

And so they put out a report that was pretty scathing, basically saying, you know, 60% of these wells are, you know, they look decrepit, they look old. This exactly what you're saying, this company is built on a ticking time bomb of buying these old wells. They have no intention to plug them. It's run by a guy named Rusty. it smells like methane to us it smells like money to him i mean it was very you know

the group is called methane hunters right i mean the reality of being an oil and gas company of any type is that there are people that will just want to keep it in the ground you know and and so again uh if you look at the actual results from that i think that there's is certainly some things that should not have been occurring. I think that's without a doubt. A couple of those wells that they, a number of the wells, for one, they visited 120th to 1% of the wells. You can't really draw many conclusions from that.

For several of the wells that they had visited, they were very recently acquired by diversified and they hadn't really had a chance to get to them to fix them. Some of the leaks of that 60% were pneumatic devices. which is, you know, is a priority for everybody to, to fix. So pneumatics are actuated by compressed natural gas, methane, and usually those pneumatics are relating to, like, getting fluids off the well bore. So they're necessary to the function of these wells. But, you know, when they actually took the samples with the, you know,

when they use the imaging camera, the only thing that you can tell is that there's some amount of methane linking. And, you know, I know you've covered this to some extent in your piece, but like go sit at a fuel repumping station and look through one of these things. You will be terrified. You know, I mean, if you lived your life looking through one of these things, you would think the world is ending. The quote the expert told me was he was like, do I know about the Bloomberg piece? Yes. Did I read it? No, there's been 100 hit pieces like it. If you take a flurr camera and go turn a lawnmower on and look through the flur camera, as you said, you will think the entire world is ending.

It's just like, no, it's just a lawnmower. Yeah. And so the amount that they actually measured with a high flow sampler was very much in line. What diversified had already disclosed in their sustainability report. I'm not saying that that's okay. And neither do they think that that's okay. They're trying to get their emissions down. And their biggest priority is methane.

So their most recent Sustainability Report, which was the 2021 Sustainability Report, was a methane intensity of about a third of a percent. So of the total natural gas that they produce, roughly one-third of one percent escapes as fugitive emissions. And when you think about fugitive emissions, the thing to keep in mind is that methane is what diversified cells. You know, they are very incentivized to go and get these get more molecules to the sales meter because typically, and they said for for these leaks that were identified by these two reporters, it was a total repair cost of $2,000. and some of them, most all of them were a turn of a wrench, right, to tighten a pipe. And so these are not hard fixes. They require consistent attention and time.

And so they are aligned with you in terms of wanting to make sure these don't escape as emissions. The other thing is that the average diversified well tender lives 30 minutes from like his well. these people live in the communities that these walls are. They're not trying to pollute. These people care. A lot of these welltenders, like they love being outdoors. They're very patriotic people. They, you know, it's so easy to paint things with a negative brush.

But in reality, nobody wants to be part of the problem. I don't know if this is too naive on my part, but one thing that kind of got me a little more comfortable of this as well as this Bloomberg piece has been out for, let's call it a year at this point, right? If there was real meat to this bone, I would have thought some politicians would have jumped on this and started like shot in. And not that you can make a career out of just like crucifying one really small oil and gas company, but you could make a career, you could make a pretty good local career or start of one out of kind of crucifying them on

don't leak in our backyard. And to my knowledge, I could, I could, I could. could be missing something. I haven't seen anybody really try to make anything of it, which suggests to me that the problem was pretty small and diversified with sitting down with a couple of people were able to explain, hey, if you really try and turn this into the thing, it's probably not going to go well for you because there's really not anything here and people believe them. I don't know if I'm naive on that or not. No, I think when you talk to state regulatory bodies, when you talk to, I mean, diversified is co-managing the state of Ohio's program. You know, they have a very,

very, very good reputation for doing the right thing. And while that might not sit well with some people who want a more extreme outcome or who cannot possibly conceive that an oil and gas company could be part of the solution, you know, it's hard for them to, to swallow. But I think the, you know, the, you know, I don't know if this is a bull or bear case, right? But you will frequently here, diversified own so many wells and has so much arrows, they're too big to fail. And they'll also mention the Ohio state regulatory program. And some people will say that in a negative way, is in, hey, they're never going to pay the AROs in full because they'll keep going to the states and be like, look, if you leave us out to dry, we're just going to hand

you a billion dollars worth of AROs. So like, give us some breaks. Let us keep harming the environment because if not, you get this bell of goods. And a very cynical bull case would be the same thing, but that says, hey, they can juice their cash flows from due to that. I don't think either are necessarily true, but I think it is worth quickly addressing. Yeah, I think that is certainly, you know, people, of course, say that all the time. The reality is, is that depending on what, you know, depending on what source you look at, I mean, there's an estimated million, you know, orphan oil and gas wells out there. They've got 70,000, 60,000. I mean, Too big to fail. We've already, like, we already have a monster problem in the United States.

And my personal view on this, and, you know, I'm based in New Orleans, my personal view on this is that the onshore liabilities are going to be a walk in the park. We are, you know, you know, knock on wood, without some kind of major across all oil and gas, fallout of some disastrous proportion, like we are going to take care of these onshore arrows. The offshore arrows really freak me out. And when you start diving in, particularly into like just the Gulf, how many non-producing offshore abandoned platforms there are, it is terrifying. And these are way more complicated to address.

And so I'm not saying that we don't have a problem. We need to address this. And it's going to be a collective effort. But it is not the, you know, pipe sticking out of your backyard and middle of nowhere, Virginia. That scares me. Like that you can address that. That's not a super complicated thing. Deep water abandoned well, that freaks me out.

Having dealt a little bit with longtime listeners from know, Amplify energy. Having dealt with this a little bit with Amplify Energy and the oil spill off the coast of California, I can say that it is no joke handling environmental liabilities in offshore. It is just absolutely crazy. You've been super generous to your time, but I do want to ask two more questions before we go. And then I'm happy to keep going because I'm learning so much for this. But the first question, look, it wouldn't be a podcast without asking. And it's particularly relevant here. These guys pay out a massive dividend. And a lot of people will look at that and say, look, They're out here saying we trade for half of PV10, 33% free cash flow yield to our stock, which, by the way, it's not free cash flow yield that's juiced by super high energy prices because one of the great things I like about these guys is they hedge so much that they're kind of realizing $3 oil and gas prices when gas is at 9. So, you know, it's 33% on hedged numbers. They've got great visibility.

Why are they paying this massive dividend? Why do they keep raising the dividend? Why don't they buy back stock? A lot of people point to the dividend and lack of share buybacks as, hey, further proof that they want to leave a bag of goods to the AROs at the end. And they're just trying to get all the cash out of the state in the meantime. One of my pushbacks on Q rate, sorry, I'm rambling here, but no, no, this is great. Q rate in 2020, they paid out a big dividend. They paid out some perverts.

They paid out a big dividend. And a lot of shareholders looked at them and say, look at the free cash flow year. They're going to give you all back to shareholders. And my kind of different point was John Malone has never paid dividends before. The man hates paying taxes. He always buys back shares. If he's paying out dividends here, it suggests that he's really worried about terminal value here. And a lot of things happened in between now and then. But I think that proved outright. And here, I could see a rhyming reason why they're trying to get all the cash flow out of the estate. Yeah. So on this one,

I think there are a lot of reasons. So when you think about what they're trading off. Like right now, their stock is pretty, their stock is very cheap, very cheap. But they are able to still buy acquisitions at a competitive or maybe I would say even more attractive price than what they're, you know, they're trading at half of PV10. So maybe that's a pretty high bar right now and specific. But you also have to think about that acquisitions have a strategic, you know, there are, it's not apples to apples. So like take the Conoco example. Conoco is very contiguous to the tapstone assets that they had. They bought them for PV-17, call it 70% of PB-10, which, yeah, okay, that's more expensive than buying back your stock at half of

PV-10. But they are going to get some synergies on both that tapstone footprint and the Conoco footprint by plugging in that asset. The model is built on keeping the density going and making sure that you can drive down your cost per well. And so there is a strategic benefit to making sure you continuously plug in assets. And so if you, that's kind of number one is that they need to, in order to keep Like, if you think about a well tenders footprint just as is, that is going to be continuously declining at some rate. You know, you need to ideally keep plugging in wells to that footprint to keep at least on par, but hopefully give that tender even more production.

And one of the things that I'm excited about here, and again, I don't want to turn this into a two-hour pod, but I'd love to. But is that they have so much, you know, they have 8.6 million net acres of undeveloped acreage or partially developed acreage. And let's say that you have a well tender that's got 50 wells in their, in their geographic coverage area. Well, one of the things that could be a potential worry is saying, well, okay, let's take Appalachia where they're so already, they've required everybody already. in this area. There's nothing else to plug in. Well, they can go into the best spot in that radius and drill a $300,000 well to keep the production in this dense footprint high enough

to make it economically viable for that well tender to keep servicing the wells. Is there still gas for them to drill? Because my understanding of not all, but a lot of the land is it's pretty tapped out at this point. Like it's very well drilled, well developed. Not, no, that is not the case. I shouldn't say that's not the case. That is the case at certain price stacks. I would not say that's the case at this price. That's a great point. It might have been the case when gas was 250 or three, but when gas is nine, this is one of the things a lot of people said, we have fields that were completely un-economic for five years when gas was three. Gas is nine. These are like the most profitable fields in the history of the world to drill at this point.

Yeah. Yeah. So I think at $5, $4 to $5, they have lots of areas in Appalachia that they can use to infill drill to keep their route density economically attractive. And then, you know, we don't have to go on this tangent. But in the central region, particularly in the Cotton Valley, those are 10, 11,000 foot wells deep. There are many, many horizons uphole from where those wells are old, and they're actively doing this right now. But like the Host, the Hostin formation, which is uphole from the Cotton Valley, I mean, at $4 gas, the returns they're getting on some of these uphold perps and recompletions are, you know, very attractive. I didn't realize that. And look, that's one of the things, both CNX and diversified, which CNX was the other one I did the industry dive on. Their stocks haven't moved as gases run up because people keep looking and say, oh, they're 90% hedged in the short term, so we're not going to get that short-term cash flow gusher. It's like, yeah, of course, I wish they could get that short-term cash flow

gusher. But they're almost more levered in the long run because they're going to start hedging out 2027 at prices 50% higher than they were six months ago. And by the way, they do own all that landed acreage. And when gas goes from three to nine, a lot of that acreage that wasn't economic to develop, they can develop. And they're completely unhaged on stuff that they haven't drilled, obviously. So they get a lot of value that I think the market hasn't given them the credit for. Last question, and then I'll let you go. I just want to ask opportunity costs. And we don't have to talk to DEC versus CNX, but I do want to compare DEC versus your first podcast. DSM, right? And I think they're an interesting comparison because BSM benefits from oil and gas rising.

They have a very similar dividend geology. Both are yielding around double digits right now. But when you look at BSM, you don't get this great acquisition roll-up story, but you also, no debt on the balance sheet, basically, no headaches with asset retirement obligations and everything. Like, it's just this very clean story with lots of leverage to higher energy prices, but it's this very clean story. So I was just wondering if all portfolio management is opportunity costs, holding cash versus buying BSM versus buying DC versus just going and buying Berkshire and sitting on a beach somewhere or something, right? So just opportunity costs of these two versus anything. else in the oil and gas industry you're looking at? Absolutely. Yeah. So I am very partial to natural gas. So both BSM and diversified, you know, I think that it's a bit of an unsung hero. And I think that that will be more appreciated. And one of the interesting things, as I've done, I haven't quantified it, but people have done work to, if you really believe in electric vehicles coming on, all that energy to charge them has to come from somewhere. And they said, it's a

lot of power and natural gas is going to have to power a lot of that. And then you're up in LNG. Sorry, I just had to throw. No, yeah. Yeah. And you look at the backyard here in Louisiana between us and Houston. I mean, the LNG that's, you know, both approved, you know, look at the FERC website, proved under construction and approved, you know, like between like the driftwood, different things that are like, seems like they're getting to FID pretty soon. I mean, you have a very bullish picture for demand, particularly for Gulf Coast demand for natural gas, which is very good for, you know, not to be long-winded here, but one of the things historically that I was worried about with diversified is that it was all Appalachia. One of the things that really got me interested

is when they started doing more Gulf Coast because I really like Gulf Coast gas. And as you'll know, BSM has just a crown jewel of portfolio in Gulf Coast, Haynesville, Haynesville Acridge. So as you kind of correctly point out, BSM is definitely a bigger position. It is a, you know, in my mind, just an absolutely irreplaceable asset, extraordinarily high quality. As you think about the kind of like cap stack of energy, mineral rights are the, you know, the king. You know, you get paid, you go through, you know, bankruptcy, untouched. you know have no costs i would say that for both diversified and bism to some extent you are benefiting from a view of potentially running out of tier one acreage yep right diversified i mean bsm has a huge

undeveloped asset base as well as a very you know well mapped out quality tier one acreage but as As across the country, we continue to drill out our tier one locations, drilling costs are going up and the productivity of the wells. My, you know, guess would be that they're going to continue to come down. As that happens, the price of commodities has to go up. You know, I mean, that's... Not from these levels. Maybe not from where people are used to, yeah. But from what people are used to. And so the reason why we had such a treacherous environment

was truly like we saw productivity gains in these wells that were just unbelievable more than anybody, you know, would have expected from shale wells. And, you know, the DNC drilling and completion costs for these operators just continued to fall and fall and fall and fall. And they were just so innovative on how to squeeze every dollar out of these drilling rigs. And in 2018, 2019, on a lateral foot basis across most of the basins I've seen is really where you saw productivity peak out. So it's already going down. I was just going to say one thing that's interesting for both DC and BSM is BSM was saying on their last call, they're like, I can't remember what acreage it was, but they said, look, I think, I can't remember what acreage was, but they said

15 years ago, we ascribe zero value to that acreage. And now it's like one of our largest producing acreages because of developments in technology, not even price developments, just developments in technology made it economical. And like both BSM and DEC, as the technology gets better, as you were pointing out earlier, a lot of DEC's things that weren't economic, they've got all these old wells, you might go take another look at it and say, oh, you know, we're not using 1980s technology anymore. We're using 2020s technology. And we actually can go and find a lot of oil that's really economic to produce, and all the infrastructure is built out there. Both of them really benefit from continued increases in technology as well as prices going

up and all of that type of stuff. Yeah, yeah. I guess the last point I would say is that in terms of comparing and contrasting BSM and DEC is that BSM is on the most conservative end of the spectrum, as you could possibly imagine. I mean, they have no debt now. I think that that business should be run with some debt. And, you know, I wouldn't necessarily want, you know, I wouldn't necessarily call them aggressive, you know,

acquires of assets, but they certainly are aggressive in terms of getting operators onto their lands and trying to spool up kind of organic development. And they have a great team for that. DEC, on the other hand, they are dealmakers, you know. You know, Diversified is a energy-only private equity business that has a very niche thing that they do, which is by producing wells. They're private equity guys. You know, they are very financially savvy.

Look at their debt structure, right? They have all of their debt is in asset-backed, long-term fixed rate structures. Which I think they were one of the pioneers of with old declining wells, if I'm remembering correctly. Yeah, they're the first to do it. And so these are, you know, ABS structures that are, you know, six different separate vehicles that, you know, just incredible structuring of this, you know, all the reasons that people hate private equity, you know, diversified takes the box. I've tried to pitch smaller companies on doing that to realize some value for land that for production. I don't think they're getting any credit for. And all of them said, look, it's a really interesting model, but it takes expertise, cost, and

scale that we just do not have, which is obviously a feathering their cap. Yeah, yeah. So very different businesses. I think that the attraction for diversified is that people will continue to hate oil and gas and sell them assets. One last question, and then I'll let you go. I got so many questions. I tried to do one stock, one podcast, but I have to ask.

BSM, their CEO, but it wasn't huge in the grand scheme of things. He bought $750,000 worth of stock earlier this month, which would be huge for me. It's not huge for him. But this is the first insider purchase, I think since 2019, and it's the first sizable insider purchase, probably ever. A lot of people were wondering about that. To me, I just think it's, hey, if you listen to the Q2, the Q2 calls, that was the most bullish I think I've ever heard him on the company. And I think he was in an open window. And he said, let me take this pocket change under my cushion and put it there. But what do you

think? No, absolutely. It is very hard for me to understand how we haven't had a little bit more of a move with as bullish as they were on the last quarterly call. And I know we talked about this. And you kind of rightly pointed out to me that for whatever reason, even though we've had a really strong strip and natural gas. And, you know, with Freeport coming back online, I don't see how that doesn't get stronger. But we've had a very strong strip of natural gas. And somehow the, the business seems to be entirely correlated to oil. And I thought that was a really funny observation that you pointed out. But it seems very true. You know, even though it's 75% production of Nat gas, it seems to move every day with oil. And they basically, if you pencil out what they've said with

aethon who is drilling their, you know, prize asset, which is a Selby Trough. And, you know, I keep tabs on those wells and they are monster wells. And, uh, and between that and maybe some additional growth on the Austin Chalk acreage, what they expect to have about 30 wells drilled over the next 12 months, um, they're penciling in a 25% growth between last quarter and end of 2023 exit volumes for the royalty piece because it doesn't look that high if you just take the gross numbers they gave you, but the working interest piece is declining. And so when you back into what that means for the royalty volumes, it's like a 25 or a little higher year over year or maybe six quarters increase. And that's all gas, basically. I mean,

it's all gas. So, and then I think you exit that probably still growing in the low teens or high double digits or high, high single digits. It's very cheap. And I think it's really attractive. Look, it's just one of those ones. I love one of my other favorite podcast questions is how do you kill this company? And like with BSM, the more I've done on it, the more it's like, there's no debt on this, right? The CEO owns about 25%. the way you kill this company, okay, oil and gas go to zero overnight. Yes, fine. Industry risk like that. But if you're starting to talk company specific risk, the way you kill this company is horrible capital allocation, like on the scheme of incomplete incompetence. And again, the CEO owns 25%. Have they made some missteps? Yes. But one of the things I liked on the Q2 call was they owned up to a lot of those missteps. And they said, hey, we're aware of what we did. We're going to keep systematically hedging. We're not going to be Cowboys one. way or the other. We understand we sold some at the bottom, but we wanted to make sure we got through to the end. Don't worry. We understand the value. It's just, it's one of my favorites because

great earnings growth. They're going to give you the cash back, and it's really hard to kill. And BSM and DC have another interesting thing in common where there could be like an ownership catalyst where DC, all their assets are in the U.S. They're listed in London. They've been very clear. They've liked to come over to the U.S. at some point, which I think would make a lot of sense. BSM, MLP structure. Half the people I talk to, I say MLP and they say, not for me, pass, which completely understand, but both them, maybe one day that changes. Anyway, I've rambled.

Andrew, I've learned so much from you. It's so great talking to you, so great having you on the podcast. Anything we didn't cover you think we should hit or anything? No, this has been great. I think we could keep going for another hour and a half if we wanted to. Oh, we could. But the good news is you run concentrated by I know most of your other holdings. So I'll be ready to bring you back on for podcast number three.

but Andrew, this has been awesome. Thank you so much for coming on. And again, looking forward to podcast number three. Yeah, I really enjoyed it. Thanks for having me.