Citi sets $16 target on Diversified Energy stock with Buy rating

Tuesday, Diversified Energy Company (NYSE: DEC) received a positive outlook from Citi, as analysts initiated coverage with a Buy rating and a price target set at $16.00. The investment firm’s assessment hinges on the energy company’s unique approach to managing late-stage oil and gas assets. Citi’s analysts highlighted Diversified Energy’s low capital expenditure and strong free cash flow (FCF) conversion as core strengths. Currently trading at $12.72, InvestingPro analysis suggests the stock is undervalued, with analyst targets ranging from $14.50 to $29.00.

Citi’s price target suggests a notable upside based on the company’s projected 2025 debt-adjusted cash flow, with the target representing approximately a 4.75 times multiple. The analysts anticipate an adjusted free cash flow yield of around 17% at normalized pricing, which is based on estimates of $3.50 per thousand cubic feet (mcf) of natural gas and $65 per barrel (bbl) of oil for the year 2026. InvestingPro data shows the company offers a substantial 6.38% dividend yield, having maintained dividend payments for 9 consecutive years.

The investment firm’s positive stance is supported by Diversified Energy’s strategy of acquiring and enhancing the productivity of mature oil and gas wells. This approach has been marked by the company’s minimal need for capital investment and robust conversion of cash flow. Moreover, the vertically integrated structure of Diversified Energy and its conservative hedging strategy are seen as effective hedges against the volatility of commodity prices. The company generated revenues of $758.8 million in the last twelve months, with a healthy gross profit margin of 48.23%.

Although Citi acknowledges that there are execution risks associated with the company’s reliance on acquisitions for production growth and potential regulatory uncertainties, the analysts believe that Diversified Energy’s steady cash flow generation, low natural decline rates, and expertise in retiring wells set it apart within the energy sector. These factors contribute to the firm’s Buy rating and optimistic price target for Diversified Energy stock. InvestingPro subscribers can access additional insights through the comprehensive Pro Research Report, which includes detailed analysis of the company’s financial health, growth prospects, and valuation metrics.

In other recent news, Diversified Energy Company PLC reported its fourth-quarter 2024 earnings, showing an earnings per share (EPS) of $0.515, slightly above the forecast of $0.51, while revenue fell short at $268 million compared to an expected $273.5 million. Despite the revenue miss, the company demonstrated robust performance with total revenue of $950 million and an adjusted EBITDA of $472 million, reflecting a 50% margin. The company also managed to generate a free cash flow of $211 million and reduced its net debt by $205 million. Mizuho (NYSE:MFG) Securities maintained an Outperform rating on Diversified Energy, setting a price target of $23.00, citing the company’s strategic direction and potential for shareholder value creation. The firm’s analysts highlighted Diversified Energy’s ability to generate distinct cash flow, bolstered by ancillary businesses such as midstream operations and coal mine methane (CMM). Additionally, Diversified Energy provided an operational update through an SEC filing, ensuring compliance with regulatory standards. The company is focusing on growth through strategic acquisitions, including the recent acquisition of Maverick Natural Resources, which positions it for future expansion. Management has expressed optimism about mergers and acquisitions, especially in Oklahoma and Appalachia, and is committed to shareholder returns through a stock buyback program.

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