On September 2, Diversified Energy (NYSE: DEC) announced its largest acquisition yet, agreeing to buy Birch Permian Holdings from Elliott Investment Management for approximately $1.8 billion. This deal is expected to increase production by about 35% and Adjusted EBITDA by around 55%. However, despite these prospects, DEC’s stock trades at a forward P/E of only 4.95, indicating market skepticism regarding future growth potential.
Building A Permian Powerhouse
The Birch acquisition positions Diversified as a significant player in the Permian Basin, with around 480 net wells featuring low decline rates. This acquisition is anticipated to add about $548 million in annualized Adjusted EBITDA, operating at margins near 80%. The pro forma gross volumes could reach approximately 2.5 Bcfepd, dramatically increasing from Diversified’s original output.
The financing for this deal is noteworthy, involving roughly $1.5 billion of asset-backed debt arranged in partnership with Carlyle. This collaboration has the potential for future investments up to $10 billion, suggesting that more acquisitions could follow.
Where The Debt Meets The Math
However, the scale of this acquisition comes at a cost. The financing adds new leverage to an already leveraged balance sheet, raising concerns about servicing the new debts based on estimated production lifts. With the acquisition not expected to close until the fourth quarter of 2026, these figures are still projections.
What The Market Isn’t Buying
Market sentiment appears cautious. Hedge fund ownership of DEC fell from 31 to 27 funds in the recent quarter, and the stock has a short interest of 9.29%—a clear indicator of a bearish outlook. The market remains skeptical about whether the projected growth from the Birch acquisition will materialize.
The Bet Investors Are Watching
Diversified has a history of acquiring mature wells for cash generation, and this latest deal amplifies that strategy. The success of the Birch acquisition hinges on effective execution, timely closure, and meeting production estimates.
For those considering investments in DEC, it’s worth exploring other sectors as this company faces both potential and considerable risks with its high-stakes acquisition strategy.
