All right. Thank you, everybody, for joining us. Welcome to the Southwest Dallas Ideas Investor Conference. I'm Philip Cooper, Managing Director at Three Part Advisors. Our next presentation is Diversified Energy, which is traded on the New York and London Stock Exchange under the ticker symbol DEC. Presenting from the company today is Doug Kris, Senior Vice President of Investor Relations. Doug.
Thanks, Philip, and thank you, everyone, for being here today. Appreciate you coming out to hear our story. I'm going to try and be efficient with this presentation, give you a high-level overview from our strategy and what we're trying to accomplish here in the U.S. as a differentiated energy producer. So this is your normal reference slide. Please feel free to view any of this information and/or disclosures on our website as well. So who is Diversified Energy? What are we really? So Diversified is a differentiated oil and gas company. We are acquiring mature producing assets, improving the ultimate performance of those assets from both an emissions perspective and an operational perspective, bringing them under a framework that utilizes scale and vertical integration, leverages technology, and manages these assets until the end of life.
We are really scaling a differentiated business model, and we view ourselves as the only public operator in the U.S. that is executing upon this strategy as the right company at the right time to manage these mature producing assets and provide a solution for a number of different components of our business to other operators, as well as states and regulatory agencies. Our asset footprint encompasses two major geographic areas: what we characterize as the Appalachian Basin, which is predominantly Ohio, Kentucky, West Virginia, and PA, and our central region, Western Anadarko Basin in Oklahoma, predominantly Barnett in the Texas area, which is right here in kind of the Fort Worth area, as well as East Texas, Louisiana, that Haynesville-Cotton Valley acreage. As Philip mentioned, we are traded on both the London and the New York Stock Exchange.
Our listing on the New York Stock Exchange took place roughly around this time last year. We listed mid-December of last year. That's been a beneficial component from a daily trading liquidity perspective. We've increased our daily trading liquidity 3x from where we used to be, and we are actively growing our U.S. institutional shareholder base, and because of the fact, from a mechanics perspective, that we are a true dual listing, this is not an ADR, we are able and eligible for indexation, so in June of this year, we joined the Russell 2000 Index, which now allows us to have a more passive component or quantitative component with indexation, and a number of small-cap generalist portfolio managers are now, this is part of their benchmark. From a production standpoint, where do we sit? We produce about 850 million cubic feet a day.
The predominance of our production is natural gas, with roughly about 10% NGLs in the balance of oil. We also own 17,000 miles of midstream. We own processing plants, and we own a large swath across the United States in our operating areas of undeveloped acreage. I'm going to utilize this slide to leverage one of the new things that we most recently talked about, which is our coal mine methane capture and sale of environmental credits. During our third quarter announcement and release last week, we started to talk more about this because it's becoming an extreme economic benefit to our financials. This year alone, we're going to recognize about $8 million-$10 million of EBITDA or cash flow from this business. This is a zero-CapEx business.
This is really leveraging what our operations currently have and allowing us the ability to capture environmental credits and the sale of those credits that elegantly allows us to generate more cash flow. We're excited about this. This is a business that we believe can grow 3x-4x in a very short period of time. The reason why we're able to do this is basically our Appalachian footprint. If you take a look in the map here, you could see where our footprint lies, where our infrastructure lies in Appalachia. If you were to overlay coal mines on that, there's a lot of them involved in this area, whether those are operating coal mines and/or shuttered coal mines. Most of them still need to be degassed, and we're providing a solution to that. What we've done as a company is really de-risked the traditional E&P business model.
As I mentioned, we are a natural gas production company. We're not developing any of these wells. We're not drilling any of those wells. We acquire these mature producing assets. So we've taken the development risk off the table because of the fact that we have a high degree of hedging, and we utilize that construct in our financing by utilizing the ABS market to have a low-cost, fully amortized investment-grade type of debt. We've taken a lot of the financing risk, and again, with the hedging, a lot of the commodity price risk off the table. Our hedging in the near term, 12 months, is roughly about 85% of our production hedged, and candidly, with what we're doing from a solutions-based perspective of reducing emissions, we are 99% leak-free.
We've reduced our GHG emissions since 2022 by over 50%, and we've met our 2030 goal at the end of last year. So we are, from an environmental standpoint, managing these assets under a stewardship model that reduces emissions when these assets come under our umbrella. Ultimately, what this has allowed us to do by de-risking the traditional E&P model is realize 50% plus cash margins over the past seven years, whether or not natural gas prices, the commodity that's generally driving the revenue stream, whether they were $4, $2, $9, we're able to manage that, provide reliable production, and consistency of cash flow. That ultimately allows us to have a return framework that allows for share buybacks, dividends, repayment of debt, which creates equity value, and growth capital. As I mentioned, our production base is relatively, from a decline perspective, very low.
You can see on this slide where we sit with regard to other E&P producers that are more focused on the drill bit. Because of the mature assets that we manage and the fact that we utilize what we characterize as Smarter Asset Management, when we acquire these assets, these are not bad assets. There's a lack of focus on them. So when we're able to go in and do small-dollar workovers, or as I said, manage these assets under our Smarter Asset Management program and leverage technology, it allows us to have a low capital intensity and a lower corporate decline. All of that ends up providing meaningful cash flow to the bottom line.
You could see on this slide where we've illustrated here the importance of hedging and where it allows us to be from a margin perspective, especially in what could be constrained today in terms of natural gas pricing. For the third quarter, our hedging profile allowed us to realize roughly about $3.30, and that's a meaningful uplift from where gas prices were in that quarter, as well as where our op costs are. That allows us to have and maintain these high cash margins. One of the other things that we do from a business standpoint perspective is, as we're making these acquisitions, none of them are cookie cutter, as I like to characterize it. Most of these assets are being acquired with undeveloped land or undeveloped acreage associated with them.
We've more recently been able to, as development has started to pick up, and importantly, as the need for inventory has driven not only a predominance of the E&P consolidation over the past 12-18 months, but their need for inventory and new areas to develop has picked up. We have been able to high-grade and sell some of our acreage off, as an example here on this slide, in Oklahoma. Year to date in Oklahoma, we've realized about $23 million of land sales. Now, that's only one lever we have to accrete value from this undeveloped land position. One of the other ones would be in terms of providing a drilling JV to some of these active developers where we could potentially contribute the land, they contribute the capital to do their own drilling, and then ultimately we realize a return on that JV construct.
But importantly, what we try to emphasize is the fact that there is a lot of hidden value overall in our portfolio. And while we understand that, as illustrated here, there is a vast amount of NAV value that isn't necessarily ascribed in our stock price. The other thing, as I mentioned, from a vertical integration and cost-saving standpoint, is that we have a lot of infrastructure assets. For example, this is a photo in highlighting the Black Bear Processing Facility, which we maintain in our East Texas, Louisiana area. This was a facility that we bought for pennies on the dollar, and it has allowed us to enhance our margins by over $9 million a year by simplistically rerouting some gas, enhancing some contracts, and building out and really reframing this processing facility.
Specifically, this Black Bear Processing Facility has the ability to process 120 million cu ft of gas. When we bought this as a distressed asset for roughly about $9.8 million, there was only 15 million cu ft of gas flowing through it, and we were the 15 million cu ft . We've taken that up to close to 70 million cu ft . Again, most of it is our gas, but because of the active development going on in this area, we're receiving inbound phone calls for the ability to increase that throughput and bring in third-party revenue to even enhance margins further. So as we've talked about, this slide just gives you kind of an overview of what is this important and value-creating aspect of our business, which is the corporate infrastructure framework or the platform that we work on.
We've got our own midstream and marketing team where we market our own gas. We're actually a top 25 marketer of natural gas in the U.S. We own 17,000 mi of pipeline, predominantly in Appalachia, but in other regions, as I highlighted, the processing facility. We have done close to $600 million of acquisitions this year, mostly bolt-on in our operating areas, but we've done that with no G&A. So there's a lot of synergies that we're able to provide from the operations that we have. And again, that goes through all the way to the end of life. We've vertically integrated our cost structure so that when it comes to the need to retire a well, we've stood up our own portfolio company called Next LVL.
That company is able to economically and environmentally retire these wells in a cost-effective manner and be in partnership, providing a solution to the states in which we operate, the state of Oklahoma, the state of Pennsylvania, the state of Ohio, for their orphan well programs. Those are wells that are owned or wards of the state that have, if you read the news headlines, become a big focus for those states. And we are bringing in third-party revenue by partnering with those states and providing them a solution to retire those wells. This is just an example of the last three acquisitions that we've made, as I mentioned, over the past year, predominantly bolt-on in the central region. Importantly, when the company was first went public back in 2017, we were 100% Appalachian-focused.
What we saw from a management and strategic perspective is that the LNG buildout that was going on and the need for gas in the Gulf Coast area was highly economically important, and we have built out that footprint to where now 50% of our production in just three years is coming from the central region. More recently, we announced an LNG contract, which is highlighted on this slide, so we've got a direct contract with an LNG producer that will allow us to capture LNG pricing, lock up some gas with that provider for three years or so, and provides another strategic element to how we think about improving our cost structure and ultimately our pricing. Simplistically, it's another lever to pull for hedging by having these LNG contracts and locking in some pricing. What have we been able to accomplish with this platform this year?
I think this is an important aspect as someone who's looking at it from a shareholder perspective: that we have been able to execute on our strategy that we laid out at the beginning of the year, which is our capital allocation framework, which is reducing debt systematically, providing a shareholder return through both dividends and strategic share repurchases, and allowing us to have cash flow to make accretive acquisitions and grow the business. Where does this all stand in terms of our journey in the U.S. market and also in terms of our valuation? We, as I'm sure you hear from a number of companies at these conferences, view ourselves as being undervalued. Part of that undervaluation, I think, is just the nuance of us coming to the U.S. market and only being a year old. We think there's a long runway for valuation uplift.
If we were to think about where our peers in the E&P space trade, there's a lot of value to be accreted from a shareholder perspective in terms of just coming up to where other E&Ps trade or even where we've historically traded, so we view there a valuation multiple expansion coming in the coming years from the listing in the U.S. As I mentioned, with our framework and infrastructure that we've put in place, one of the things that we've done is really leaned into technology investment.
We are managing these assets utilizing a high degree of technology, whether it's a field operator sitting in their truck at a well pad, going over their route and looking at the production in real time in terms of the assets to where we sit in the boardroom where we've got a dashboard that can not only look at the production or the environmental emissions performance, but more importantly, as we think about utilizing AI and improving these wells from a smarter asset management perspective, utilizing predictive analytics and seeing the profitability of these wells and seeing what can be done from a management perspective. Again, this all hearkens back to having a focus on these wells allows us to capture value at the end of the day. This is just another slide that highlights our modern field management philosophy. We've got two centralized control or monitoring facilities.
On the bottom left of the slide, you could see where one of these is, and this, again, operates in real time, 24 hours, seven days a week, and allows us to have the ability to leverage that technology and monitor what we're doing real time. Here we just talk about our smarter asset management, and really, it is just managing these wells with a focus. A lot of the stuff that we do from a smarter asset management, whether it be small-dollar workovers, as an example, in Oklahoma last year, we did roughly 300 workovers. Importantly, those were small-dollar items, $40,000-$50,000 a well, but that incremental CapEx and small amount of CapEx that we spent allowed us to improve production in that area by 10%.
And if you think back to the slide where we highlighted our corporate declines, you're offsetting that corporate decline with a very de minimis amount of CapEx. And that's ultimately where we want to be. And we just call it Smarter Asset Management. From an environmental or ESG perspective, talking about emissions and where we sit, right now we are below what is known as the Methane Fee Tax. And as the slide highlights, we have improved our emissions profile because we are managing these assets in a stewardship manner and really focusing on improving this. The Oil and Gas Methane Partnership, which is a combination of the United Nations and the Environmental Defense Fund, which is known by the, it's really the global standard of emissions performance.
The difference between that protocol and other protocols that are out there is the fact that the Oil and Gas Methane Partnership focuses on true actual measurement of emissions as opposed to theoretical values based on equipment and/or tenure or years of operation of a well. So we are actually measuring our emissions on a regular basis, reporting this through third-party assurance, and we have attained Gold Standard for three years in a row from the Oil and Gas Methane Partnership, which is, there's only really five or six companies in the U.S. that have achieved that goal. This further highlights our ESG metrics, again, talking about where we sit in terms of the methane fee and our MSCI score, which is another ESG rating metric. Where we sit today is AA, and there's not really any companies that are AAA out there in the E&P world.
So I think we're very proud of where we've landed. Our sustainability report is extremely robust, and I think that is part of the reason why we've been able to really improve our ESG scores and our emissions framework for the Oil and Gas Methane Partnership. I mean, we've won the ESG report in Europe by a number of raters who are not necessarily oil and gas friendly. So that achievement on itself is fairly a great accomplishment for us.
I would encourage everyone to go to our website and see these robust reports because they not only talk about where we sit in terms of emissions, which is only one factor, but a lot of the economic impact that we provide to these areas and other stakeholders in the regions where we operate, whether it's $500 million of royalty payments in fairly impoverished areas to large numbers of jobs or $60 million of tax incentives or taxable income or tax payments to these regions. It's a very important aspect of our business, giving back to the communities for which we operate. I want to touch on our Next LVL asset retirement business. As I mentioned, this is part of our vertical integration strategy. There's two components of it. One is retiring our own wells that are at the end of life.
We have agreements with the state of Pennsylvania, the state of Ohio, the state of West Virginia to acquire in absolute numbers roughly about 90 wells a year. We are not only exceeding that requirement; we're more than doubling that requirement on a year-in-year-out basis. Importantly, last year we retired over 400 wells with the Next LVL retirement company that we have stood up. That retirement company has roughly about 19 rigs, 17 full-time crews, and allows us, as I mentioned, to provide a solution to the states in which we operate. We have very favorable relations with those regulators. I think by giving them that economic solution and that environmentally safe solution to solve their problem, it really is going to pay dividends over the long period. What else is on the future?
As I mentioned, I think one of the exciting opportunities for us is this coal mine methane capture and sale of environmental credits. We think that is a huge component of an ultimate carbon capture and carbon credit strategy. When you think about where we operate in the PJM, where there's a lot of power plants, their way to offset their emissions is through environmental credits or carbon credits. The other aspect of that is that we are working with innovative providers and through some insurance projects. Look at our asset retirement program and see the ways and the pathway and a framework, really, to have an insurance-type product where companies are paying you to retire a producing well but giving you a carbon credit and the value of that well.
So that's another way to deal with some of the number of wells that we have under our portfolio and really realize economic value for it. The other aspect is that we are working in partnership with what's called the Wells of Opportunity Program, which is a program by the Department of Energy and really looking at whether it's geothermal or battery type of aspects with some of these wells that we have and the ability to, again, accrete value for something that could be interpreted as a liability and making it an asset. What I want to do here is just quickly touch on this slide. The perception out there of whether it's Diversified or other operators of mature wells is that these are old, dirty wells, not managed in the right way.
I can't speak to other operators out there, but what I can do is speak to what Diversified is doing, and we are managing these wells under a stewardship philosophy, as I mentioned, that improves performance, utilizes technology, and enhances the ultimate economic impact of those wells for a longer period of time, so it's really what we are and what we are as a company, and it's the idea that we can provide an economic benefit to shareholders while also providing a stewardship model that improves environmental performance of these wells. We can increase our footprint and grow our production base while ultimately having the ability to retire wells in a cost-efficient, environmentally friendly manner, so that's a brief overview of us. I've left a little bit of time here, and happy to take any questions that are from the audience. Yes, please go ahead.
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So in terms of production, because these wells that would be retired are de minimis, if not, they're not producing, right? So it wouldn't be part of our production. But in terms of well count, well count, it's roughly about 200-215 per year.
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Oh, it's a small amount.
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It's small. That's correct.
So our engineered, Netherland and Sewell life goes out to as high as 75 years. So these are assets that produce in perpetuity for a long period of time because of the shallow decline of those productions.
And if you look at our Appalachian footprint, for example, those wells are extremely reliable, low costs, don't take a lot of capital, and decline anywhere from 2%-3%. Yes, please.
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Yeah. So the two main price points would be Henry Hub and Houston Ship Channel, right? So those are two of the main price points. But I want to be clear with this. We sell into probably over 30-35 different price points. Some of the ability that allows us to do that is having our own midstream and marketing team and having those midstream assets. As an example, right?
Everyone knows the difference between Henry Hub and the Appalachian Basin differential is anywhere from $0.60-$0.80. During extreme weather events, for example, last year, there are power plants where we're one of only one or two providers that could sell into that footprint where we're able to realize $10-$14 an M. And because of that, it's literally just scarcity because of the fact that we're vertically integrated and own all these assets to sell into specific price points that a lot of the other Appalachian producers, for example, that are in Southwest PA don't have access to. That's really what it is. That's the advantage that we have is the access to all of those different markets. Now, with regard to that as well, I think the important aspect, as I mentioned, is hedging, right? 85% of our production is hedged.
As it sits as of last quarter, our hedging was almost 40% higher than where the current spot price was at the time. So that regimented and strategic way of thinking about locking in cash flows is important for us to understand from a business model perspective as we look at two, three, four years into the future. Having that reliability of cash flows allows us to really ultimately provide shareholder value. I always tell people this, and I'll just add to that. If you're looking for a small-cap way to torque the natural gas pricing because companies aren't hedged, we're not your model, right? But if you're looking for a way to have energy exposure to a company that's focused on a stewardship business model and providing solutions in the energy space, then I think you should come knocking at the door. Please.
One of your slides pointed out the opportunities for carbon sequestration for old wellbores. [Audio distortion]
Yeah. I mean, listen, by just sheer size, we've got a lot of those, right? And so there are a lot of programs and research projects going on with that. I mean, ultimately, if we think about it, the best place to sequester carbon is the place where it came from in the first place, right? So we've got the opportunity to do that. We're working on a number of innovative projects to do that, to sequester carbon. The other aspect from a business that we have, we own three storage facilities, right? So salt caverns types of storage. That is another area for us to ultimately sequester carbon in, right?
Right now, we utilize that for storing our own gas, playing summer-winter arbitrage in terms of pricing, and that could be turned should there be economic benefit and the economic forecast look better in carbon sequestration. That's another aspect to do that too, outside of just the wellbores themselves.
Do you have enough salt dome storage to view that as a hedging mechanism?
Yeah, we do. That's exactly right. That's exactly what we do, yeah. Please, I think there was another question. Yes.
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Yeah, sure. So our dividend is $1.16 per share, US dollars. So depending on the day, it's anywhere from a 7.5%-8.5% dividend yield.
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It is fixed. There's not a floating component or a variable component based on cash flow or commodity price.
It's a true fixed dividend. We fixed it at that amount, and we believe that it's sustainable for the future, and it allows us to also have the ability for, from a capital allocation perspective, those different buckets of paying down debt, which ultimately creates equity value from paying down that debt, strategic share repurchases as utilizing the opportunity on any sort of pullback to strategically buy some shares, and have the flexibility to utilize some of that cash flow for accretive acquisitions. Yes, please.
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Right,
and y'all noted in your last presentation that ABS financing, we should incur higher debt to secure revenue.
Are y'all getting comfortable with carrying more debt on a more growth type of instance of a merger investment cycle, or is 2.5 still where you're targeting?
No, I think our target is still in that 2-2.5 range. Historically, we've operated there, and again, in various commodity price environments. While still making acquisitions, we've been able to do that. I think this year we leaned into more of the debt financing construct. We were able to use an equity component, but it's a smaller amount. But the equity component that we utilized as we tested with our New York Stock Exchange listing was really utilizing direct equity to those sellers. So it's a smaller component, but it's worked. And that was always, candidly, a gating item when we were solely listed in the U.S., right?
The entities that we were buying assets from said, "We like your business model. We like your strategy. Appreciate the cash flow and the dividend, but we don't want any LSE paper," right? If you were to do an offering, then you could get some cash to give a, "But we didn't want your stock." So now they're willing to take our stock. And candidly, a lot of them have said, "Listen, we like your business model, and we think there's a long runway for this. So we appreciate being partners with you and being a shareholder with you." So I think it does. I think it is an important aspect of it, right? As opposed to in the past where they don't want the foreign currency risk.
Candidly, the London market has. I don't think this is. I'm speaking out of turn. The fact that it's structurally had some challenges over the past 18-24 months, especially in the unfavored E&P space over in the UK.
I guess capital you've got didn't have to find the rebel orders to make them. How much do you invest in lower workers and stuff? How much do you require to maintain the production if you get the same sort of multiples on that?
It's a good observation. So two components to your question, and I'll try and do them quickly. One, from a sustaining CapEx perspective, what we say and tell everyone is that we've got roughly about $50 million, plus or minus, of CapEx to sustain the business.
A portion of that is on midstream assets, but another portion is on just your workovers, your daily blocking and tackling to improve the performance. Because you're not only, by improving that performance, you're, in theory, potentially offsetting those corporate declines. In terms of how we think about longer term, we really look at this business as having a future to grow and have the ability to grow that. And I don't think that leverage and/or that CapEx will meaningfully change with how we think about that. And we highlight 10%. Candidly, in some quarters, is it below that? Yes. But I think from a modeling perspective, it's easier to say it's 10% or better on a year-in-year-out basis.
Are there any competing projects that your midstream assets going to deal with that? Like you said, no CapEx, but just a little bit of.
Yeah.
So no, from where we sit today, how I would characterize it is we're in the bottom of the first inning, right? So I mentioned that to U.K. investors when I was in London last week. And there were some like, "Oh, what does that mean?" Right? But hopefully, it resonates, right? So it's in the early stages. We've got the infrastructure, the ability to do this. I'm being a little bit coy in terms of how we're doing it because there is some proprietary IP in this. But what it really is, I mean, there is a component to how I would think about this from an investable standpoint, just this standalone business, if you were to do it that way. It's a moat type of investment. And what do I mean by that? There's high barriers to entry. It's a low cost, right? Not everyone could do this.
You can't just go and start up. You've got to have the acreage footprint, the infrastructure, and some of the intellectual property and facilities to be able to do this. And we're doing it on a day-in-day-out basis. We produce gas in, around, adjacent, or through coal mines. And now it's just the process to some extent of that, of getting the environmental and recognizing the environmental credits for that business. So we view this as an exciting opportunity for us, really, from a sum-of-the-parts perspective, a way to increase that valuation on top of what would be a normal E&P enterprise value to EBITDA multiple that you would get. You said you were 85% in at this point.
How does that compare with prior years? And does that reflect your view of natural gas pricing?
So let me take the latter part of your question first.
So I would say from how we think about natural gas pricing longer term and the supply demand or macro outlook, I think we're very bullish on where we see natural gas prices going in the future. I think there's a lot of demand pull. I think from the LNG pause that was so notably talked about earlier this year with the new administration that comes in, if not on day one, it's probably day two, that that order gets lifted. That will provide, again, a more robust environment and a more commercial environment, not only for projects to get started again, but for that ultimate demand pull.
The other aspect of it is, as you think about the data center macro environment and the power really that's associated to power those data centers, where we sit in that footprint, again, in that corridor of Virginia, West Virginia, down through Tennessee and Kentucky, that's what's known as Data Center Alley. And what excites us about this, getting back to the Coal Mine Methane opportunity, is the fact that a number of these data centers, as they look at these projects, are looking for ways to get net zero gas. And the Coal Mine Methane capture is net zero gas. So it's a very attractive attribute. The other attribute, when you look at a number of these folks that are developing these projects, most of them are technology providers that have a lot of cash sitting on their balance sheet.
They're well funded and have the ability to fund these. But they also want to do this in areas where they would have a very meaningful amount of economic impact in impoverished areas or areas that could really see a benefit from job creation from providing these facilities. That's another demand pull that we see ultimately longer term for natural gas. In terms of our hedging, which is where you started with your question, we're always in that, call it near-term, 12 months, roughly about 80%-85% hedged. We try and do that strategically for 12 to 18 months. Then as you go out, it kind of scales down as some of those hedges roll off to for year 2026, 2027, closer to that 65%-70%.
It allows you the benefit to capture some of that, what we believe is better pricing longer term, and we were able to do that in our most recent announcement in September, where we announced our LNG contract. There's a point in the curve in 2026 and 2027 where you've got some price improvement, and we layered on some incremental hedges during that timeframe, so we're pretty nimble and very strategic about how we think about hedging. Well, I think I'm over time, but I appreciate everyone's ability to listen to the story here, and feel free to. My contact information is up here. Please feel free to reach out anytime. Happy to have a further discussion. Thank you.