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Diversified Gas & Oil already on lookout for more big US deals

Dividends and paying them out underpin Diversfied Gas's strategy
picture of gas pipes
Production will rise to the equivalent of 11,000 barrels daily

Diversified Gas & Oil plc (LON:DGCO) joined a very small club when its published its interim numbers in September.

“DGOC is now one of only two AIM companies amongst the 90 constituent companies in the Oil & Gas Production sector that pays a dividend to its shareholders,” chief executive Rusty Hutson said.

For the record the other is Volga Gas, but given that Volga has been listed for years and DGOC only joined the junior market in February, it’s an impressive claim.

Dividends key to strategy

Hutson makes no bones that dividends and paying them out underpin everything the gas, and to a lesser extent oil, producer is doing.

In September, the group announced a 1.99c (1.56p) payout but if all goes to plan this should be just the start.

“[Our strategy] is all about cashflow and acquiring assets at compelling levels.

 “[We have] to be very disciplined in how much we pay for deals, which contributes to the bottom line and dividend policy.”

“Dividend is an absolute big part of our investment strategy.

"The type of assets means we are not a big drilling company. We buy assets at very compelling multiples and return cash to shareholders.”

WATCH: DIVERSIFIED GAS & OIL'S HUTSON: 'PRO-FORMA THE BOTTOM LINE WAS UP 1000%'

READ: Productions soars at Diversified Gas & Oil as acquisitions bed down

Numbers highlight huge expansion

Since it joined AIM, in Hutson’s owns words, DGOC has been 'very busy'.

Two sizeable acquisitions have already been completed - one in April for 1,300 wells and another ‘transformational’ deal in June for Titan Energy.

Like all of DCOG’s assets, Titan is in the Appalachian Basin, the home of the US shale industry and major fields such as Utica and Marcellus.

The cost was US$84.2mln and will add a net 6,800 barrels equivalent to DGOC’s mainly gas production stream.

According to Hutson: “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 integration of the Titan assets is progressing well and 2H17 will see a material step-change in revenue and Adjusted EBITDA as we reap the full benefit of that acquisition, the cost of which has largely been taken in the first half of the year."

Pro-forma picture

Handily, DGOC also included a pro-forma set of results for the half year, which showed adjusted underlying earnings (EBITDA) up to US$12.9mln from US$1.3mln and margins doubling to 35.6%.

Lower costs were part of the reason for the margin improvement and Hutson expects them to fall again over the remainder of 2017 as economies of scale from the Titan deal come through.

Lifting costs (extracting the gas and oil) have fallen to US$7.20 per barrel from US$8.26 a year earlier but Hutson sees them falling below US$7 per barrel in time.

More deals on the way

Once that occurs, DGOC will probably be ready for another deal and Hutson says the pace will not let up with more big acquisitions likely.

This may double production again, he says, and be in the Appalachian Basin.

“We are keen on these assets. They are mature, long life and have low decline rates. And the Appalachian Basin has a lot of these.”

At 73.5p, DGOC is valued at £109mln.

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