Greetings, and welcome to Diversified Energy's acquisition of Birch conference call. At this time, all participants are on a listen-only mode. A question- and- answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Douglas Kris, Senior Vice President of Investor Relations and Corporate Communications. Please go ahead.
Good morning, and thank you all for joining us here today, especially on short notice for the Birch Acquisition conference call. With me today are Diversified's Founder, Chairman, and Chief Executive Officer, Rusty Hutson, President and Chief Financial Officer, Brad Gray, and Executive Vice President and Chief Operating Officer, Rick Gideon. Before we start, I would remind everyone that the remarks on the call reflect the financial and operational outlook as of today, September 3rd, 2026. Certain statements made on today's call are forward-looking and may be subject to risks and uncertainties related to future events and the future financial performance of the company.
Actual results may materially differ from those anticipated. The risk factors that may affect results are detailed in the company's public filings with the SEC, including the annual report on Form 10-K for fiscal year 2025, which was filed on February 26, 2026, along with subsequent filings with the SEC. During this call, we also referenced certain non-GAAP financial measures. Our disclosures regarding those items are found in our earnings materials, on our website, and in regulatory filings. I will now turn the call over to Rusty.
Thank you, Doug, and thank you all for joining the call today. Today, we are announcing the acquisition of Birch Resources for $1.8 billion with an approximate PV-14 value and 3.3x multiple. This highly accretive acquisition is the largest in our company's history and marks an important milestone in the evolution of our long-term growth strategy and an outstanding accomplishment in our 25th year in business. For those of you following along with our acquisition slide deck, which we posted on our website last night, I plan to cover a few slides focusing on the acquisition we announced and its impact in further bolstering our resilient cash flow machine before opening the call for your questions.
I would note that at this time, we are not making any adjustments to our guidance, but we anticipate doing so following the close of the acquisition, which is currently planned for the fourth quarter of 2026. Starting on slide three, I want to spend a minute on why we believe in the value of this acquisition, because I don't want anyone to mistake the size or location of this deal for a change in strategy. For 25 years, we have done one thing, focused on acquiring established, low-decline producing assets, operating them better than anyone else, and converting stable production into durable cash flow.
That is who we are, and it's in our DNA. It's our proven business model, and Birch fits that profile extremely well, but it's just bigger and in the most prolific oil basin in the United States. Importantly, the Permian Basin is maturing, and as it does, an enormous amount of proved developed producing or PDP assets are in the hands of operators who want to drill and explore rather than focus on optimizing and stewarding them. That is our opportunity.
That is our expertise. We have said for some time that we intended to build a scaled Permian position since we first entered with a toehold in 2025 through the acquisition of Maverick Natural Resources. Today, we are taking a significant step forward in securing scale, achieving operating leverage, and capturing potential synergies through the acquisition of Birch Resources. Let me make some key points about why Birch and why now. First, quality. Birch is almost entirely PDP, low decline, predictable, already producing durable cash flow generation.
There's no focus on undeveloped inventory in this acquisition. We are buying cash flow that exists today. Second, geography. Birch sits directly alongside our existing Texas assets. The operational overlap is real, economies of scale are real, and it drives synergies and margin enhancement from day one. Third, diversification. Birch is 70% liquids. That materially rebalances our commodity mix and adds a larger oil wedge of liquid-based revenue to our cash flow.
Fourth, runway. This is an anchor position, not a finished one. It gives us the scale and the operating footprint to consolidate additional PDP assets across the Permian Basin for years to come. The bottom line, Diversified is now solidly positioned in a fourth core basin, adding to our opportunity set while materially increasing our overall production by 35% and our adjusted EBITDA by 55%. Now, for some additional details on what we are acquiring.
This acquisition is composed of approximately 480 net wells with approximately 68 Mboepd of production and approximately 1.2 TCFE of reserves. We are also acquiring infrastructure which includes 12 centralized production facilities, gathering pipelines, and water disposal systems. Notably, there's an upside beyond the base production for our Portfolio Optimization Program, including 150 permitted EOR, enhanced oil recovery locations, and incremental net mineral acres that will provide additional options over time.
Turning to slide four, let me walk you through some of the acquisition details. We are purchasing Birch Resources for approximately $1.8 billion on a gross basis, subject to customary purchase price adjustments and effective date cash flow adjustments. The transaction will be funded predominantly through ABS, facilitated by Carlyle, alongside available liquidity under our senior secured bank facility. This acquisition is going to be on balance sheet with Diversified maintaining full ownership and the full benefit of the production from the assets being part of the consolidated company.
Notably, I am also excited to say that our strategic partnership with Carlyle just got bigger, with the ABS funding capacity for pursuing new PDP opportunities now earmarked at up to $10 billion. That's a real runway for growth, and we believe there are many opportunities in the marketplace that fit our strategy. We are buying these assets at a compelling valuation of approximately PV-14 and approximately 3.3x EBITDA. That is before synergies, before optimization, and consistent with the discipline framework we have historically applied to deals we have done.
We expect to close in the fourth quarter, pending customary closing conditions, so the real impact on production and financial metrics will be felt in 2027. Turning to slide five. Now let's look at what this does to our Permian position. Production goes from approximately 9 Mboepd- 77 Mboepd , an approximate 800% increase. In addition, adjusted EBITDA from our Permian assets goes from $64 million- $612 million, an approximate 800% increase.
That is not just incremental growth. In one transaction, we go from a modest Permian Basin position to a scaled, operated premier position in the most prolific oil basin in the United States a nd as the Permian matures, the consolidation opportunity in front of us only gets bigger. We intend to be the operator of choice for those PDP assets, and with our strong strategic partnership with The Carlyle Group, which brings attractive investment-grade financing to help execute and support our growth, I believe we are extremely well positioned for success.
Turning to slide six. Something we always focus on in an acquisition is our proven integration playbook and its importance at the field level, corporate levels, as well as in the technology stack. The Birch position is highly contiguous, concentrated, and is vertically integrated. From an infrastructure of 12 central production facilities and nine well gathering facilities, they have been able to keep operating costs low, which today run approximately $5.70/ BOE and achieve approximately 81% adjusted EBITDA margins.
That is a low-cost operation before we have touched it, and we will touch it. With this acquisition, we will accelerate synergies by increasing asset density within the basin of our field operations, integrating processes and systems into our OneDEC platforms, and consolidating applicable corporate and technology functions. Our teams are already identifying expense reductions through our Smarter Asset Management framework, which is the same playbook that has driven margin expansion across every asset we have acquired. We use every lever at our disposal to extract free cash flow from our assets.
Turning to slide seven. On this slide, we show what we have timelessly built with the hard work and devoted effort of the best-in-class operating team in the field and in the corporate office. I am extremely proud of this accomplishment. Diversified has grown to four scaled core basins, Appalachia, Oklahoma Mid-Con, East Texas, Haynesville and Cotton Valley, and now the Permian Basin. The Permian becomes our largest basin by PV-10 reserve value of $2.3 billion and by adjusted EBITDA of $612 million, supported by 71% liquids production. 25 years ago, we started with a simple idea.
If you focus on establishing producing assets and operate them efficiently, you will generate durable cash flow. That thesis has not changed. What has changed is our scale, our diversification, the capabilities of our team, and the quality of the platform. These attributes are the foundation for the next 25 years, and importantly, having the core production and scaled operations we have across these basins now gives us the optionality within our consolidation strategy to take more shots on goal with PDP acquisition opportunities.
Turning to slide eight. The next slide puts the impacts of this acquisition in market terms. Diversified has again delivered meaningful growth in key operational and financial metrics, improving our position among peers and enabling the company to benefit from further expansion in trading multiples. The relative performance and significant increase in cash generation have now allowed us to compete with peers with larger market capitalizations and production profiles.
Specifically, with this acquisition, we have a step change in free cash flow generation increasing by over 100%. Now let's zoom in and look at that middle row on the slide. We trade at approximately 3.9x EV to EBITDA. Our closest peers on that metric trade between 5.7x- 6.2x. We are delivering the same scale, cash generation, and commodity diversification of a company valued materially higher than we are today. Importantly, we think that gap closes. Turning to slide nine. I'm going to close out where we started today. Diversified is a cash flow machine, and Birch makes it stronger.
Birch delivers high-quality PDP assets with predictable production and durable cash flow, contiguous Permian Basin position that adds to our acquisition and Portfolio Optimization Program opportunities, and scale and vertical integration that enhance our margins. We have now announced more than $8 billion into acquisitions since our IPO in 2017. We have built an innovative financing structure with a partner in Carlyle who is prepared to fund up to $10 billion more, and we have a significant runway of opportunities ahead of us.
While this is the largest acquisition we have ever made, it is also probably one of the most natural ones. We have conducted disciplined valuation analysis for 25 years, and we applied the same discipline to our valuation of Birch. Thank you for your continued interest in our company and in this transaction. We believe this acquisition is a win for our employees, our customers, our shareholders, and our partners, notably our partnership with Carlyle. I am excited to work with our teams to integrate the Birch Resources assets into our great company. With that, I'd like to turn it over to the operator for the Q&A portion of today's call.
Thank you. The floor is now open for questions. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. We do ask that you limit yourself to one question and one follow-up. Again, that's star one to register a question at this time. Today's first question is coming from Neal Dingmann of William Blair. Please go ahead.
Morning, guys. Congrats on the deal. Looks very positive. Rusty, my first question is just, I like your point about, hey, this certainly doesn't change the strategy you've done for 25 years. I guess my question is around, does it provide? You've talked about [inaudible] Mid-Con having an opportunity to potentially operate a little bit. Do you see any opportunities to do that in this area? I guess number one, and then maybe just ask my second question at the same time. Besides potentially would you consider operating anything here around this new area? Is there a lot of low-hanging fruit, if you will, just on the mature PDP improvement side that you could do as well? Thank you.
Yeah. Thanks, Neal. On the first question around the operated drilling, not part of this deal. It's a straight up PDP deal for us. Free cash flow generation. You've seen all the metrics that we talked about during the call. Increase in EBITDA, increase in reserves, increase in free cash flow generation. Think about it, 100% increase in free cash flow. That's material. That's not on the radar in terms of an operated drilling program in this acreage position. The other question related to What was the other question?
Just on the low-hanging fruit. Did you all?
Oh, yeah, the low-hanging fruit.
Yes.
Yeah, just synergies. Every time we look at a deal like this where you are adding additional geographical concentration around our existing operation, you find ways to find efficiencies within the expense base. We will continue to do that. We have already been monitoring where are the opportunities, the low-hanging fruit. This was a well-operated asset, so the Birch team did a fantastic job in building and operating this. But when you add geographical concentration in an area where we already had assets, there will be synergies that we can leg into.
Yeah, Neal, you are very familiar with our two programs that we have named, our Smarter Asset Management program and our Portfolio Optimization Program. So we will bring both of those mindsets and focus to this acquisition. We have always been successful with our team to be creative and look for ways that we can bring value forward and drive additional cash flow, and I am sure we will be successful with this asset as well.
Thank you all.
Thanks, Neal.
Thank you. The next question is coming from Jonathan Mardini of KeyBanc Capital Markets. Please go ahead.
Good morning, and thank you for taking our questions. The first is on the asset base. You know 75% of the wells are 2022 vintage or older, implying 1/4 are more recent. Can you just help us think through what the decline rate looks like on the Birch assets and how you see the liquids mix there trending over the next few years?
Jonathan, good morning. Thanks for your question. In regards to the decline rate, we're going to see mid-teens with this asset base for the next several years. I think that's pretty common in this area. We've modeled all that and comfortable with it. It is a 70% liquids weighted asset. We'll have those type of cash flows and that mix, which we're excited about. So when you blend it into our overall portfolio, it'll have a minor or kind of immaterial impact overall to that corporate decline rate. But that's how we're viewing it. We've got Rick Gideon here as well, and Rick probably has some perspective.
Yeah. When you take a look, these are mature assets, even at those dates. And we've got a pretty good mix of lift methodologies and lasting life lift methodologies when it comes to different gas lift or rod pump. Still have a portion of ESPs, but they've already been stepped down a number of cases. So we'll continue to manage that, and we'll manage that decline. But, we'll continue to manage the cash flow is what we'll do.
Yeah, that makes sense. I appreciate the detail on that. Just to follow up on the balance sheet. So you expanded the Carlyle framework to $10 billion. Just with the acquisition, could push pro forma leverage maybe towards the higher end of your 2x-2.5x target. How are you just thinking about the near term balance between continued deal making and prioritizing debt pay down, especially as you stand up the operated rig program in the Mid-Con?
Yeah. I'll let Brad elaborate a little bit more, but if you look at over the, including the Birch transaction, and you look out over the next four years, we're going to be de-levering close to $2 billion. That's a lot of debt reduction in a four-year period, just through amortization on the ABS notes. And I think that gets missed a lot with some of the folks that don't pay a lot of attention to us, that our debt is amortizing, and it amortizes a lot over a period of time.
So we feel pretty comfortable with that. This is an on-balance sheet transaction. To your point, it might increase our to the upper end a little bit, but the de-levering aspect of our business helps to alleviate that over time. Brad, you want to add anything else to that?
Yeah. And that was part of my answer. Jonathan, the timing of this acquisition is really very good. Our balance sheet is the strongest it's been in our company history. We've got great liquidity. We've got a great support from our commercial banks. Obviously, we've extended our relationship with Carlyle and having access into a growing and deep ABS market at a very low cost of capital. So the way we've capitalized the business within the ABS market, we're getting that low cost of capital, and it works with these type of assets. So, we're very comfortable with the balance sheet, where it is right now, and we're pleased that we've been able to build in the strong liquidity that we have at this point.
Yeah, that makes sense. I appreciate the time. I will leave it there.
Okay. Thank you, Jonathan.
Thank you. The next question is coming from Gabe Daoud of Truist. Please go ahead.
Thanks, operator. Morning, guys. Congrats on the transaction. Was curious if we could just maybe get a bit more color on the 150 permitted EOR locations. Just curious, I guess what the strategy or plan is there.
This is Rick Gideon. The strategy, as we operate these later in life assets, we are always looking for the best way to optimize and gain recoveries. As you well know, we operate EOR floods in the Permian. Now we operate them in Oklahoma. So we have got a lot of experience in this space. We are always looking to optimize and what our optionality for later in life EOR and secondary recoveries.
I think it is interesting to note as well, you hear a lot of the bigger companies, even to date in the Permian, a lot of their discussions have turned from additional inventory to getting more oil from their existing fields, and they are going to do that through these EOR recovery programs. This was already permitted. It was part of the deal that we are acquiring. But it is just optionality for us at this present time.
Understood. Okay, cool. Thanks, guys. I guess just as a follow-up, you talked about the Smarter Asset Management platform and how that will drive costs lower over time. I guess with this transaction, you noted about $5.72/ BOE in LOE. Just curious, I guess, where do you think the Permian LOE figure could go over time, just as you start to optimize and take control of the assets?
Well, before Rick probably has a thought on that, Gabe, as Rusty indicated in our comments, we are not really updating any additional guidance at this point with this acquisition. We think that the cash flows on this asset are very positive and strong, and we are going to continue to do what we do, as you indicated, with our Smarter Asset Management to look for ways to drive costs down.
The other thing that Rusty mentioned, in his comments, we are well-positioned now with this asset, with scale, to look for additional opportunities, just like we have done in Appalachia, just like we have done in the Mid-Con, like we have done over in East Texas. We believe that we will be in a position to further drive down cost with some additional opportunities in the future, but-
Yeah. The only thing I would add to that, Gabe, is scale matters. With the scale that we have through our central region and then even into our Appalachian region, when we talk about lift methodologies, when we talk about chemical programs, compression programs, scale matters. It gives us the ability to drive those costs down.
Understood. Great. Thanks, guys.
Thank you.
Thanks, Gabe.
Thank you. The next question is coming from Sam Wahab of Peel Hunt. Please go ahead.
Hi all. Thanks for taking my questions, and congratulations again for another pleasing acquisition. There are three questions from me. The first is that, given that this acquisition falls outside of the off-balance sheet Carlyle structure, what did you see in terms of return hurdles that made it more accretive to be a 100% owner, relative to having it off balance sheet? The second one probably answers a little bit of the first, but very compelling EV to EBITDA metrics as usual.
How competitive are you seeing the market for PDP gas assets today versus two years ago? Then finally, referring to slide eight in your presentation, clearly there has been a big uplift in available financial capacity with Carlyle going from $2 billion- $10 billion. As that grows, there are a number of peers that you have highlighted there that if they did become sensible acquisition targets and you grow outside of that financial capacity, would you consider adding more strategic partners alongside Carlyle?
Okay. Hey, Sam. Good morning, and thanks for your questions there. I am going to hit the first one related to the on balance sheet nature of it. I think, the word that you used in your question is really the answer, and that is, this is a highly accretive transaction for our company. The cash flows are very robust, on a growth basis and a per share basis. You saw the growth in the Permian Basin. It is going from like our third contributor, third or fourth contributor of the four basins that we operate in, into the first.
So that, as Rick mentioned, the scale matters that we are going to be able to generate. It just made sense for us to maintain this on the balance sheet. That is what we did. Now, clearly, Carlyle is still a very strong partner, even though they're not participating in the equity in this transaction. They've increased their commitment to us 5x . They're also heavily involved in the syndication of this ABS debt. So it's a great transaction for us, and the cash flow contribution is significant.
Yeah. As it relates to the PDP market and the PDP acquisitions versus a couple of years ago, it evolves every year it seems like. Some years you have more assets available than others. I think you've seen a spike in some of the oil deals this year, primarily just because of the oil price getting to a level that it hadn't seen in a while. Gas seems to be still kind of a challenging market in terms of PDP acquisitions as we sit here today. But ultimately, we're set up, because of our capital structure, the liquidity that we have, the partners that we have, like Carlyle.
We have the ability to stay disciplined, watch the market, adapt. We've got a low cost of capital. It just leaves us in a very good position to take advantage of the market that we're in. You asked about Carlyle and their capacity. $10 billion is a lot of capital. That doesn't include what we would be able to put into those deals as well. So $10 billion is really $15 billion, $20 billion when you really look at it. So we feel really good about Carlyle and their partnership.
We don't need another partner. But at the same time, we have opportunities. We could partner with a lot of people. I think there's a lot of people that would like to be doing what Carlyle is getting the advantage of right now. But they're great partners. We continue to have a great relationship. We're like-minded in the market and what's going on, and so we feel good about where we are.
That's great. Thanks very much.
Thank you.
Thanks, Sam.
Thank you. Ladies and gentlemen, this brings us to the end of today's question and answer session. I would like to turn the floor back over to Mr. Hutson for closing comments.
Thank you all for attending today. I know it was short notice. I look forward to answering your questions as you digest the information, and looking forward to getting Birch under our belt and moving forward. Thank you all for attending today.
Ladies and gentlemen, this concludes today's event. You may disconnect your lines and log off the webcast at this time, and enjoy the rest of your day.