The term “exploration and production company” has been widely used for only four or five decades, but the activities it represents have a history that dates back to the first oil well drilled by Edwin Drake in Titusville, PA, in 1859. Ever since that world-changing event, discovering and developing new sources of oil and gas has remained the industry’s passion, exemplified by wildcatters and, more recently, by the technological wizards of the Shale Revolution. To this day, every major public upstream company still invests in finding and developing reserves — except one. In today’s RBN blog, we examine the unique approach taken by Diversified Energy Co., which has grown substantially by ignoring the “E” part of E&P.
As we’ve frequently pointed out in the RBN blogosphere, the long-term sustainability of an E&P depends on the level and effectiveness of its investment in replacing the oil and gas reserves produced each year. Generally speaking, the most impactful are reserves unlocked through the development of existing fields and the successful exploration of new properties, which are both funded by the “finding and development” (F&D) part of the company’s capital spending budget. In 2023, the 42 major U.S. E&Ps we monitor allocated a combined $84 billion — or nearly three-quarters of their total $114 billion investment — to F&D activities. However, as we noted in our most recent blog on reserve replacement, Replace Me, organic replacement costs — that is, the costs of actually finding and developing new reserves — have increased dramatically and the volumes replaced via that approach have been declining. This trend has been a key driver of the recent wave of massive industry consolidation as many producers compete to deepen their portfolios of Tier 1 reserves by acquiring them from others.
We’ve also highlighted strategic alternatives to pursuing large corporate mergers. In Homegrown, for example, we outlined EOG Resources’ long-term laser focus on organic growth through the stealthy exploration and development of new unconventional resource plays. Let’s Dance described the rise of public companies that solely pursue non-operated interests, which allows them to high-grade their F&D investment by giving them the option to participate — or not participate — in individual wells. Non-op entities such as Northern Oil & Gas have played key roles in partially funding major M&A deals, most recently SM Energy’s purchase of Uinta Basin producer XCL Energy (see I Want Your Wax). Today, we’re analyzing a company taking a very different path, namely by entirely eschewing organic development by budgeting virtually no F&D spending.
Diversified Energy (formerly Diversified Gas & Oil), founded in 2001 by banker Robert “Rusty” Hutson Jr., has a specialized focus: to acquire mature, conventional gas and oil assets in Appalachia and hold them until the end of their productive lives. The wells purchased have an average age of 8-9 years and a productive life of an average 20+ years. Because these wells — many of them “stripper wells” with average production of 15 boe/d or less — are past the steepest portion of their decline curves, the company has had virtually no drilling and completion (D&C) costs. Over the last three years (2021-23), Diversified has drilled no exploration wells and developed only six net wells, primarily by completing development that was already underway at the time of purchase. The cumulative F&D reserve additions were just 14 Bcfe (billion cubic feet equivalent), or only 0.03% of the company’s 3.9 Tcf (trillion cubic feet) of proved reserves.
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