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Beaufort Securities Breakfast Alert: Diversified Gas & Oil plc, PHSC

Beaufort Securities Breakfast Alert: Diversified Gas & Oil plc, PHSC

Today's edition features:


• Diversified Gas & Oil (LON:DGOC)




The FTSE-100 finished yesterday's session 0.49% higher at 7,413.59 whilst the FTSE AIM All-Share index was down 0.02% at 1,010.33. In continental Europe, the CAC-40 finished 1.24% higher at 5,176.71 whilst the DAX was up 1.39% at 12,475.24.

Wall Street

In New York last night, the Dow Jones closed 1.19% higher at 22,057.37, the S&P-500 ended 1.08% higher at 2,488.11 and the Nasdaq was up 1.13% at 6,432.26.


In Asian markets this morning, the Nikkei 225 was up 1.02% at 19,744.60 whilst the Hang Seng was down 0.01% at 27,952.99.


In early trade today, WTI crude oil was 0.10% lower at $48.02 per barrel and Brent was down 0.19% at $53.74 per barrel.



Volkswagen plans electric option for all models by 2030

Volkswagen, the world's biggest carmaker, will offer an electric version of all its 300 models by 2030, becoming the latest manufacturer to move away from petrol and diesel. VW will double investment in zero-emission vehicles to 20bn euros (£18bn) as it seeks to put the diesel emissions scandal behind it. The German firm plans to offer 80 new electric cars across the group by 2025. It comes as Mercedes-Benz also promised electric versions of all its cars. Mercedes chief Dieter Zetsche said the entire range would have electric or hybrid versions by 2022.

Source: BBC News


Company news

PHSC (LON:PHSC, 12.50p) – Speculative Buy

The leading provider of health, safety, hygiene and environmental consultancy services and security solutions to the public and private sectors, held its Annual General Meeting yesterday. At the meeting, the Group Chief Executive, Stephen King, made the following statement "I am pleased to report that the Group's performance for the first four months of the year to the end of July 2017 has been in line with the Board's expectations at the time we released our results for the year ended 31 March 2017. In the statement accompanying those results, we advised that for the first quarter of 2017-18 the Group had total revenues of £1.82m and EBITDA of around £120k. This can now be updated to cover the four months to the end of July 2017, where the Group's management accounts (unaudited) show revenues of £2.43m and EBITDA of £134k (before exceptional costs). This compares very favourably with an EBITDA loss of £94k on revenues of £2.3m at the same stage last year. The exceptional costs comprised redundancy payments in July of around £9k at our Adamson's Laboratory Services subsidiary".

Our View: Good news! The improved operating performance that was first reported back in May has continued. The Group's legacy health and safety businesses continue to enjoy a large amount of repeat business from its loyal client base. Losses at its asbestos-related operation have bottomed out and management are seeing stabilisation of prices after a period of heavy discounting and, although there may be further costs associated with restructuring this business, large trading losses are now seen to be a thing of the past. The Group's proposed reconfiguration of its security-related companies into a single division should also ultimately result in cost savings. In addition, there continue to be good prospects for increased sales and opportunities for technological innovation of the products supplied. Political uncertainty and Sterling weakness adversely affected last year's financial performance given that products, particularly for the security-related subsidiaries which import materials priced in Euros and US dollars. The weakening of the US$ since the start of the new fiscal period, however, has reversed some of this while divisional loss elimination, ongoing rationalisation and a cost reduction programme will allow management to present an improving half-year picture that is now expected to continue right through to the period end. Hefty final dividend pay-outs have, of course, characterised PHSC in past years, so notice with the Group's 2016/17 preliminaries (11th August 2017) that "No final dividend proposed but an interim dividend may be considered if progress continues" left disappointed investors at least anticipating some compensatory payment for last year's missed instalment this year. No re-scheduling of prospective dividend payments or changes to the Group's 'progressive' policy are foreseen for future years but, based on current operational progress, there appears scope to make an interim payment of, say, 0.5p when half-year numbers are announced early in December followed by, assuming trading momentum is sustained, a final pay-out of 1.0p/share, making a total 1.5p/share for the full year and matching 2015/16's total full year pay-out. On this basis, the shares would presently be offering an annualised 2017/18E yield of around 12%. Beaufort retains its Speculative Buy recommendation on PHSC plc shares, given also that they trade at a deep discount to the Group's net assets of £4.58m.

Beaufort Securities acts as corporate broker to PHSC plc


Diversified Gas & Oil (LON:DGOC, 73.00p) – Speculative Buy

Diversified Gas & Oil plc ('DGO'), the US based gas and oil producer, yesterday announced its interim results for the 6 months ended 30 June 2017 ('H1 FY2017'). During the period, revenue advanced by +51% to US$11.5m against comparative period (H1 FY2016). On an adjusted basis, EBITDA grew by +209% to US$4.1m, supported by +105% improvement in margin to 35%, resulting diluted EBITDA per share of 4 US cents, up +33%. Pro Forma for the Titan Energy, LLC ('Titan') acquisition completed in June 2017, revenue was US$36.1m (+372%), adjusted EBITDA US$12.9m (878%), adjusted EBITDA per share of 0.14 US cents (367%). Adjusted net debt was US$35.2m, a reduction of -17%, implying net debt to pro forma adjusted EBITDA of 1.4x, compared to 16.2x last year. Pro Forma results represent the 'performance-would-be' if Titan acquisition was occurred on 1 January 2017. The Group strengthened its liquidity position now totaling US$75.4m; comprised of US$29.5m cash and near cash equivalent (US$4.6m cash plus US$24.9m AIM offering equity placing receivable) and US$46m undrawn debt facility of US$110m. On the operational front, IPO was successfully completed in February 2017 raising US$50m and the Group acquired number of producing assets to its portfolio. As mentioned above, the Group completed reverse takeover and readmitted on the London Stock Exchange through the "transformational" acquisition of certain gas and oil assets of Titan for US$84.2m in June 2017. The acquisition was funded by proceeds from further placing (US$35m) and debt facility (US$64m). DGO's CEO, Rusty Hutson, commented "The DGO team has been incredibly active and highly focused in 1H17, delivering on a number of important corporate and strategic objectives for the benefit of our shareholders. Collectively, these 1H17 acquisitions more than doubled our high-quality, long-life and low-decline asset base, while significantly enhancing DGO's production base and operating cash flows. DGO enters 2H17 owning a portfolio capable of producing a net 11,000 boepd of highly predictable and profitable volumes of gas and oil, which places DGO amongst the largest producers on AIM, and underpins our stable business model". The Group declared an interim dividend of 1.99 US cents per share (H1 FY2016: N/A), to be paid on 20 December 2017.

Our View: Diversified Gas & Oil announced promising results for the H1 FY2017, having ambitiously significantly expanded its operational base through series of acquisitions since quoting on London's AIM. In that respect, the Board has delivered on strategic, corporate and operational objectives defined at the time of its IPO back in February. The Group paid its maiden dividend of 1.99 US cents per share (US$2.9m) on 31 July 2017, becoming one of only two AIM companies in the Oil & Gas Production sector that offers a dividend to its shareholders. This has now been followed with yesterday's a declaration of interim dividend, also of 1.99 US cents per share, as a clear demonstration of it's continuing confidence and fulfillment of promises to investors. Following series of acquisitions (including Titan), the Group now has gross oil & gas production of c.18,300 boepd (11,000 net), coming from total gross gas production of c.104,200 mcfpd plus gross oil production of c.931 bopd. Proved Developed Producing reserves now stands at c.59.4mmboe. The pro forma results for the Titan demonstrates the scale of the acquisition DGO has completed, significantly increase its asset base, production base and operating cash flows. The Board has confirmed that the acquisition will be immediately accretive to EBITDA. The performance in the second half for the enlarged Group is expected to improve further as various operational synergies from such acquisition will come through, while the Group's field management team works to enhance operational techniques of the newly acquired assets. The management has a proven track record of improving the operating cost, which is already demonstrated by the reduction of operating expenses by 6.4% to US$7.73 per boe against US$8.26 per boe as reported in its readmission document for the last three months of 2016. Looking ahead, the management confidently stated that the H2 "promises to represent a step-change in DGO's financial and operational profile" while noting that with its strengthened balance sheet, the Group is well resourced and will continue to screen a pipeline of "complementary and value accretive opportunities". After appreciation in share price yesterday, it is now valued at FY2017E and FY2018E P/E multiple of 44.4x and 23.3x, along with 4.1% and 7.1%, respectively. Any further acquisition that meets the Group's criteria is expected to significantly reward shareholders in the form of dividend income. The Group has a track record of generating profitability in a low commodity price environment, currently being spoiled of choice as the large independent Oil & Gas company are keen to offload the conventional assets to a capable operator who can maintain production so that it can retain the licenses to the unconventional shale reservoirs. Should the oil and gas prices rise (or attractive M&A opportunities cease), the Group also has the option of switching to infill drilling in order to drive organic growth within the diverse portfolio that it has acquired. Given the clear demonstration of DGO's management abilities, the shares still appear far too cheap based on both on peer group and DCF assessments. The visibility provided by DGO's operations makes the shares suitable for both income and growth investors. Beaufort reiterate its Speculative Buy rating on the Share with a price target of 95p per share.

Important Risk Warnings and Disclaimers 

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