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Greetings, and welcome to the Diversified Energy Company's 2021 Final Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Rusty Hutson, CEO. Please go ahead.
Thank you. Appreciate everybody's time this morning. As most of you know, we reported our 2021 earnings this morning at market open. We'd like to go through some slides today to talk a little bit about the year. I'm going to spend a little bit of time talking about what I consider to be the state of the union for the company and then talk a little bit about '21 highlights. And then I'm going to turn it over to Brad, Brad Gray, our Chief Operating Officer, to speak about the operations and some of the highlights for '21. And then Eric will finish us up with some financial highlights, and then I'll come back and talk about '22 and kind of where I see the rest of the year going.
I'm going to start here on Slide 5. As most of you know, or a lot of you know, I should say, when we went public 5 years ago, I made a lot of, what I consider to be, promises as to what the company would do and how we would operate and how we will conduct business and really what we wanted to do, which was focused on shareholder returns.
We talked about the type of asset profile that we would look at, low decline, long-life assets. You can see that for '21, we have a 9% -- or approximately 9% consolidated corporate decline, the lowest in the industry. If you look at the publics in the U.S., we are 50% to 100% lower than most. I think the next lowest is 20%. We talked about not taking a lot of price risk and protecting our cash flows through hedging and making sure that our margins were protected.
You can see that for '22, we're approximately 90% already hedged. And in '21, we were 90% hedged through most of the year and protecting that cash flow that we'll talk about in our financial highlights in a little bit. So hedging, very important to us, and we continue to be very prudent in making sure that we're protecting our cash flows. We talked about Smarter Asset Management, operating wells better than the previous owners and putting time and attention into operating wells versus drilling and completion. And that results in efficient operations, reducing costs, enhancing production on wells and really generating higher margins in the business. And you can see for '21, 50% margin, we've been operating for several quarters now greater than 50% in the EBITDA margin category.
And then the last thing, which you've heard me say over and over again is if you don't have cash flow, you don't have a business. We talked about how the industry is -- has operated on a negative cash flow for several years and is now coming back around to what our business model has been from -- since day 1, which is operating through significant cash flow. You can see for -- we're operating at around 20% free cash flow yield, 40% cash flow margin. We continue to generate a lot of cash flow. And it's helped us. As you can see here, we've distributed over $350 million in dividends -- since our 2017 IPO, which I think is an incredible fee for us, starting from such a small company back in 2017. You can see up above that our dividend has increased every year since IPO, and we're generating a total shareholder return over that period of almost 180%.
So the company has performed. We continue to do the things that we said we would do from day 1. And that's really what I wanted to do from -- since the IPO, and that's consistent, do what we say we're going to do and perform and return -- and perform and generate significant shareholder returns, which we've done.
So let's -- flipping to Page 6, let's talk a little bit about 2021 highlights. '21 was a very, very active year for us. We accomplished a lot. We obviously moved into our central region, which was a strategic entry for us in our first time outside of Appalachia. We executed on 4 acquisitions of high-margin assets. And really, what's really important for us is that this new region, we believe, gives us a lot of opportunity to grow the company as there's a lot of assets in this area that we can look at. We'll continue to be focused on lot of disjointed ownership of assets with a lot of different types of assets that fit the mold of what we look for in the asset profile of acquisitions we do.
We produced record annual volumes of 119,000 BOE per day. We exited the year at 139,000, which is a record. That was -- the average annual volume was a 15% increase over 2020, which was really a direct result of the acquisitions and Smarter Asset Management, which we -- which Brad will talk about in his operating section.
We generated $343 million of hedged adjusted EBITDA, also a record, achieving that 50% cash margin that we talked about. More importantly, we delivered $252 million of free cash flow, again, a record for us with a 20% free cash flow yield. That $252 million of free cash flow, obviously, was able to -- not only to create liquidity for additional acquisitions, but to support, to sustain the dividend that we pay. We also were able to do all this by maintaining a leverage ratio of 2.1x, which is in comfortably within the range that we've identified, that we would try to stay in as we operate the business. So '21 was a very, very active year, a lot of activity that we'll talk about as we flip through the next several slides. Going to Page 7, advancing our ESG initiatives, we -- back in November, we talked about at our Capital Markets Day, our ESG objectives and we identified some of the projects and made some commitments that we would fulfill as we kicked off '22. We talked about a $15 million commitment to emissions-related projects to reduce methane emissions. We also talked about reducing our Scope 1 methane emissions' intensity by 2030 by 50%, with an intermediate goal of 30% reduction by '26. Again, we'll talk about some of this as we flip through these next few slides. And then we talked about -- and we've committed to accelerating our net zero emissions target, bringing it forward from 2050 to 2040, and we have a very ambitious program that we'll talk about and how we plan on getting there.
All of these initiatives -- these aren't really new to us A lot of these things that, as Brad gets into the operating section talks about some of the things that we're doing from an ESG perspective. These were things we were doing all along. We're just now putting a lot of highlight and making sure that you as investors understand exactly what we're doing to reduce emissions and to disclose that -- and we'll talk a little bit too about the fact that we, for the first time, as part of our Capital Markets Day, we committed to a third-party validation of our ESG numbers, which we have completed also.
So with that, I will turn it over to Brad and let him talk a little bit about the operating structure and business this year.
Okay. Thank you, Rusty. I'm pleased to share some highlights for 2021. Last year was the fourth year of delivering accretive results for our shareholders since our 2017 initial listing on AIM. During this period of time, we've integrated and completed 18 acquisitions. Our team has grown from 80 employees to 1,450 employees in 10 states. And so I want to express my appreciation to our employees for their commitment, their diligence during 2021 as they were able to accomplish many great projects, integrate 4 acquisitions in new basin and deliver record results. So hats off to the great Diversified team members.
We'll start with some specific comments and more detail on our ESG efforts. And 2021 was a significant year for all aspects of our ESG programs. Throughout 2021, we were able to substantially enhance and improve all aspects of our ESG results, particularly with our e-portion of ESG, we advanced numerous initiatives as we presented back at our Capital Markets Day in November of last year, we implemented a specific project that we call Project Fresh, which focused on the continuation of improving the accuracy of our emission calculations.
Since our initial sustainability report in 2019, we have consistently discussed 2 aspects of our emissions calculations. The first is our intentional decision to be conservative with our calculations so that we did not understate emissions. And the second is our commitment to incorporate and improve the equipment inventory and measurement information from the assets that we've acquired over the past few years.
So during this past year, we were able to improve our emissions calculations to more accurately reflect the actual emissions from our operations, in particular, with our upstream operations. And with our improved information that we obtained from extensive well reviews and capturing actual physical measurements, we revised our 2020 methane intensity ratio for our Appalachia assets from 4.2 down to 1.6 due to a 648,000 revision in reported metric tons of carbon dioxide equivalents. Further, we continued our efforts to eliminate methane emissions. Our methane intensity ratio in 2021 for these same Appalachia assets further reduced to 1.5% or a 6% reduction.
The methane intensity ratio for the central region assets is also at 1.5%, thus placing our consolidated methane intensity ratio at 1.5% for 2021. Our 2021 sustainability report is scheduled to be published in early April, and this report will provide extensive details on our emissions information. Also today, I'm pleased to report that we have publicly released our 2021 enhanced Task Force for Climate-related Financial Disclosures report. This full TCFD report is available now on our website.
Additionally, during 2021, we implemented a comprehensive emissions detection program during late 2021, which has also rolled into the first quarter this year, which includes our handheld emissions detection equipment for our field deploys and an aerial LIDAR detection program with our partner, Bridger Photonics. Both programs are well underway in 2022, and we're pleased with the results from these programs.
On the bottom right of this slide, we are providing some initial results from our handheld emission surveys. We have completed approximately 14,000 unique site surveys, of which 12,000 of those or 85% and of the sites had no detectable emissions. And I'll point out that our handheld emission devices are designed to detect emissions at one parts per million.
Additionally, of the 2,000 sites where emissions were detected, our field employees were immediate -- were able to immediately repair the unintended emissions at the time of the survey for another 1,300 wells. Thus, after the surveys were completed, 95% of our visited locations had 0 unintended emissions. So we're pleased with these results, while at the same time, we are also pleased to validate that our long-standing 0 emissions tolerance policy has been effective.
Moving on to the S of ESG, we were pleased with the results of our initial employee engagement survey that we completed last year. We had a terrific response rate and our ratings for employee and manager relationships were 13% and 17% higher than external benchmarks. Considering the pace our employees have worked over the past several years, these high scores reflect the hard work our leaders exhibited to build a strong culture of Diversified Energy. On the Governance portion of ESG, we exceeded our gender diversity goal of 33% with the addition of Sylvia Kerrigan to our Board.
So now we'll go to the next slide and talk some about our integration and acquisitions. So as we've already discussed, our move into the central region has provided us with additional opportunities to extract and create value. From an integration perspective, we have fully integrated the Indigo, Tanos and Black Beer transactions. With the December 2021 Tapstone transactions, our teams are fully engaged on a planned midyear system integration and conversion for Tapstone. From a field operations perspective, our integration is complete, and we are very pleased with the great talent and experience from the former Tapstone employees.
As a reminder, we continue to be fully committed to our "One DEC" strategy for systems and business applications with all of the integrations and conversions from 2021, and our "One DEC" strategy fully leverages our 100% cloud-based architecture. I'm very proud of our information technology team that's led by our CIO, David Myers. For each of our Central region acquisitions, we implemented our Smarter Asset Management programs with a focus on returning wells to production. Our new Tapstone employees successfully returned over 450 wells to a producing state during 2021 with 110 of those wells coming online after our due diligence period began, which further enhanced the value of this acquisition.
With the significant experience and talent of our employees, we constantly look for ways to leverage their abilities across all operating areas. With our move into the central region, we have successfully utilized the talent and leadership from our Appalachia operations in both upstream and midstream functions, and we've also been able to deliver some great knowledge transfer from our central region employees back to several functions in our Appalachia operations. And this level of teamwork is great to watch.
Moving forward to some more information in regards to Smarter Asset Management. This program continues to be an important aspect of our operational excellence and is closely aligned with our 4 daily priorities of safety, production, efficiency and enjoyment. Our field teams delivered some great results with some large projects throughout all areas of our operations, including our new central region in early 2022. A few highlights of the Smarter Asset Management projects include a 7-mile pipeline we constructed in Southern West Virginia, which became operational in early fall of last year.
This new pipeline segment allows us to sell our produced gas into premium priced markets. In the second quarter of this year, we will further expand this pipeline with a 2-mile extension, which will allow us to increase our gas supply to this premium price market by 50%. Also, our marketing teams have worked closely with our midstream teams to identify inefficient pipeline cost, which has allowed us to eliminate no longer needed firm transportation expense, removing unnecessary firm transportation costs provides an immediate margin enhancement.
And then finally, on Smarter Asset Management, we continue to drive expense efficiencies with compressor consolidations and eliminations. These efforts not only help increase our margins, they also generate tangible emission reductions. We also continue to review our spend with outside contractors as we prefer our internal operating model. We recently implemented a program to convert upstream contractors in our former Tanos assets to company-operated employees. This decision alone will lower our annual expense with these assets by $2 million.
Moving on to discussed production and reserves. Clearly, with these 4 central region acquisitions, our production, reserves and PV10 value all experienced material increases. Our December exit rate for our net production of 139,000 Boe per day was an increase of 35% compared to 2020.
Our PDP reserves increased by 27% to 774 million Boe and our PV10 grew to $3.8 billion with the increased reserves and the strength in commodity pricing. As Rusty mentioned earlier, our consolidated corporate decline rate of approximately 9% continues to support the sustainability of our cash flows for many years.
Finally, I'll wrap up my comments regarding our plugging operation. And as we have discussed and shared over the past weeks, we continue to view our plugging operations as a core component to our business. Just like our upstream and midstream operations, we are striving for operational excellence in our recently expanded plugging business. Last year was our first year with an internal plugging team in West Virginia, and we're very pleased with our West Virginia results as we achieved a 30% savings in plugging costs with this internal team.
Additionally, in 2021, we retired 136 wells, which exceeded our state agreement obligations by 70%. We have further increased our well plugging capacity in 2022 with the recently announced acquisition of Next LVL Energy. With addition of Next LVL along with the further planned expansion of our internal teams, we will have 6 plugging crews operational by the second quarter of this year.
We also increased our inventory of heavy equipment that is necessary to support a professional plugging operation. And so with our increased capacity, we have strengthened our ability to meet our expanded retirement targets, and we've created the ability to sell excess service capacity to third parties and to states to generate revenue, and that revenue will effectively offset the cost of our own plugging program. Also with our expanded internal capacity, we are mitigating the potential for cost increases from third-party contractors. Finally, we believe that we're well positioned to further expand our plugging operations with our aim to have 10 to 12 crews in place over the next 6 to 12 months, which will have the capacity to plug up to 400 wells per year. So those are my comments for highlights for 2021. Now over to Eric Williams, our CFO.
Thank you, Brad. For everybody following along, I will pick up on Page 15. With just a quick point. Obviously, today, we're announcing full year 2021 earnings. And rather than going through a laborious comparison of our IFRS and our alternative performance measure numbers, thought we'd provide a simple recap here, but really point you to a very robust full annual report that we posted to our website, 200 pages for your reading pleasure that I encourage you all to spend time reviewing. Whether you're talking about IFRS or our adjusted earnings metrics, certainly impressive year-over-year performance with total revenue now at $1 billion on an IFRS basis, which was adjusted for hedging at $687 million and then record earnings as well on an adjusted basis with hedged EBITDA at 400 -- $343 million still a very healthy 50% margin.
But as we move to Page 16, and unpacking that a bit, as Rusty said, we built the company 5 years ago on -- well, really 20 years ago, but 5 years as a publicly listed company on an asset profile and a hedging strategy that would allow us to deliver consistent results despite the commodity cycle. And if you recall on the slide that Rusty opened, you'll notice that we map the commodity price against the company's share performance and the company's dividend performance. And over that period of time, we've seen prices dip rather significantly. But because we prudently and proactively hedged, we were able to deliver consistent cash dividends and returns to our investors. Within just the year-over-year that you see on 16, I'd highlight that you see that consistent 50% margin over both years. But notice the unhedged margin that we point out. Last year, had we not been responsibly hedging, we would have realized a 38% margin. So we outperformed that by 16 points, thanks to the proactive protection that we put in place. And this year, we achieved a 50% margin.
And we'll talk a little bit about the change in the company structure with the central region, which gave back 15% or 15 points on an unhedged basis. But ultimately, that stability is what allows us to ultimately have a very durable and predictable dividend, which is what we know our shareholders look for us to do as we derisk the business. You can see that we've talked about as we introduced the central region into the mix that it does have similar margins, but a different cost and pricing structure. So you see that uptick in realized price going from $15.14 per unit up to $15.88 with a corresponding increase in expenses as well, but ultimately maintaining that strong margin.
I'd remind, as Brad highlighted, Smarter Asset Management is part of our DNA, and we are very much early innings with respect to executing that strategy in the central region and are certainly optimistic that between continued expense -- focus on expenses, continuing to utilize our midstream assets and other assets to drive pricing higher as well as opportunistically hedging into an improving price environment, that we can see those margins continue to re-expand. So we're very optimistic about the year to come.
Illustrative of our taking advantage of an improving price environment, you can see that we highlight that our recent hedges that we've added for '22 and '23 have been at 50% and 30% higher prices than our average floors prior to the price rebound. So we're certainly layering in better prices into the portfolio.
Moving to 17. Brad talked a lot about the investments we've made in our internal plugging programs. And really, we've been focused on vertical integration since the beginning this being the more recent area of focus for obvious reasons. And we're really proud of the progress that we've made even before we stepped in and invested in our own crews we managed asset retirement differently by leveraging our skilled well tenders and well force to proactively prepare any site that -- where we were going to retire a well so that we could be very, very efficient with the third-party services that we used. And that resulted in lower plugging and abandonment costs than our peers, which was reflected in our financial statements as the retirement obligation.
But as we look forward and we look at the continued progress that we're making, you saw us report a 10% reduction in the per well cost year-over-year, and that's on enlarged portfolio of doing 136 wells this year versus just under 100 last year. So -- but that 10% outperformance on an average basis was really built on a 30% outperformance on the wells that we plug for ourselves.
And so when you think about it, this is with a 5-year horizon of work that we've been doing. I think we're at a unique point where we can now look to asset retirement and the progress we're making as a real value contributor to the overall business because what it relates to is that, that undiscounted asset retirement obligation is dropping very significantly. And we've been talking about asset retirement for years, and we have a very fulsome supplement presentation on the website that walks you through how the cash flows from the wells that we own today not only pay a very healthy dividend over the next several decades, pay all taxes, pay all G&A and then responsibly retire themselves. So every dollar saved on asset retirement is $1 of additional reinvestment capital that we have for the business, whether that's through additional non-dilutive acquisitions or whether that's through other capital projects on our existing footprint.
And so if you look back where we started the year at an undiscounted asset retirement obligation on Appalachia, $1.7 billion. If we were to realize this 30% cost savings across the whole portfolio, that's $0.5 billion of additional value that we'll be able to reinvest into the business, which is dramatic and significant. And I'd point out that this is early innings. If you think back, and I talked about this at Capital Markets Day, but analogize this to what we saw in the D&C side of the business, where declining prices forced a renaissance in the way that we thought about shale development, and we witnessed not only well costs come down dramatically, but well performance improved.
And so I'm confident as we see asset retirement garnering a significant amount of attention publicly, not just for Diversified because of our large portfolio, but across all operators and with public stakeholders taking real interest in this area, and now significant investment dollars coming into the space with nearly $5 billion of federal money being allocated to the state for orphan well retirement, I would be -- I'm excited about the potential renaissance that we'll see in the techniques and technology that's applied in this space. So if we're able to achieve 30% today using our disciplined approach and existing technologies, I'm excited to see where this can go as we, alongside others, really invest in improving this process holistically with the potential to drive this down even further.
Moving to Page 18. We talked about, obviously, every dollar saved on asset retirement obligation is $1 is available for reinvestment. But fundamentally, having built this company on producing assets that had very low capital and. [Audio Gap] after acquiring, we generate a significant amount of free cash flow.
We talked about 40% free cash flow margin yielding a 20% with a dividend yield of 11%. But importantly, and if we just use 2021 as an example, obviously, expecting '22 to be higher given that we'll have a full year contribution from those 4 acquisitions that we did in the back half of '21, you can see that, that $343 million of EBITDA after you layer off taxes, interest, CapEx leaves us with a $250 million of free cash flow, of which we paid out $130 million in dividend, leaving nearly as much available for reinvestment and debt pay down.
So that significant amount of residual free cash flow, which is why we sized the dividend at a target of 40% of free cash flow gives us the ability to begin to reinvest in the business in a meaningful way on a nondilutive basis. And so if you think about the price at which we're acquiring assets, we've always said 2 to 4x cash flow. This gives us -- and in 2021, that average was closer to 2.5x, given the shape of the price curve, gives us a significant opportunity to use our balance sheet to acquire.
As we move to 19, what we wanted to illuminate here was really the simplicity of our capital structure, and then we'll talk a little bit about liquidity and our ability to fund ongoing growth. But simplistically, we simply have 2 components to our long-term financing or financing in general. The first being our revolving credit facility, which, of course, provides us quick liquidity for financing transactions. And then longer-term amortizing financing that are primarily asset-backed securitizations that provide us a glide path to delevering over time, given that they do fully amortize over anywhere from 8 to 10 years as well as providing a stable low-cost rate that complements our equity very nicely to provide a nice leverage return.
And you see how we've responsibly used our ability to now access in a meaningful way the securitization market, having embarked on that journey in 2019 and materially expanded it coming into 2022. Where prior to 2019, we were 100% borrowed on the RBL as our source of financing, but we began to change that mix in 2019 with 70% of our debt on RBL and 30% on ABS. We inverted that in 2020 to have 30% on the RBL and 70% on the ABS with a similar allocation during the calendar year 2021. But with our more recent securitizations, you see 2 things happen. You see that today, 90% of our debt sits in that low-cost sub-5% rate long-term borrowing that amortizes off over that period I mentioned.
So a glide path to being to debt reduction. And just 10% drawing on the RBL that net of the additional value that we unlock in the assets through securitization, nearly doubled our liquidity, which puts us in a very offensive position to be acquisitive on a nondilutive basis in 2022.
So turning to 20, I'll wrap up talking a little bit about how we think about liquidity and why that's so important to us. Obviously, the securitizations are a path to unlocking additional liquidity for us to do non-dilutive growth. And we ended -- we began the year net of the 2 securitizations with over $400 million that we're now able to look forward at different opportunities, both through acquisition or through capital projects on our large portfolio, including the central region, that we can deliver on a nondilutive basis.
And given that we set our target leverage threshold is anywhere from 2 to 2.5x. And you can see that we've maintained that over the horizon at 1.8, 2x, 2.2x and now 2.1x pro forma for the most recent deals we've done puts us in a position that we can use leverage effectively. And you'll recall, I mentioned that the average price we paid for our acquisitions in 2021 was about 2.5x. And given that, that multiple has come down given the shape of the curve, we're able to use larger portions of these low-cost financing to alongside our free cash generation, to eliminate the need for equity as we continue to sustain the business and provide very consistent and stable dividend returns to our shareholders. So very much mindful of as we look forward using our free cash generation to deliver growth and high visibility in how we maintain what Diversified has built.
So with that, I will turn it back to Rusty for some closing comments.
Thanks, Eric. Thanks, Brad. Let's talk a little bit about 2022 and really the outlook of where I think we're headed and some of the main initiatives as we head throughout 2022. Obviously, always #1 on the list is maintaining our focused execution on our operations optimization. Lots of opportunities to continue to create value through our Smarter Asset Management program. Especially with all the new transactions that we've done in 2021. We feel like there's an opportunity set there to execute on, and we will be relentless in executing on that.
We will aggressively drive reductions in our absolute emissions. I'd like to call it, we're going to attack emission. We're going to be all over it, all year long. Brad mentioned some of the projects that we already have ongoing, but we will continue to be relentless in executing on the ESG initiatives and making sure that we're doing exactly what we said we would do, both from our Capital Markets Day and in some of our goals and targets. We'll look at our -- to leverage financial opportunities and improve our profitability. Obviously, with a very volatile price curve that we're seeing today, we'll look to take advantage of hedging optimization and margin enhancement type projects and opportunities as we look throughout 2022. We'll also look to enhance liquidity. I've made it very clear to our team As we sit here today, we're at record liquidity of close to $400 million. I want it to be $600 million, $700 million worth of liquidity. And so we've got that charge out to the team, and they're aggressively looking at ways to do that because we want to be able to grow the business and generate enough capital that we can do it non-dilutive without -- growing the company as much as possible without issuing any shares.
And then lastly, growth is always at the top of our list. We're looking at things in the market, looking to acquire assets both upstream, midstream, plugging opportunities anything we see that we feel gives us an advantage, growth opportunities to grow not only revenue, but profitability and earnings that we can then utilize to return to our shareholders. And we'll also look at ways to -- I believe that the midstream opportunities are out there that we can take advantage of. Obviously, we will look at those things that where we have gas flowing. But any way that we can to generate additional margins in the business, we'll be taking advantage of those as we look throughout 2022.
So that's how we look at 2022 and really the focus of this year.
With that, I'll turn it back over to the operator and open it up for some questions.
[Operator Instructions] The first question today comes from David Round of Stifel.
Firstly, just on emissions, it's great to see those numbers fall so much. Rusty, you touched on it a minute ago. But looking forward, can you help us understand where the future reductions are likely to come from? And I suppose what I'm thinking about is how much more do you think there is to come from, let's say, more accurate reading versus theoretical? Or is the bulk of that work now done, so is the next phase more about reducing absolute emissions?
Yes, that's a good question. I think -- I'm going to let Brad answer the question because I think he has more details around how we're going to attack it. I would say from a personal perspective, that a lot of, as we move forward, a lot of our reductions will be true reductions, not just getting true readings but also some of the projects that we've set forth that we can -- the actual emissions themselves be reduced, you can...
Sure. David, we will be -- we're always looking to get better in all aspects of our business, which includes reporting. And we're very pleased on what we're able to do over the last year. So in regards to Appalachia, the majority of the reporting revisions and accuracy, we believe we've done. We'll continue to work on that, especially with our compression fleet. But from an upstream perspective, we think there's -- we think we've done a lot of the good work there. We will be focused on the actual emission reductions in all aspects of our business with a big focus on the leaks that are reported.
Clearly, we've shared some information this morning that have provided us with a lot of confidence that a large majority of our well pads and equipment on these well pads, do not have emissions. We believe that those numbers will begin to be reflected in our numbers on a go-forward basis as we report 2022.
We're also focused on emissions that come from pneumatic valve operations. And we've identified a couple of hundred well pad sites, primarily actually in our central region, in particular, in the Barnett area, that we are going to replace the functional or the operating function of those pneumatic valves from utilizing methane to utilizing this air with air compression.
So we are -- we've installed a few air compressor sites at some of these well pads where there's a lot of moving parts. And by the end of the year -- and we'll update you throughout the year. But by the end of the year, we anticipate to make substantial progress on that front.
So we're going at it from all areas. We do think we will have some reporting improvements in our central region assets. Clearly, we didn't have those for a very long period of time last year. So we'll be looking at that as well.
Yes. And I'll just complement that on the financial side to say that we spent a lot of time thinking about the capital to allocate to the improvements that we wanted to make in our platform to put the operations team on this trajectory. As Brad said, 0 emissions has always been part of our Smart Asset Management target, and they've worked hard to that. We committed $15 million to give us a jump start on some of the more broad initiatives that we've put in place, which proportional to our peers was a significant investment.
And at the time of the Capital Markets Day, we said we were still determining whether or not that needed to be an annualized number or a onetime reset. And based on what we're seeing from the investments that we're making in our ground game, I think we feel increasingly confident that, that will be -- this investment will be very sufficient and the work that's necessary for the pneumatic valves and other capital adjustments. But that Smarter Asset Management, which has always been part of our operations, what you see in our existing LOE we'll be able to sustain the trajectory as we move forward. So I think we're emboldened on the financial front as well.
Okay. Great. That's clear. And Eric, maybe just another one for you just on the ARO liability, and you talked about this $500 million. Can you just clarify, please, whether that saving has been reflected in your balance sheet liability and whether any savings have been reflected there yet? And I suppose then the question is, if not, what do we need to see in order to get that reflected?
Yes. No, it's a great question. And if you turn to Page 146, I think it is in the annual report. We have a table on the following Page 145, and there's a footnote around the revisions to estimates. The net revisions were upward $76 million, but $110 million of that was related to change in discount rate because we're about to see a different rate environment. But last year, rates continue to come down, which compressed the discount rate that we used to below 3%. But we did have a positive revision from better cost. What flowed through the balance sheet was about $30 million, I think $27 million-and-change.
However, if you looked at our reserve report that looks at things on an undiscounted basis. The undiscounted asset retirement change on the reserves fell over $200 million. So we did see -- you are seeing that in the reserves and then, of course, the balance sheet discounts that and is accreting it up. So that's why -- and our asset retirement supplement, provides a lot of detail. We'll be doing a full refresh of that with the adjusted numbers and inclusive of the central region. But yes, you are absolutely seeing that our realized cost reductions are flowing through to our audited financial statements as well.
And if you look closely, as I said, our significant outperformance is in the state of West Virginia, where we had our early crews. So we're going to continue to build on that. And we continue to outperform in other states as well. And as we build crews, I think you'll see Appalachia continue to come in meaningfully. And again, I can't overstate it enough, just the fact that this is so early innings before you've seen the industry really invest in revolutionizing a process, innovation will make a tremendous difference, not just the repetition that brings efficiency.
So I'm really excited, and we certainly will transfer everything we learned from Appalachia into the central region. We have a few -- much fewer well count in Central. So we'll be very focused on that. but expect to see positive developments there as well.
But I really wanted to emphasize that what I think has been a bit of an overhang candidly and why we spent 4 years or more trying to educate investors about our asset retirement portfolio in a multi-decade systematic obligation as opposed to decommissioning is now pivoting to where I think it can be a real value driver and a thesis behind why Diversified makes a lot of sense because we -- this is a long-dated obligation that we have a lot of time to continue to get better and better at.
Yes. And just to finalize those thoughts. The one thing that we don't want to lose sight of is we're going to have 6 plugging crews on the ground. We're trying to get to 10 or more either through acquisition or just by putting our own crews out there. But what that will allow us to do and what we're already seeing is the states who have a lot of federal money being thrown at them now to plug orphan wells that they own, I think it's going to result in us being able to do a lot of work for the states, which will then decrease that cost even further on the wells that we're plugging. And I think that's a big, big item that people need to really keep in the back of their minds as we move forward because that's going to be a revenue item that we can then use to offset our own cost on our own plugging.
Yes. I appreciate that reminder. I meant to talk about that. You'll recall Brad's slide showed that with 6 crews, we'll have the capacity to plug our full annual commitment of 200 wells. But our plan is to look to at least double that over time and have the capacity to do 400 or more wells. In the shorter term, because we're comfortable with our pace, that incremental 200 well capacity will outsource and generate third-party fees. But importantly, not only the fees we earn, which, as Rusty said, will effectively subsidize the cash flows associated with our own AROs and potentially netting that to 0 cash flow impact on us, but we'll learn from that continued experience across a broader set of well retirement that institutional knowledge that we'll be able to use to prosecute our own. And then over time, as we continue to increase our annual retirement we'll have already stood up those crews to continue to stay vertically integrated and control our own destiny. So again, I think there's a lot of great developments that are coming into focus on this really important aspect of our business.
The next question is from Matt Cooper.
So first one. So your mid-term reduction targets are based on the 2020 baseline. I just wondered, will these now be based on the revised 1.6.
Figure, or will it be on the original 4.2 figure? And if you're using the revised figure, does this make it any harder to hit the targets, given it's a much lower absolute number that you need to get to?
Well, I mean, we want to be as low as possible, obviously. And I think the 1.6 is a tremendous number really as you look at we're -- look at us compared to the rest of the industry. Obviously, when you're working from a lower number, you have to -- to get lower, obviously, it's going to be -- the bar is a little lower or higher, I should say. But we will absolutely work from that 1.6 number, not the higher number.
Yes, it's -- I completely great. It's based upon the revised 1.6. That's why we provided a tremendous amount of detail in the information that will be in our sustainability report here in a few weeks, and we gave you the highlights this morning. But it will be on the 1.6. And I don't necessarily believe that it makes it harder. Clearly, the math is different. But that doesn't change the approach that we're taking to eliminate the main sources of emissions from our operations.
Okay. That's clear. So don't expect any changes to targets given you're using...
We're keeping the same 30% by '26 and 50% by '50 based upon the 1.6 revision.
Got you. I just wanted to ask about the leaks detected to date that you mentioned. So it looks like you detected leaks at about 2,000 wells, 1,300 of those were immediately repaired, leaving around 700. Yes, I just wanted to understand why there's 700 outstanding? Is it just a timing thing? And these were some of the last wells that you looked at? Or are the leaks on those 700s for some reason, more complicated or expensive to repair?
Yes. They're generally not more expensive to repair. Very simply, the equipment necessary to make some of the repairs may not be in the trucks of the guys that are detecting the emissions. And so it just requires a little more follow-up. But we have a process in place. We created an application, a handheld application for documentation and tracking of these repairs that either get made at the time of the visit or get deferred until a later point to where we may need another piece of equipment, a different type of skill set or something like that. But these Appalachia wells that we have or the workovers, I've always said that a workover on one of these wells can be $250 to $10,000. So in general, we're not talking about expensive repairs at all. But we do have a good process in place and we will absolutely get back to each one of those and address them as necessary.
Yes. And if you'll recall, when we walked through this before on some of the early discussions we had around wells that we had emissions at. And those that did require some cash to fix, the average was $200 to $300 per well. So as Brad said, most of them were fixed with the turn of a wrench on site at the moment. Those that do require doubling back are generally inexpensive pieces, whether it's additional pipe that you're replacing. But the spend is quite nominal.
Got it. And final one, I just want to ask a bit of a follow-up to the previous question, but is it now reasonable for us to assume a 30% reduction to plugging costs going forward? So looking at around 18,000 a well in Appalachia? And what are the risks to achieving that?
Well, I'll let these guys that do the work every day, give you a little more details around this answer. What I would say is that so far with the wells that we've utilized our plugging crews for, we have seen a 30% reduction in cost of doing those wells. We'll have more data as we get throughout this year on if that holds true on a well-by-well basis, utilizing our existing plugging crews.
We'll still have some third-party vendors doing some of the wells because some of the -- we're not -- more remote areas or areas where we don't have close proximity to the plugging operations that we currently run. So what I would say is we're cautiously optimistic that as we roll out our existing plugging crews, those costs will continue to be in that 30% reduction range. Let's give us some time to continue to go through the portfolio to kind of validate that.
And just to add to that, I think Eric highlighted in his comments earlier, that on a blended basis, the overall decline was around 10%. The 30% was with the crews that we -- with the one crew in West Virginia that we stood up this past year. And we did we did have great success with that team. We targeted West Virginia because it was the most expensive state that we were incurring -- it was the most expensive plugging state that we had. So we did anticipate to get some nice improvements there, probably not 30%, to be honest, but we're very pleased to achieve that.
So I'm very confident that we're going to continue to achieve great cost mitigation, cost improvements. And as Eric also indicated, there's a lot of innovation and technology and different techniques that are chasing this plugging challenge here in the United States. And we're right in the middle of that. We'll benefit from that. We're already working with some of the thought leaders and companies pursuing some of those more efficient techniques. And so I'm confident that we'll be able to benefit from those processes as well.
Yes. And just to pull all that together. We talked about having the capacity to put 200 wells, and we focused our initial crews early time in West Virginia. We have a large footprint. It spans predominantly 4, but really 6 states in Appalachia and now Central. So where we have our crews isn't necessarily where we'll retire every well. And so that's why to Rusty's point, we'll continue to opportunistically use third parties. Now we'll be very proactive as we always have been and doing all that site prep work to maintain the efficiency and the strong utilization of those services. Over time, as we continue to build our crews, we'll have the ability to reach further and further into our own.
So if we're not using the capacity for our own, that's where we'll be using capacity for third parties. So you'll have a mix of cost reductions as well as we certainly like to believe a growing stream of third-party revenues associated with the capacity that we'll outsource. But I think we are confident that longer term, we'll realize that across the whole portfolio, but we're also a really good start.
The next question is from Mark Wilson of Jefferies.
A few points, please. First one, on the liquidity of $412 million, Eric, if you could please bridge the gap for us there. The credit [ search ] now revenue is $500 million after the latest ABS, cash on the balance sheet at year-end was only $12 million. So just bridge the gap, there for us, please, in terms of available RBL facility.
And then the second point, there's not much in the way of guidance in the results today. So just at what points both operationally and commercially, can you point to in terms of guidance for the coming year? I'm thinking particularly, is the 40% of free cash flow as dividend return retained for the year?
And then a lot of discussion on the P&A teams, what we should expect as CapEx there?
And then if there is time, very interesting, Brad, on the 14,000 site visits, some investors tell me that's 20% of the overall site. So what is the plan there? And would you be able to visit every site under your ownership?
Yes, Mark, thanks for the questions. I'll try to tick through those, and if I miss something, circle back. Page 19, I think, answers your questions with respect to liquidity. And you'll notice we have a 2021 as at year-end and then 2021 pro forma. Perhaps what you're missing is that the securitizations that we did that we netted $500 million was in -- we used those proceeds to repay borrowings on the RBL, which frees up the undrawn capacity. So we -- the RBL borrowing base went down $300 million, but of course, we financed $325 million, but we financed $525 million. So we net increase the liquidity by $200 million by using the long-term hedge protected ABS.
So it really was a refinancing of debt off of the RBL into those amortizing structures at a lower rate while enhancing liquidity. So we always maintain low cash on hand because we park all excess cash on the RBL to avoid interest. So just prudent treasury management.
And just to clarify there. that leaves $400 million of undrawn capacity on the RBL at year-end.
That's right. You see $98 million drawn on the $500 million borrowing base plus cash. So that's how you get to the liquidity.
Guidance, it's an interesting question, and we do talk about whether to perhaps look more like our peers, we begin to offer it, certainly as a premium listed company. Candidly, the reason we don't is that in our business, it's less than necessary because we give you our average decline of 8.5% to 9%. So -- because we don't run a drill bit. So you're not trying to determine where we're spending capital, how many wells we're going to drill, where we're going to drill them, what type curve they're going to come on at, how they're going to decline near term? Our business is very steady, as with acquisition, and we recast all of it and get all the modeling level detail for each acquisition we would do. But you've got our production, you've got our general decline rate.
We talked about our cost structure. We conservatively will model off of where we are and then certainly work through Smarter Asset Management to outperform it. You certainly see we have a track record of declining unit costs once we have established operations. So we'll be looking to prosecute that. But our business just doesn't really lend itself to needing guidance in the same way that a development-oriented company does. So that's the only reason that you're not seeing us guide. We just never have in the 5 years we've been listed.
With respect to our asset retirement, I think you were asking about the capital associated with it. 200 wells per year is about 400 -- I mean $4 million of cash that we would expect to spend. So that puts P&A at about 1% of where -- historically, if you looked at our P&A spend relative to the portfolio, it's been less than 1%. And even if we increase the notional jobs, that relative 1% of EBITDA is about right, with total CapEx, including what we spend to support our midstream -- largely midstream assets, being in the 7% to 8% of free cash flow. So again -- because we're not developing, we don't have a significant capital spend that you're trying to track against new wells and D&C costs and type curve. So hopefully, that all sums together to make sense. So before I pass to Brad to answer your operations question, did I hit all your financial questions, okay?
Well, I'll just check on the 40% of free cash flows dividend then, please.
Yes. Thank you. I'm sorry. the dividend. Yes, that's an important question. So if you simply took our current dividend rate and annualize it, you're looking at $145 million of dividends. That's a modest increase of the $130 million that we paid last year. And what we've said is that -- and we talked about this at Capital Markets Day, growing Core is -- we would never cut the dividend. We believe it's a prudent payout and certainly a sustainable payout that leaves sufficient free cash flow to reinvest. But given where that yield is, as we look at our yield relative to our formulaic 40% payout, we're really going to balance those 2 in tandem. So as we continue to grow, we'll look to see if our yield is healthy. And if it is, then we'll look to reinvest a larger portion of the incremental free cash flow from additional growth back into the business, either through debt paydowns, which generate liquidity for future nondilutive growth or directly to an acquisition opportunity.
So I think we feel really good about where our rate sits. Certainly, if we did something transformative, we would revisit that. But if we continue to notionally move along, I think we're comfortable...
Yes, Mark, and this is Rusty. I said this, I think, during the trading update call or trading update presentation that one thing that we'll do as we look into '22 and forward, is we'll probably look to moderate the growth of the dividend and reinvest more cash flow back in the business. So as Eric said, we'll never cut the dividend. It's a sustainable payout. But we definitely may moderate the actual growth. If we do more transactions instead of growing it at the same pace that we have in previous years, we may moderate that growth in the dividend and reinvest it into future opportunities.
And in regards to your question about the number of well sites that we can visit. So we're in the process of completing the rollout of the handheld devices, will be complete by the end of the month in our Southern Appalachia area. We have had good success. Our teams are really excited about this process and the work that they're doing. So that's helping us have some early success. I think we can get close to 100% by the end of the year. We stated at our Capital Markets Day that we'd like to -- our goal was to be completed by the middle of next year with the 65,000 sites in Appalachia. Clearly, the math would indicate that we're on pace to beat that. And we'll just keep the market updated on the progress throughout the year. But it's a high likelihood that we can get them done by the end of the year.
The next question is from Simon Scholes of First Berlin.
Yes. I've got two. Just on the well-plugging subject, you seem to be hinting during the call that there's scope to make another acquisition in this area. I was just wondering how readily available these targets are.
And also, did I hear right that you expect to get to the 10 to 12 team mark within 6 to 12 months?
And also on recurring admin cost, I mean, look at this -- the main driver in the increase there is going to be ESG this year, I mean the $15 million incremental spend that you're talking about relative to last year. And are there any other influences on recurring administration spend that we should be taking into account for 2022? That's it.
Yes. So Simon, this is Brad. In regards to the growth of the plugging operations, we can either grow through a prudent acquisition in the Appalachia area or we can do it by buying equipment and staffing up internally. And really, we're doing both of that this year. Next LVL acquisition brought on 3 crews, and we were already in the process of standing up 2 additional crews to our one. So that's how we're getting to the 6. So we're looking at both of those and just looking for the opportunities that make the most sense.
And in regards to being a 10 to 12 by 6 to 12 months, yes, as Rusty indicated, we would like to and plan to continue our expansion to get to that. And if we can get there in 6 months, fine. But again, we want to -- we just want to make the right move for the right price.
On the G&A side, go ahead.
Yes. So on the cost side, you're right. We're certainly proud that year-over-year show that we're leveraging the scale of our administrative function, showing a 10% unit reduction as we have a partial contribution from the central region. Certainly expect that as you get a full year contribution, that will put additional downward pressure on the unit cost and allow us to be more and more efficient. But importantly, we continue to be, I'd say, proactive in sizing the organization for where we are taking it. 2021, I said that -- I expected 2021 to look a lot like 2018 and be really transformative and it was. And certainly, having done 4 acquisitions on a gross basis, over $1 billion partnering with Oaktree. And we're operating all of that, and of course, getting the benefit of the promote from Oaktree and had the carrier at the end operate it very efficiently to earn that back end promote, both of which are -- essentially will offset our G&A costs really stack up nicely.
But obviously, we've said that we're looking at hard at that U.S. listing. And so I think we've been prudent to get in front of that and make sure that we're staffed appropriately to deliver that result as we continue to have that as a focus. But no doubt that I expect to see us continue to get more and more competitive.
I don't think you would expect to see the recurring number change meaningfully. I think you would expect to see that number simply allocated across a larger and larger operation.
The next question is from Brendan D'Souza of Dowgate Capital.
Just a couple of questions for me. First on M&A. With gas prices trending higher, especially in Europe and also in the U.S., are you seeing any indication that asset prices are going up, the potential ones that you're looking at?
And the other one is also just with regards to gas price, and it trending higher, is this going to change or could this potentially change your strategy of hedging? So as we go into 2023, maybe instead of 90%, you'd maybe hedge, say, 60% or 70%.
Yes. Well, let's talk about the acquisitions first. The one thing that we're seeing on the acquisition side is there is a significant number of opportunities in the market a lot. And what really makes it attractive from my perspective is, is that there's a lot of opportunity, but there's a limited universe of buyers. And so what typically happens when you have this kind of market is even though the prices are up, you still have the opportunity to buy pretty compelling valuations because the competition on an asset-by-asset basis just isn't real significant. Now there's -- obviously, when you're looking at transactions of $100 million or less, you can find a lot of competition. But when you start going above $100 million, $200 million or even $250 million, really, the competition thins out pretty quickly, and you can still acquire assets with a good valuation.
Now from our perspective, we're buying PDP. So if you're buying PDP and you're not really relying or putting any value on the upside, you can hedge the front end of the curve and lock in those returns that you're pricing on in the first place. If you look at the curve, the pricing curve, both oil and natural gas, the first 6 to 12 months are the highest priced months. And so that's where we look to take the risk off the table pretty quickly in a transaction so that we can lock in those returns that we're pricing the deal on.
So I would tell you that there's a lot of deal flow. We still feel really, really good with the liquidity that we have. And if you just look at the liquidity, if you got $400 million liquidity, that would say that you could probably do $100 million, $125 million worth of EBITDA in the deals that you could buy with those without even having to look at any kind of equity raise to help fund the deal. I mean we've got $125 million, which is a 25% increase in our EBITDA.
So we're feeling pretty good about it. We think that there's a lot of activity out there that we can take advantage of, and we just need to be prudent and patient. And so that's what we're doing.
What was the second question on...
Hedging strategy.
Hedging strategy as we move forward. The one thing that we've said from day 1 is we don't like to take pricing risk. We want to make sure that we're hedging enough volumes to solidify and be able to be comfortable in saying that we've got enough cash to operate the business to manage our debt and to pay our dividend. And so we'll -- that percentage -- we'll always hedge that percentage that's necessary to have the margin that we need to take care of those obligations. And so will we be less aggressive on the hedging side? Probably not.
I like the prices in '23 right now a lot. I think we're right at $4. And if you went back to a little -- maybe a little higher than that. So if you go back to 2020 when prices were $2, and you said, could we lock in $4 natural gas price in '23, the line would have been a long line of people standing waiting to get that. And so at $4 and an all-in cost of $1.30, that's a pretty steep, or a pretty hefty margin for us. And so we feel pretty good about hedging at that price.
And so I would say that our strategy doesn't change much. We're going to continue to take care of and hedge the price as necessary to be comfortable in meeting all those obligations that I just stated.
And let me be very clear about the dividend. Under no circumstances is our dividend ever in jeopardy, we will never cut our dividend. We will always grow our dividend as we grow through acquisitions, we'll always grow our dividend. That's part of our plan. That's the way we return cash to our shareholders. We told them we would and we will continue to do that. We'll also -- we feel that 11% dividend yield is a pretty hefty dividend yield. And so we can use excess cash to acquire assets. We can use excess cash to buy back stock if necessary. We can do a lot of things with that cash. But the dividend will always be a crucial part of the business and we'll continue to grow it as we grow the business.
Yes. And I think just to complement that, Rusty's emphasis on that commitment is why we will continue to hedge we may forgo upside, but it's so important that we -- and at those prices, the margins are incredibly healthy. So we'll lock in a really good margin that allows us to protect that dividend. But importantly, it allows us to reinvest into the business so that you can see visibility into how we can sustain that dividend. So if we were to move towards a bit more speculative outlook on the commodity, just the trade-off would have to be in the dividend. That's just not a trade-off we're willing to make.
There are no additional questions at this time. I will turn the call back to Rusty Hutson for closing remarks.
Yes. Thank you. So as you guys see, '21 was a fabulous year for us. It was a transformative year in a lot of ways, entering a new region, record earnings, record revenue, all those things that we talked about during the call. '22, we're very, very excited about. We think that this is going to be another year where we can transform the business and really grow it to be what we expect it to be in terms of revenue, EBITDA. We think that we can grow substantially throughout 2022 with the opportunity set that's out there in front of us.
We also are looking hard at the U.S. market and the potential for an ADR, dual listing. That will be a tremendous focus for us as we go through 2022, and the future is bright. We're really happy and feel like the best days for Diversified are ahead.
So thank you all for your time today. And if anybody has further questions, obviously, get in touch with our IR group, and they'll answer anything you have. Thank you very much.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.