Rusty Hudson: We step up when others step away. We did it when we built this company from the ground up in Appalachia, when other operators were chasing the drill bit and moving away from conventional production operations. We did it with recent transactions like Maverick, Canvas, and Sheridan, and we're doing it now with Camino. We didn't inherit this model. We didn't copy this model. We invented it. And the barrier to entry isn't just capital. It's operational muscle, institutional knowledge, technological innovation, and relationship infrastructure that underpin everything we do. We don't just generate cash flow, we engineer it, make it durable, and make it consistent. The result, 25 years in, is a company that has returned approximately $1.2 billion to shareholders in dividends and share repurchases since IPO that has grown EBITDA per share at a 12% compounded annual growth rate over the last five years and that will control over 1,000 Oklahoma undeveloped drilling locations, over 38,000 miles of midstream pipeline, operations in four distinct basins, including high-quality Permian assets, and a daily production platform of over 1.2 BCF per day. When I look at the execution and results displayed here, it is important to note that that kind of consistency doesn't just happen by accident. It happens because we have built something that most companies in this industry haven't, a true operating platform. It's not just a collection of wells. It's a technology driven, vertically integrated, continuously improving system that rings every dollar of value out of every asset and acquisition. In a volatile world, in an industry filled with uncertainty, the market rewards stability, and we are the constant. 25 years in, with more opportunity ahead of us than behind us, we are proven. and we're just getting started. With that, I'd like to turn it over to the operator for the Q&A portion of today's call. Operator.
Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Your first question comes from Neil Digman with William Blair. Please go ahead.
Neil Digman: Morning, guys. Nice quarter. My first question is on your potential operational activity. Specifically on slide seven, you all mentioned the potential for a rig on Camino's assets to complement your non-op. And I'm just wondering, what will determine if and when you would bring in a rig like this? And then remind me, you know, other areas where you also have optionality like this to potentially bring in a rig to, you know, sort of juice things?
Rusty Hudson: Yeah, no, I think that's a great question, Neil. We really look at it, we have alternatives. It's optionality. So we can, you know, we have acreage, and I'll just, you know, be frank, I've received multiple calls already regarding the acreage we're picking up with this Camino transaction, you know, wanting to partner, drill, whatever. So we've got options here. We can, you know, acreage sales are always on the table. JVs with other partners like our Muborn operator relationship in the Cherokee, the one that we just announced with Continental in the Permian, or to your point, adding a rig ourselves. All of those options are on the table. As we stated in here, we have 100 locations that are highly economic at $65 oil, so you can imagine one of those three options would be something we would be looking at doing fairly quickly after we close the transaction.
Brad: Neil, this is Brad. I would just add, as Rusty indicated in his comments, we do have 1,000 locations now in Oklahoma that we've accumulated with Canvas, Camino, Tapstone, and Yeah, and one other, but in 450 of those locations are highly economic, you know, at a $65 world price. So, you know, that number of opportunities really, as Rusty indicated, creates tremendous optionality for us.
Neil Digman: And, Brad, that sort of leads me to my second question was going to be around slide five, you know, where you classify locations. As you said, just with diversified alone, over $350,000, another $100,000 for Camino, which you all term actionable Oklahoma inventory. I'm just wondering, what metrics are you using to put it in that, you know, to cause it, call it actionable? And, you know, what would be potential timing of development of this area?
Brad: Generally, we've underwritten these assets at $65 oil, $375 gas. That's the primary. And we've been, as also as Rusty indicated, running through our in-house engineering and rigorous process. We've really risked, de-risked these locations. You know, as we said, there's a hundred, a thousand out there, but 450 are economic here. So, you know, it's a big inventory. I mean, if you ran one rig on that number of locations, you could have 30 years of inventory. So it's a good opportunity for us.
Rusty Hudson: And, Neil, from our perspective, everything we do, we have acquisitions at IRR hurdles that we have to look at. This would have to compare to it. And so everything is obviously compared on an IRR basis. So those 100 would obviously fit that mold. And so the one thing for us now is how do we lay into it and what which degree that we leg into it, you know, outright sale, JV, or with our own ring. But I would say that from a timing perspective, you know, it's not something we would sit on for a year or two, that's for sure.
Neil Digman: That makes sense, guys. Great time to have massive anchors. Thank you.
Operator: Next question, Charles Meade with Johnson Rice. Please go ahead.
Charles Meade: Good morning, Rusty and Brad, to the rest of the Diversify team there. I wanted to ask about the – I know there's probably more details than we could or should get into on this call, but about the Camino SPV and the mechanics of it and how diversified it owns the, I guess, the undeveloped portions. Does the SPV just own an interest in the existing wellbores? And if that's the case, then what is the – what's the – what's the structure of the mechanism whereby Diversified kind of owns the rest? And is there any kind of duration on this SPV that you could point us to?
Brad: Neil, first of all, as we indicated in our comments, the undeveloped inventory, the undeveloped acreage is 100% owned by Diversified. It is not included within the SPV. So we have full ability to benefit from the value there. The SPV does own the well bores of the producing PDP wells. And then the ownership percentage of that SPV is 60% Carlisle, 40% diversified energy. The SPV will also have the debt will issue the ABS debt, and as we indicated, it will not be consolidated on our balance sheet. So, really, I mean, you could look at this transaction in two different transactions, one with an undeveloped component and one with a PDP component. The SPV has the PDP diversified as the undeveloped, along with its equity interest in the SPV.
Charles Meade: Got it, Brad. You understood where I was going with that. Thank you. And then if I could actually go back to what Neil was just asking about, because I want to make sure I understand. Is Diversified now considering running an operating – it sounds like you are considering running an operated drilling program, but you're not committed to it. I know in the past you've talked about it's like if you're going to run an operated drilling program, that means there's a whole set of professional – competencies that you have to have in your organization, which historically, I believe you haven't. But you picked up a lot of talent with Maverick, and it's possible you're picking up more talent here with Camino. So could you just elaborate on that?
Rusty Hudson: Yeah, Charles. I'll call you Charles. Brad called you Neil. I'll call you Charles. Oh, I'm sorry.
Charles Meade: I called that too.
Rusty Hudson: No, yeah, you're absolutely right. But again, keep in mind, we have three options here, okay? The one that will make the most economic viability to us is the one we would take. We can sell the acreage. We can JV it, which we've done twice now with Newborn and then also now with Continental and the Permian, which in both of those cases, as you know, that brings their expertise to the table and we're just participating alongside of them. They're paying us for that value and then we're participating alongside of them. Or we're In some cases, we could consider bringing on a rigor self. All three of those options are viable. For us, it will just be evaluating which one makes the most sense, most economic sense to us as we move forward.
Brad: And Charles, you did mention an accurate statement that we did pick up a lot of very specific solid, strong talent in our Maverick Natural Resources acquisition. And Rick Gideon, who's our chief operating officer, you know, has extensive experience in the lower 48, including in Oklahoma in developing wells. We picked up some very capable technical talent from an engineering perspective at all different parts And we've got experience with our employees that have worked in drilling programs, drilling and completion programs in the past. So we're not starting from scratch if that's the path that we decide to go down.
Rusty Hudson: Yeah. And Charles, I will also just want to elaborate just further. That experience that Rick and his team, the engineering team and such, brought to the table from the Maverick deal was also one of the reasons why you have seen us be so successful in our POP program. You know, being able to, for the first time, really get behind the scenes, evaluate all of our acreage position across the company, and really determine value that we can then go out and extract for things that we didn't pay for when we did these transactions. And so Rick and his team have helped us tremendously from that standpoint.
Charles Meade: Got it. Thank you, gentlemen.
Rusty Hudson: Thank you.
Operator: Next question, Jonathan Mardini with KeyBank Capital Markets. Please proceed.
Jonathan Mardini: Hi, good morning, and thank you for taking my questions. You alluded to this a little bit, but in the prepared remarks and just broadly, historically, you talked about the potential to buy out Carlisle's equity interest, in this case, you know, the Camino assets as they mature and, you know, the ABS within the SPV delevers over time. Just curious how you would think about the various milestones or the timing that could drive a potential buyout of the structure.
Rusty Hudson: Yeah, it's really – I wouldn't say that there's any specific thing that we would put our finger on to say that's the time to do it. But for us, there are a lot of variables in there. There's obviously the delevering, the asset maturity, the reversion aspect of the SPV, that to be triggered where we would automatically receive a reversion. And so all of those things will come into play. And a lot of it just goes back to the one thing that's really attractive about this partnership is we're able to really accumulate a lot more assets at a much faster pace than we would if we were trying to do all this on our own balance sheet, but it's setting up a massive inventory that we can acquire. As we sit here every so often, we hear questions. They say, well, how are you going to grow the business long-term, acquisitions, whatever? This is going to be a big inventory of assets that we can continue to acquire back from Carlisle just by buying out their residual equity value in the SPV and bringing it on balance sheets. I don't think there's any triggering moment. It's really based on just from Diversified's perspective, what's the right timing and the need to grow the business on a going forward basis.
Brad: And Jonathan, one other aspect, we have a track record of issuing ABS nodes, allowing them to delever and and then creating equity value in those structures. And then we've been able to refinance and tap into that equity value, just like you would in your home mortgage that you're paying down. We've been able to tap into that equity value and use that liquidity to continue to grow the business. And so there would be some similar characteristics that we would look at in this Carlisle structure with the ABS notes that we're putting on that.
Jonathan Mardini: Okay, yeah, that's clear. I appreciate the detail. If I could just pivot on your non-off JVs. You referenced asset sales to Continental this year related to a joint development program starting in 4Q. Can you just maybe talk about or help frame the scope of that JDA, whether in terms of well or rig commitments or maybe expected contribution to production over time?
Rusty Hudson: Yeah, it's an ongoing, to be fair, you know, we just signed it up. I mean, literally just a couple, yeah. And so sitting down with them, walking through the drill schedule that they have anticipated, you know, they paid us for 50% of that acreage position up front. And then we'll participate alongside them on a going forward basis. Most of that contribution will be in 27, obviously, because they're not really picking up a rig until the end of the year. But they're still working through the mechanics of the timing and how many wells and when they're going to drill them.
Brad: And then on top of that, you know, we've talked about in the past that we've got non-core acreage. We don't really consider this acreage position that we had that we contributed to Continental as non-core. I mean, it's very proven acreage. We just believed through our analysis by Rick and his team that the best way to generate value for Diversified was to contribute, receive cash, and then utilize the expertise of Continental in that area. So this is very good acreage, and we just through our economic analysis, believe that this was the best path.
Jonathan Mardini: Right. Okay. Great. Thanks for the time. I'll leave it there.
Sam Wahab: Thank you.
Operator: Next question, Jared Giroux with Stevens. Please go ahead.
Jared Giroux: Hey, good morning, guys. Thanks for taking my questions. Good morning. So my first one is just on the Camino acquisition. Thank you, Rusty, for the details on why you're funding the acquisition, utilizing the off-balance sheet equity method of accounting. So I guess my question is for future acquisitions, how do you guys decide if that's the route you'll go if utilizing the off-balance sheet financing? And can you just give an update on your partnership with Carlyle? I believe the original agreement was up to $2 billion in PDP acquisitions. So I guess after the Camino, what's still remaining, or can you guys go higher than the total $2 billion?
Rusty Hudson: Yeah, let me address the first question. In terms of forward acquisitions, whether we use the Carlisle partnership or not, I would say a lot of the transactions that we're looking at sitting here to date, the Carlisle structure would be highly utilized through that acquisition opportunity set. You know, for us, we're seeing a very robust market right now. You know, I think, you know, just the overall market for divestitures has opened up quite a bit in the last 30 days. And I think we're going to, you know, be involved in several of those. And so I think that off-balance sheet, non-dilutive structure to us is very attractive. We're able to do more. without stressing the balance sheet. So I would say that's probably going to be a majority of what we do moving forward here over the next several months. On the other hand, you know, as it relates to their, you know, the agreement we had with them stated a $2 billion commitment, but they're, the opportunity is way bigger and they have made the commitment. They don't really, it was $2 billion. We put it in our agreement just because we had to put a number. It's unlimited. I mean, they have capital. We have opportunities set. They're ready to put money to work as we are. And I would say that there's no restrictions, at least right now, in terms of the opportunities and what they're willing to step up for.
Jared Giroux: That's great color. Thank you for that. Yeah, and then just my second question, just on capital return priorities. If you had to rank debt reduction, share purchases, the fixed dividend, and acquisitions, how would you rank those most important to least important to diversified?
Rusty Hudson: It's, you know, look, they're all very, very important. And I wouldn't rank them. I would say we would always put them in the order of which one makes the most sense at that specific time. And so, you know, we're on a systemic debt reduction process with the ABSs. So, Every quarter, or really every month, we have debt reduction. So that's ongoing. That's a very important factor in our business. We obviously, as Brad said earlier, these ABSs, we want them to pay down. We want them to create equity value that we can then utilize to grow the business going forward. So that one is probably, if I had to rank them as I sat here today, that one's always going to be right at the top because you're doing it every quarter. But as it relates to dividends, that's a very, very important factor. piece of our business. We've set that dividend. We've said that it's stable and it's very dependable. And no one should worry about that fixed dividend. And then share repurchases, as I said in my comments, they really just kind of factor on, are the shares being mispriced? And when they are, we're going to be opportunistic to step in there and buy them because it We believe that's a very, very good use of our cash to reduce our share count and create value for the ones that are still holding it. So all in all, I think we're all in a, you know, all four of them are important, but, you know, as is growing the business because you have to grow. So I think it's really just based on that specific moment, which one makes the most sense.
Brad: And what I like about the business model and the business that we've built is the fact that we do have flexibility on all of those. The durability and consistency of our cash flows give us, and the way we've capitalized the business, give us the ability to balance all four.
Jared Giroux: That's great. Thanks for the color and thanks for taking my questions and congrats on the acquisition. Thank you.
Operator: Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Next question comes from Sam Wahab with Peel Hunt. Please go ahead.
Sam Wahab: Morning, guys. Thanks for taking my question. Actually, a lot of mine have already been answered, but one that I do have is that just in terms of the off-balance sheet SPV, I mean, what sort of differences in terms of return hurdles have you applied to the Camino deal that you wouldn't necessarily do or you would do more if it was on your balance sheet?
Rusty Hudson: Well, the only thing that would, if it was on our balance sheet, the biggest restriction would be, Sam, is that it would really tie us up from being able to do more transactions of that size in the future. Because when you bring it on the balance sheet, you've got the, you know, you've got the debt, you've got the, you know, all the other things that come along with the balance sheet transaction. That's something that we wanted to We didn't want, number one, the leverage on our balance sheet, but we also didn't want it to result in any kind of dilution to our existing shareholders. That was the big thing. We want to grow the business. We want to grow the free cash flow profile of the business with as little to no dilution to our shareholders as possible. And so that would probably be the only difference.
Charles Meade: Okay.
Brad: Hey, Sam, I'll also add that Yeah, with our Carlisle partnership, it's not just a financing partnership. It's a true partnership to really look for value, you know, because they're taking an equity interest in the SPV like we are. And so we're definitely aligned as it relates to the valuing of the assets.
Sam Wahab: Yeah, yeah, understood. So should we start thinking that that sort of structure would be the dominant funding route for your sort of larger deals, but you remain off as when you see, you know, good fits and synergies potential in your existing sort of on-balance sheet format?
Rusty Hudson: Yeah, I mean, the larger deals for sure would be things that we would look at with them. You know, I would say, you know, as it relates to our on-balance sheet, smaller bolt-ons, you know, corporate transactions that may not fit the structure would be the things that we would look at from that standpoint.
Brad: And if you just play this answer forward into the future, and if we're fortunate enough to be able to stack four or five of these type of transactions over the next couple of years, what does that mean three and four years down the road? Well, it creates an inventory of acquisitions that we can bring back onto the balance sheet, bring that cash flow, as we've mentioned, high margin cash flow back onto the our financial statements, and that just provides, again, stability, future stability for our company.
Sam Wahab: Great. And just finally, more broadly, you mentioned, Rusty, that you're seeing a lot more activity up until recently. A lot of our investors said, could you just talk a little bit about what's driving that, where you're seeing the opportunity in terms of geography? I can also comment on Is it more gas-related? Is it more liquid-related and where your preference would lie?
Rusty Hudson: Yeah, no, I think, you know, obviously liquids have become to the forefront here. You know, obviously the oil price escalation in the next month or two, I think what people aren't really focused on is you just think, well, oil's up, you know, in the front month. But if you look out over the curve, it's not really that substantially higher than it was six months ago. But that $2 difference in that curve going forward has caused some of these more liquid-rich plays or assets to come to market. We still are seeing gas. There's some gas out there that's in the market. It's just not as much as you're seeing on the liquid side right now.
Sam Wahab: Okay, great. Well, thanks very much, and congratulations again on another impressive deal.
Rusty Hudson: Thanks, Sam. Thanks, Sam.
Operator: Thank you. I would like to turn the floor over to Rusty Hudson for closing remarks.
Rusty Hudson: Just want to say thank you all again for joining today. If you have any further questions, obviously reach out to Doug on our investor relations group, and he'll have all the answers you need. Thank you again.
Operator: This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
