Diversified Energy Co (DEC) 2021 Q2 法說會逐字稿

Greetings, and welcome to Diversified Energy Company 2021 Interim Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn this conference over to your host, Mr. Rusty Hutson, Jr., Co-Founder and CEO. Thank you, sir. You may begin.

Thank you. Appreciate that. Good morning, everyone, or afternoon, I guess, in London. This morning, we announced our first quarter -- or first half highlights financials. We're going to go through a presentation this morning. We're going to -- I'm going to talk a little bit about what I saw as the highlights and the things that we've accomplished in that first half.

I'm going to turn it over to Brad and let him talk a little bit about the operation and ESG initiatives and how we performed from an operational perspective. Eric will join us and talk a little bit about the financial statements and some of the highlights there that we reported this morning. And then I'll wrap it up with the way I'm looking at the rest of the year.

The first half, really, really positive; really pleased with the way we ended the year or ended this first half. Obviously, as all of you know, we announced and/or closed on $342 million worth of accretive acquisitions into a new Central Region, which we feel like is an area that we can replicate what we've done in Appalachia, and we'll talk about that as we move through this presentation today. But we're really happy with these acquisitions and where we're -- and the positioning that it gives us in this new region.

We obviously had a very good free cash flow generation for the first half of the year, $117 million on EBITDA of $151 million. Again, very -- when you have this kind of free cash flow, which represents about a 20% free cash flow yield on today's stock price, it gives you a lot of flexibility. We obviously are really return-focused for our shareholders. So it allows us to pay dividends and continue to pay down debt and create liquidity that we can continue to grow the company both through acquisition and organically.

So finished the first half, average daily production of 106,000, which is the highest we've ever had for a reportable period. More importantly, we exited June at 116,000 BOE per day with the addition of the Indigo acquisition that closed in May, I believe.

EBITDA margins continue to be strong, above 50%. The operating efficiencies that we have continue to pay dividends for us in that regard and really is indicative of the free cash flow that we generate. So we'll talk more about that.

Oaktree, obviously, participated for the first time in our acquisition strategy, which again, gives confidence that the model that we employ is real, it's working, it's return-focused, and Oaktree is very, very pleased to be involved. They've now spent $200 million, I believe, of their $1 billion commitment, and we're already having discussions around being able to potentially do more than that. So it's a great partnership, and we look forward to continuing to work with them through the second half of the year.

And then ESG, it's always top of the line, top of the issues that we want to focus on as we move throughout the next 6 months. But we made a lot of progress there, which Brad will talk about. But we're fundamentally committed to this, and we're going to have a Capital Markets Day here in the next couple of months in which we're going to really give a lot more detail around this -- the initiatives from an emissions reduction and other initiatives related to this.

So all in all, very, very positive first half of the year for us. It's funny as I look at others' earnings reports and announcements here in the U.S. and, to some degree, even in the London market, you're hearing more and more about now flipping to a return on equity focus, return to shareholders' focus. I'm proud to say we've been there for almost 5 years now. So I feel like we're ahead of the game from that perspective.

With that, I'm going to turn it over to Brad, and let him talk a little bit about the operating results for the first half.

Okay. Thank you, Rusty. And if you're following on our slides, we're on Page 6. So our teams have been very active and productive on many fronts during the first half of 2021. And I'm pleased to provide an update on these activities. But first, I want to say thank you to the 1,200 Diversified employees that each day are working hard to create value for our many stakeholders. Our teams are committed to the safe and efficient production of affordable clean energy for our communities and all of our customers. And regardless of the weather conditions, the time of day or night, the challenges, the location, our employees always show up with intention to deliver great results.

So starting out with our ESG initiatives. We've been very active on all aspects of ESG during the first half of the year. Diversified has been, is and will always be a company that's focused on sustainability. Our business model is built on the optimization and operational integrity and sustainability of our assets. Thus, we are naturally aligned with each of the areas of ESG.

Our commitment to ESG goes beyond just a box-checking exercise. Our commitment to good ESG business practices is fundamental to who we have always been, and we know that good ESG is good business.

Just a few weeks back, we did announce Teresa Odom, our former Vice President of Investor Relations, has been promoted to the role of Vice President of ESG and Sustainability Initiatives. Teresa has been a terrific member of our IR team, while at the same time, she has led the development of our very robust sustainability reports that we issued in 2019 and '20. So we're very pleased to have Teresa in this senior position, so that she can use her skills to further the sharing of information about the many ESG initiatives that we have in process at Diversified.

In addition to Teresa's new role, we added additional resources to our EHS team that will focus on emissions monitoring and emissions data and analysis. We've discussed over the past 1.5 years that we've been very focused on the accurate aggregation of our production equipment across our vast inventory of wells. We've made great progress in 2020, and we've continued this progress in 2021. And these additional resources will help us develop definitive and impactful plans to help us achieve our goal to be carbon neutral by 2050, as well as help us develop achievable goals in the next several years.

Also during 2020, we purchased and deployed numerous gas detection devices to assist our teams in detecting fugitive emissions. These devices were primarily assigned to our pipeline teams, and they've proven to be very successful. And so as a result of this success, we're making a further investment in our fugitive emissions detecting equipment, and we're purchasing over 100 additional units to be deployed with our upstream production teams. This investment will help us detect emissions that may not be naturally detectable by human senses and allow us to eliminate fugitive emission sources and provide opportunities for additional sales and revenue.

From an asset retirement standpoint, our asset retirement teams have been very active for the first half of the year. At the end of June, we were at 80% of our plugging obligations with our state consent agreements. We continue to utilize both the mixture of our in-house West Virginia plugging team and third-party contractors. And as we anticipated, the implementation of our in-house team has provided us with lower cost for our plugging projects.

We continue to work with industry suppliers as well as our state regulators to find innovative methods and products to further lower our overall plugging cost. And we do have an additional slide in the appendix of this presentation that will provide you more specific information on our year-to-date plugging activities.

From social aspects of ESG, we've continued our commitment to provide competitive wages, excellent benefits and growth opportunities for our employees.

With our recent acquisition in our central region, we are onboarding approximately 100 new employees. Our initial interactions with these employees have been very positive, and they're excited about joining our company and our culture.

In this summer, we had a very successful intern program. We hired a diverse group of college students in the Appalachia basin and have them work in numerous functions of our company. We had engineering interns, land interns, legal interns as well as operational interns working in the multiple states in which we operate. It was a tremendously successful program, and it's one that we intended to continue for years to come.

From a community perspective, our teams have been very active with community support programs. Our support for the programs for the past several months have included Earth Day events, numerous children's organizations and civic cleanup projects.

Additionally, we're proud to say that we've partnered with West Virginia University to support many of their athletic scholarship programs with a specific emphasis on women's athletics. As a part of our partnership with WVU, we were named the official energy provider of West Virginia University. And we've made a significant investment in the State of West Virginia, as most of you know, and we're pleased to show our support for this great university.

On the governance front of ESG, we've continued our tradition of transparency and good governance best practices. We committed to increasing diversity on our Board of Directors, and we are far along in this process, and we anticipate achieving our commitment before the end of 2021. Additionally, our remuneration committee of our Board is also completing a review of executive compensation policies to both encourage retention as well as compliance with applicable standards.

And finally, on the governance front, our enterprise risk management assessments and reviews continue, and we've made solid progress on further strengthening controls in numerous risk categories, including access to capital, commodity price risk mitigation and cybersecurity. So that's a -- as you can tell, we've been very active on the ESG front.

So I'm going to flip over now to Page 7. And as we've discussed over the last several months and as Rusty hit on with his early comments, we've entered a new basin of production, which we call our Central Region. We've closed on the acquisitions of assets from Indigo Minerals and Blackbeard, and we are scheduled to close on the assets from Tanos exploration in a few weeks. We're very excited about these new assets in this region, and we are confident that we can replicate our successes that we have achieved in the Appalachia basin.

In the near term, we're very focused on onboarding our new employees and integrating our processes into these new assets. An important part of our integration process is to work with these new employees to find optimization opportunities and instill a mindset of empowerment and action to realize the identified opportunities.

We are also in the process of developing and building solid relationships with the vendor and contractor community in the Central Region. And as we always do, we will encourage them to bring efficiency opportunities to the table as well. And we're getting to know the other operators in the region, and we're looking for ways to optimize our newly acquired assets.

From a longer-term perspective, we continue to be extremely encouraged with the very healthy pricing dynamics in these Gulf Coast markets. The basis differentials are much closer to Henry Hub pricing, and in some cases they're actually positive to Henry Hub.

We also believe that the Central Region has a very good and robust inventory of opportunities for us to continue to grow our production base. The central region is comprised of many operators that we believe would be better to be part of a much larger operation or organization, an operation that can drive accretive expense and operational efficiencies. So we're going to continue to support our business development team as they work to bring new opportunities to us in the Central Region.

I'm going to move forward into production now. Our production base continues to grow. And as Rusty mentioned earlier, we exited June with a production level of 116,000 BOE per day, and an average for the first half of 106,000 BOE. Both of these production levels are records for our company. Our growing production is supported by our very low corporate decline profiles, which are approximately 8.5%. And this low decline rate is also favorably impacted by the significant improvements we have made from our Smarter Asset Management projects and will continue to be supported by the large inventory of production optimization projects across our 8 states of operation.

On a pro forma basis for the first half of 2021, if we had had the impact of the 3 acquisitions, our production levels would have been approximately 141,000 BOE per day, which would have represented a 30% production increase. We're confident that our Smarter Asset Management programs will generate many opportunities for our Central Region assets.

And we also relocated 1 of our top production managers from Southwest Pennsylvania to lead our production efforts in East Texas and Louisiana. And this young man is already achieving great success and is leading our new team to bring shut-in production back online and is developing future plans to further optimize production and expense efficiency.

Next page. I want to reiterate the value that we place on owning and operating our midstream assets. And as you recall, the midstream assets that we like to own and operate are assets where we have a majority of the flowing volumes. Our midstream integration strategy allows us to achieve flow assurance, opportunities for pricing and revenue optimization by moving gas to better markets and expense optimization with our Smarter Asset Management practices. By owning and operating these midstream assets, our overall cost of operation, which also includes the benefits of third-party gathering revenue, typically is 50% lower than our gathering and transportation costs we incur from third-party midstream companies.

Earlier in the year, we initiated a project to construct a pipeline from a compression facility that we acquired in our Carbon Energy acquisition from May of last year, and we wanted to connect that compression facility to a different transmission pipeline.

This new pipeline, which you can see a picture of on Page 9, this allows us to move gas from a significantly negative basis differential market to a very small -- to a positive basis differential market. We anticipate moving the gas on this new pipeline at the start of November. The project, at the time we commenced it, 7 or 8 months ago, had a less than 2-year payback period. But now with current prices, our payback period is absolutely improving.

Also, as a result of our midstream investments as well as the capabilities of our midstream team, we are targeting another significant opportunity to move gas into one of our major NGL processing plants, which will allow us to generate higher revenues from these molecules that we are already producing. And we anticipate that this project will be online in mid-2022.

So Rusty, thank you for the opportunity to share some of the highlights of our teams for the first half. And I'll turn it over to Eric Williams.

Thanks, Brad, and good morning, everyone. I will pick up on the presentation on Page 11, which is a bit of a busy schedule, and I think you'll all appreciate that I won't rehash this for you.

Many of you probably saw our RNS this morning, which included our full midyear report, which goes through these results in detail. So I'd certainly encourage you to take a look at that. I'll be referring to some alternative performance measures in addition to our IFRS reporting metrics. And certainly, in that presentation as well as in the appendix to the slides, we provide reconciliation of any alternative performance measures to those IFRS measures. So please refer to those.

As you look at the results, one of the things we pride ourselves on is a stable base of production, long-life, low-decline assets that we prudently and disciplinedly partner with hedges to make sure that we have stable cash flows. It's just a consistent delivery, consistent results. And as Rusty alluded to earlier, a consistent tangible returns to all of our stakeholders, whether they be equity investors or debt investors. But because from an accounting perspective, we elect not to treat our derivative contracts as accounting hedges. You will, from time to time, as we have volatility in commodity prices, see some rather strange movements through the IFRS financial statements. And that certainly played out at year-end. You're seeing that again in the interim reports, which candidly is a really positive backdrop for the company.

We talked about a positive outlook for natural gas. I think we've all enjoyed seeing the sentiment for the natural gas outlook improving and believe in the long-term value opportunity that that creates for all of us. The rising gas prices, when you have prudently hedged to protect cash flow, will drive a mark-to-market valuation adjustment that we show on our balance sheet as a liability. And so we bring forward a very long-dated hedge portfolio and put that on the balance sheet today, even though those cash flows will play out over a much longer period of time. And importantly, have no effect on the very positive and robust operating margins that we constantly remind, fund our dividend and our debt repayments.

You can see revenue growth, not surprisingly up, significantly, 44% and 75% sequentially and year-over-year. As a result, not only of acquisitions but just improvement in gas prices. Our results, while we -- you'll recall we acquired Indigo in May of this year, really are a reflection of the asset base that we assembled last year. You'll recall, we did make some acquisitions in the midyear that we're getting the full benefit in the half year this year. You'll see the impact of the 3 acquisitions that Rusty mentioned, the Indigo assets, the Blackbeard assets and the Tanos assets. It's really began to roll through in the second half of the year. So certainly, upside from where we sit.

But where you see some anomalies, if you will, and just the way that our financial statements present is in the derivative portfolio. Importantly, when you look at our cash-settled derivative instruments, last half year period, if we looked at the second half of 2020, they added $61 million for cash flow. In the first half of 2020, they added $84 million of cash flow. But as we see gas prices improve, we did make distributions or hedge settlement payments of $22 million back to our counterparties. So we'll look at how that drives stable realizations in a minute. But where you see the significant movement is on the unsettled derivative prices. And so you're seeing a $371 million mark through the P&L, and we'll walk through how that unpacks over time, a much longer long-term duration.

If you flow down to income or loss before taxation, you obviously see a large loss. But when you tax effect that as well as recognize the significant benefits of the marginal well tax credits that we achieved, you see an income tax benefit of $260 million for a net loss of $84 million. But importantly, when you remove the noncash mark-to-market charges that we had on those derivatives, you've got a positive adjusted net income of $204 million, a positive EBITDA, as Rusty talked about, of $151 million; and then free cash flow, which, of course, funds the dividend and debt repayment, of $117 million. So very, very healthy cash flow numbers.

I'll move on to Page 12. And I'd say a theme that you'll find throughout our results is stability, and that's what we focus on. And we use our hedge portfolio to make sure that as we -- had stable production from our assets, we have stable cash flows to not only fund the business but those dividends and debt repayments.

And if you look at what we've delivered over the last 3 periods, you can see tremendous volatility in price, but a very stable realized price as a result of the derivatives. In fact, if you look at the first half of 2020, our derivatives added 45% to our realized prices. Fast forward to the second half of '20, they added 27% to our realized prices. And then the first half to '21, they gave back 7%.

So certainly, they disproportionately benefited us during a really challenging commodity price environment that we've been through over the last couple of years, and we're all very pleased to see a much more positive outlook, which will give us the opportunity, as we'll talk about in a moment, to capture that through additional hedging as we move forward.

Ultimately, you see, as we've grown the asset base and we annualize the results of the acquisition, 12% year-over-year growth in both production and revenues, I think, which really speaks to the stability.

So moving to Page 13. This is where -- we attempt to make an effort to unpack the hedge program and how this both protects all our stakeholders and those revenue -- sorry, dividend and debt repayment as well as how -- what this mark-to-market really looks like over time.

So we start at the bottom of the graph, what you'll see is our operating expenses. And this is what we're really proud to be exceptionally low on an asset base of our type, with an all-in cash expense around $1 to $1.4 -- $1.2 to $1.40 per Mcfe. And we hedged, as you're well aware, more the $2.70 to $2.80 range, which is what you see in that green section, the hedge price. And so we've effectively locked in what you've seen to be a consistent 50% to 50-plus percent cash margin. And it's that margin that pays our dividends and pays our debt repayments.

But as you move forward and look at where the curve is going, the curve is obviously rising, and that's upside that we did forgo on the volumes that we hedged. But importantly, it's upside that we're able to capture and value we can create on our unhedged volumes as we move forward.

The bar graph that you can see above the dark shaded areas are the realized cash gains and losses. And importantly, as we said, over the last 2 years, we've realized $194 million, so almost $200 million of cash in the bank by prudently and disciplinedly hedging. Whereas in the first half of the year, we did get back $22 million of that. So certainly, a 90% bias to the cash upside. And it's those hedges that afforded us to stable cash flows that allow us to have the confidence to increase our dividend not once but twice during COVID, as we saw many companies needing to cut because they had not prudently protected their cash flows.

So as we look across the forward curve, you can see this graph is all the way out to 2030, which is the period of time over which we've hedged. And if you look at the volumes that we've hedged and the current market prices versus the prices at which we've hedged, you do see that we've essentially foregone a portion of that upside, that if you add up all of that, so we're adding up 10 years of activity, you ultimately will tie back to the $500 million of hedge liabilities that you see sitting on our balance sheet today.

So importantly, that's a very long-term number. And I use the word potential upside of forgone because we all know that commodity prices can be very volatile. And were prices to come back down, this liability would come back down and come back down quickly while still affording us the protection to make those dividend payments and debt repayment. So really, really important.

Moving on to 14. Yes, I stress the fact that while you're seeing a liability still on the balance sheet for the long-term hedge obligation, this creates significant value for and opportunity for the company. So if you look at where the price curve sat just a year ago, at [$6.30], and you fast forward to today and see where the curve is currently sitting, you see we have a 45% uplift in the next couple of years and 20% uplift in a couple of years after that and a 15% uplift thereafter.

And because we have increasing volumes available to hedge, going from 10% in the remaining of '21, 25% in '22 and increasing to 70% in the outer years, those are volumes on which we're able to capture that upside through additional hedging. And we've talked about, we always protect the near term, which is why you see those percentages lower in '21 and '22. But this is where we had the opportunity in the outer years to begin to really build and solidify those margins in the future to make sure that we can continue to pay our dividends and pay our debt.

If you looked at those volumes relative to those uplifts, this has the opportunity or the potential of increasing our realized margins by an additional 10 points. So taking margins you see today at 50% and debt of any additional improvement in realized price or any improvement in our expense structure, which we're constantly working to improve, would allow us to take those cash margins to 60%.

But more tangibly, perhaps, if you look at the reserves that we had today on the books, the improvement in prices has increased the value of that -- of our preferred portfolio by approximately $1 billion. We did forego about half of that. You saw the long-term liability, it's about $500 million. But that's a net 15% improvement in the value of our reserves as a result of the forward curve. So it's really, really important.

So while you'll see volatility through the P&L, remember that we all want to see higher prices and certainly very much look forward to the opportunity to now capture those prices.

It wasn't long ago that we were getting the question, "Your hedges have provided you tremendous protection. But if prices don't go up, how are you ultimately going to realize higher prices?" And we said, "Listen, you hedge to weather commodity volatility because it's cyclical." And what we want to do is emerge on the other side with the opportunity to do the same thing, prudently layer in that protection, so that as we see future volatility, we can continue to deliver very stable cash flows.

Moving to 15. Yes, we talk about margins all the time, and this is what we're very, very focused on. And if you look at, what I'd call our real-world Appalachia case study, you see that our focus has really been on the expense side of the equation because the pricing dynamics in Appalachia are really driven by Henry Hub, less -- a more significant differential than you'll see in other parts of the country.

So we focus on what we control, which has been expenses. And over that period of time, if you went back to IPO, we've driven our unit level expenses down by growing asset scale, increasing asset density in our geographic region, as Brad talked about, working with our vendors to reduce cost and leverage the economies of scale. We've reduced our unit expenses by 45%. So a significant decrease, which has allowed us to deliver tremendous margin improvement. Starting it back in fiscal year '17 is a 40% margin. And even in a declining price environment, you see going from $17 down to $15, we've been able to widen that margin up to nearly 54%.

And as we step into the Central Region, we're excited to not only have the opportunity to start on that same expense reduction journey, as Brad said, building scale and working with vendors, but importantly, those -- the enhanced pricing dynamics of the Central Region are a really nice complement to what we have in Appalachia, and will give us an opportunity to work on the pricing side of the equation as well and realize better pricing.

So while you've seen some margin compression in the first half of the year as the asset mix is changing, we're introducing some additional unconventional assets and the Central Region assets that have a higher cost structure, they also have a higher pricing dynamic as well. And so what you can see is if we had owned the 3 acquisitions for the entire first half of the year, relative to where the strip price was, then our margin would already be at 54%. And certainly, as we see prices continue to improve, which will work to capture with hedging and we simultaneously work to reduce prices, you can see that path to even higher margins, capturing EBITDA to that 60%, as we talked earlier. So very, very positive outlook as we think about cash flow and margins.

Moving to 16 and talking a bit more about the balance sheet. We've always said it's very important to maintain a healthy balance sheet and be very strategic with respect to how we finance our business. I'm very pleased to report that we have a healthy and very supportive bank group. You'll recall that earlier this year, we announced the unanimous reaffirmation of our full borrowing base of $425 million. And that was our third consecutive redetermination without adding any additional collateral.

But as we sit today, adding the additional assets from the 3 acquisitions we've made, we're very pleased to have the lead banks in our syndicate give us a conditional commitment for a $200 million increase, taking that borrowing base up to $625 million, which I think is really telling in an environment where you're seeing compression on facilities, banks exiting other facilities and a real vote of confidence to both our strategy and asset quality. And that increase in borrowing base certainly gives us additional liquidity that combined with additional financing capacity with net debt EBITDA at just 1.9x today, and we've always said our stated target at 2.5x or less, positions us to do additional acquisitions on a non-dilutive basis, leveraging our healthy balance sheet, our RBL availability as well as our access to other types of financing, including, as we've done in the past, the asset-backed securitization.

We certainly are always focused on optimizing the cost of our capital and are proud to have a blended average rate of less than 5%, which I think is really remarkable, speaks to the low-risk nature of our business. And we're always balancing cost, tenor, risk and flexibility. And so we're in the process of looking at a variety of ways to continue to use financing in a strategic way to partner with equity to afford us the ability to grow on a non-dilutive basis and one that certainly maintains a low coupon for the benefit of shareholders.

If you look back to IPO and all the borrowings we've done to finance our acquisitions, that adds up to nearly $1 billion. We partnered that with about $1 billion of equity. But where net debt is at June 30, we were --it's just $635 million. So you've seen that we've repaid over that short horizon, 35% of the borrowings that we've made, which is really unique in our industry. You generally see the industry sideways. But due to the unique nature of our assets and certainly the unique nature of our financing, we're continuously paying down debt, creating liquidity that positions us for non-dilutive growth. And 75% of that debt sits in those amortizing structures that we've talked about, the asset-backed securitization that are underpinned with the long-term hedges that really protect those cash flows and provide certainty of that deleveraging as well as the term loan that we did with Munich Re to finance our acquisitions last year, you can see that glide path down to being debt-free by the end of 2030, which on an asset that has a 40 to 50-year remaining life, I think, is really, really important.

Wrapping up on 17. We talk about the low capital intensity nature of our business and the ability to, within our cash flows, the significant free cash flows we generate to not only maintain our EBITDA through, whether it be organic or inorganic acquisitions, but to even grow. Because our cash flow are in excess of what we would consider EBITDA replacement CapEx is meaningfully higher. So you can see we had $301 million -- and this is just in the first half of the year -- of adjusted revenue, so that's after hedges.

If you net off operating expenses, which include filled operating expense plus CapEx, that's where you get to our $151 million of EBITDA, 50% margin. If you then layer off our CapEx, our interest, our cash taxes, you're less with free cash flow of $117 million. So as Rusty said, that's a 20% free cash flow yield or a 40% free cash flow margin. From that, we paid $62 million of dividends to our shareholders as gratitude for allowing us the opportunity to assemble the portfolio, which leaves us with $55 million for reinvestment. And that reinvestment could be through delevering or through growth.

And if you see how we think about our EBITDA and our very low declines, as Brad said, inclusive of the Central Basin, that decline rate is about 8.5%. But where we said in the first half of the year, looking just at Appalachia, that decline was 7%. And so if you look 70% -- 7% of our EBITDA, that would imply that we need to replace about $11 million a year. And if you recall what we pay, we pay anywhere from 2x to 4x cash flow when we acquire assets. And if you look in the Central Region, we paid anywhere from 2.8% to 3.5%. So the midpoint really is comfortably around that 3x multiple. That means that we need about $33 million on an unlevered basis to replace our EBITDA as it rolls off, which compares to $55 million available for reinvestment or 40% in excess.

So it's -- I think it's really important. I know at times it can be difficult to distinguish between a return of versus a return on capital. But it's our hope that this certainly gives confidence that the nature of the assets we built, the cash flows that we generate, certainly do generate a very healthy return on capital and position us to do so for a very long period of time.

So with that, I'll hand it back to Rusty to talk about where he sees us going for the rest of the year and our commitments to you.

Thank you, Eric. Thank you, Brad. So just to wrap this up. As I look at the rest of the year and think about where we've been up to this point and where we really want to go for the second half of the year, obviously, we want to maximize the impact of our existing assets. We continue to be very laser-focused on opportunities, both in Appalachia, we have not forgotten about Appalachia. We're still very, very focused.

We still see opportunities there that we didn't consider the low-hanging fruit when we first started in Appalachia, but they're big return investments, and we'll get into more of that in our Capital Markets Day, but there's still a lot of things to do there, especially on the midstream side, we still see a lot of opportunity.

We'll continue to deploy the Smarter Asset Management across this new portfolio that we've acquired in the Central Region and stay heavily focused on the integration of those assets and the operational efficiencies and synergies that we see as we start to operate there.

We'll continue to broaden and enhance our stewardship. ESG, it's all about making sure that we're focused on those initiatives, especially on the emissions reduction side, both from a reporting perspective and the accuracy around that. And then as Brad was stating in his comments, we're heavily focused on real reductions. And so we'll get into that more also in our Capital Markets Day in a couple of months.

Scale, we're developing scale; continue to look at the region that we just entered, looking for value additive opportunities there, and there's no shortage. And so we'll continue to look at acquisitions, both in Appalachia and Central Region.

Heavily focused on creating value, valuation multiples, making sure that we're paying the right valuations and setting ourselves up for success over the long haul. We still see a lot of opportunities in that new region for efficiencies and margin enhancement. We talked about that we believe that the expense side of that region is where we're going to make up. Pricing is great. We get much better netback pricing there. So we're looking at that expense side to continue to drive those margins higher and gain that operational scale.

And then just focus on shareholder returns. I mentioned it earlier, but it's kind of amusing to me to see everybody starting to, in their press releases and in their earnings releases talk about, we're now focused on returns to shareholders and flipping that switch. Like I said, we've been there. We've already done that for 5 years, and we continue to put heavy emphasis on it. So we'll continue to capture that value.

Looking at the forward curve, as Eric was talking about on the pricing side. Sure, in the short term, which is what we have told our investors is extremely important to us is to take that volatility out of the short-term earnings, which we have in this year and next. We still have some upside in next year, and we're seeing that start to flow through in our internal models.

But at the end of the day, when you look at '23 forward, and I'm talking about 2023 and forward, it's exciting to us to see that forward curve starting to creep up because it's adding tremendous value on our unhedged volumes and giving us the ability to start to layer in hedges that will give us very profitable earnings and very steady and stable cash flows. Because at the end of the day, what we're really focused on from -- have been focused on up to this point, but we'll continue to be very, very focused on is our commitment to our shareholders, making sure that we're growing the company in a very safe way and making sure that our balance sheet stays strong and really focused on the sustainability of the company over the long haul, especially those dividends and making sure that we put a lot of emphasis on dividend sustainability and operating cash flow per share sustainability and making sure that we're managing that over the long haul.

So that's our prepared remarks. At this point, I'll turn it over to the -- to our host and open it up for some questions.

(Operator Instructions) Our first question comes from the line of David Round with Stifel.

Just one on the Smarter Asset Management activities. And I'm really just trying to understand whether there are big differences in the number of opportunities you see across each of the asset packages. So I suppose what I'm asking is, if you compare Blackbeard to Indigo, would one of those packages come with more opportunities? And how does that compare to the base business, which obviously has the midstream attached?

And just a follow-on there, I'd be interested to understand whether you have good visibility of the opportunities ahead of acquisition, so factor it into a purchase price? Or is it something that evolves over time once you have operatorship?

Yes. Let me answer the first one real quickly, and I'll let Brad expand if he wants to. I think that as we look at all the acquisitions that we've done in that region already, Brad has been identifying things already on the ground. Obviously, we've moved out one of our really strong employees down there to really set the stage with our Smarter Asset Management. We knew we needed that leadership really to kick that off.

Obviously, with the Indigo deal and then Tanos on top of that, those are very, very concentrated in the same general vicinities, have some ability probably to take a look at some staffing and those kind of things. But the assets at the end of the day don't really look that much different than what we've seen in Appalachia in terms of the opportunity set.

Brad, I don't know if you want to expand.

Yes. Sure. David, one of the things that has been consistent, whether it was in Appalachia or in our new Central Region is, in many cases, we're buying assets from companies that are focused on development versus production. And so the consistent theme there is that the production side of the house typically does not get the necessary focus as the development side. So from that perspective, we believe that we will have a robust inventory of opportunities in the Barnett as well as the Louisiana East Texas areas. But also, as Rusty mentioned, the fact that we do have Tanos and Indigo that are basically stacked on top of each other, that scale brings to the table another layer of opportunities.

So if we're fortunate to be able to do the same in the Barnett region, which I'm sure Rusty may want to add a comment or 2, just with growth opportunities in the Central Region. But if we're fortunate to be able to do that, we'll have the same opportunities. But -- so right now, we've got capable teams in place. And as Rusty mentioned, we're laser-focused on identifying and executing on those opportunities.

Yes. And David, just to finish that comment. What we find is it's not really about the type of assets. It's really not even about whether or not they look the same or whether they have characteristics that makes them -- the ability to get more efficiencies out of them. What we have found is it's more about the neglect of paying attention to those kind of assets.

For example, the Cotton Valley. Everybody's focused on Haynesville. People that have Cotton Valley in their portfolios aren't paying much attention to them. They're going to pay less attention to those and pay more attention to the Haynesville in the Barnett shale.

We -- those assets we acquired, we acquired them from an operator that it was a smash company. They took a bunch of their portfolio companies and smashed them together. This was an asset that they had just picked up. They hadn't paid much attention to it. And so those -- that's where we see opportunity, is when there has been somebody else that owns the asset that aren't really using it as a core asset.

As it relates to the acquisition, what was the question again on the acquisition?

Well, I was -- there was a secondary question, and I just said about the Barnett about the opportunities for scale there as well.

Yes. No. And so we're going to look at other assets that will help us to scale the Barnett. And we'll continue to be -- Tanos was the second deal in the Cotton Valley, but we're seeing some opportunities already present themselves there. People are -- once you become known as a buyer of a certain type of asset, then you start to get inbounds on those. And so -- and I feel very comfortable that we'll be looking at the same type of multiples and valuations that we saw in these first ones.

Yes. And David, this is Eric. What I'd add to that is -- and I think you alluded to it. We never pay for that upside. We always value the acquisitions based on what they're doing at the point of entry. So we're not rolling the dice that we're going to be able to improve upon the performance. But for your history in Appalachia, buying from a host of different types of sellers has demonstrated us that there's inherent upside when, particularly when they're focused on development and either neglecting or just defensively managing the legacy assets. But importantly, and Brad alluded to, he's been in the process of onboarding the employees from each of the respective sellers. And it's that retained knowledge that affords us immediate access to what we refer to as that low-hanging fruit. And I know Brad has been down on the new assets already identifying things that are -- will be very tangible in near-term opportunities.

So we are seeing those emerge, and that's done through that knowledge retention and keeping those valuable employees, so that we're not scrambling to assemble a workforce that's working to understand assets. We acquire a workforce that understands the assets really well. So certainly de-risks the nature of our business model, and candidly, was what gave us the confidence that it's a very replicable model across a diverse geographic footprint because we do step into the asset level knowledge day 1.

Our next question comes from the line of Alex Smith with Investec.

Just a quick couple of questions for me, more on the natural gas prices and the current backdrop that you're seeing. You've alluded to the shift in the sentiment, especially at the back end of the curve. Is there an opportunity for you to top-up on those long-term hedges towards the end of the decade? Or is there a way that you can bring up the floor price that you have at the moment that currently sits around $2.30, $2.40?

And just another one. On the improved commodity price environment, are you expecting to see some more competition of asset packages? You also mentioned that competitors are trying to replicate the same ROE model? And what are you kind of seeing in the market? Is there higher prices? Are we seeing multiples increase? Do you think that there is still capacity for you to buy asset packages at similar multiples that you have done previously?

Yes. Great questions. No, on the forward curve, there's no doubt that we see the opportunity to add and layer in at higher prices to bring that floor up significantly, because we're only about 10% or 20% edge, I believe, in those out years, which leaves you an 80% delta to play with there. And we -- I'm probably not looking at the second half of that decade right now for sure. But the front half of that decade, absolutely. Because as we look at 2022, we still have some upside there that we'll take advantage of, and we're seeing that already, like I said earlier, in our pricing models having an impact on next year's earnings. But if you look at '23 and '24, those prices have moved up significantly from where they were 60 days ago.

And so modeling -- or I'm sorry, layering in those years is absolutely happening, and we're definitely on the radar. And so we're going to -- I've always said, we're always going to take care of this year. We're always going to take care of next year. As I sit here right now, I'm saying, we're going to take care of '23 and '24, because '23 and '24 right now are affording us some opportunities that weren't there 60 days ago.

As it relates to the acquisitions, when -- the comments I was making about people looking at return on equity, that's across the board. That's drillers, shale guys, everybody, all of a sudden got religion in return on equity, which is amusing. But at the end of the day, one of the things, as it relates to the acquisitions, sure, there's a lot of people that's trying to replicate the model. There is a very limited amount of capital out there for people to take advantage of it. So we're still in a very good place.

We've shown the ability when needed to raise equity. We have room now to continue our acquisition strategy without using the equity up to a certain amount anyway. And so we're focused on that. We've got Oaktree alongside of us to help us fund bigger deals, which is an extreme advantage. And then as we look at the multiples, they're really not changing. Prices are up, mostly on the first 2 or 3 years of -- from a significant standpoint. But the valuations in terms of the multiples haven't changed much, simply because, unless there's more capital that comes into the space to create more competition for assets, those aren't going to change. We're setting the market pretty much when we're bidding on assets.

So I think we're still in a very, very good spot to take advantage of growth opportunities. And that's really where we want to be. I mean, I've said this, it's not a secret. We're north of $350 million of EBITDA going forward, $400 million on a 12-month basis from here. But at the end of the day, we need to be at a much higher scale. We need to be $700 million, $800 million to create the kind of company that can compete across the board, have access to all forms of capital. And so that's what we're focused on getting.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Hutson for closing remarks.

Yes. I just want to say thank you all for joining us this morning. Obviously, if you have any other further questions or need anything answered, our IR team is available all times of the day, obviously. And so just give them a call or e-mail them, and they'll get you the answers. And appreciate your time. Thank you very much.

Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.