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Diversified Gas & Oil PLC: THE INVESTMENT CASE
INVESTMENT OVERVIEW

DGOC’s acquisitive production business is paying off faster than expected

The acquisitive oiler has told investors that financial results for 2018 will be ahead of previous expectations
oil and gas operations
INVESTMENT OVERVIEW: DGOC The Big Picture
It is producing some 70,000 boepd

Only weeks after Diversified Gas & Oil PLC (LON:DGOC) completed its latest big-money deal the company revealed that its acquisition strategy is paying off quicker than anticipated.

Having spent nearly US$1bn on parcels of wells, acreage and infrastructure the company is to end 2018 as the AIM market’s most productive oil and gas firm.

In November, the company was producing at a rate of 70,000 barrels oil equivalent per day – such a level of output would be enviable even for the junior market’s most ambitious explorers.

DGOC is far from being a ‘big bang’ explorer. It has no interest in single big risk, big reward new drilling projects.

Acquiring scale and productivity

Its business is about building a portfolio made up of thousands of already existing wells.

The wells are relatively simple, mature and located in developed regions. No one well is prolific and all are some way down the decline curve albeit they are still said to have long operating lifespans.  

Nonetheless, with well-priced deals, scale and a supportive funding framework it promises to be a profitable endeavour.

READ: DGOC says financial results will be “materially ahead” of expectations

Indeed, DGOC has given investors an early Christmas present on 3 December as it announced that financial results for 2018 would be “materially ahead of current market expectations”.

Specifically, the company highlighted the performance during October which, according to DGOC, showed successful progress with asset integration and the associated operating efficiencies.

Earnings (adjusted EBITDA) for the month of October amounted to US$23.6mln, and, the company said that earnings for the ten months to the end of October amounted to US$96.3mln.

DGOC shares rose just over 10% following the announcement to trade at 116.94p, which leaves the shares on course to finish 2018 some 30% higher than where they began the year.

A highly profitable business

"We are very pleased with the progress we are making in terms of integrating the most recently acquired assets from Core and extracting maximum value from the expanded portfolio,” said Rusty Hutson, DGOC chief executive.

“As evidenced by our financial performance for the month of October, we have a highly profitable business underpinned by a healthy financial position.

“The dynamics for natural gas pricing in our region are positive and we are benefitting from a material rise in local pricing.”

He added: “We continue to work with the relevant authorities in our States of operations to reach long-term decommissioning agreements that meet the needs of all parties."

DGOC ended November with US$216mln of available liquidity and net debt stood at US$507mln, which equated to 1.8 times annualised earnings.

In 2018, DGOC acquired assets from APC, CNX, EQT Corporation and Core Appalachia for an aggregate cost of US$938mln, supported by US$492mln of equity-based funding and a US$1bn ‘low cost’ credit facility (at the end of November, it had a US$720mln borrowing base and US$213mln of available capacity).

APC acquisition

In March, DGOC paid US$95mln to acquire 13,000 wells in Ohio, Pennsylvania, West Virginia.

The APC deal accounted for 8,800 boepd at the time of acquisition and added 49mln barrels of proved and developed reserves.

CNX assets

For another US$85mln, also in March, the company acquired 11,000 wells located in Pennsylvania and West Virginia.

It added 9,000 boepd to production and 69mln barrels of proved and developed reserves.

EQT assets

July brought the company’s biggest transaction, paying US$575bn for 11,350 wells that yielded 32,000 boepd of production at the time of the deal.

The assets are located in Kentucky, West Virginia and Virginia. And it gave the company 233mln barrels of proved and developed reserves.

Significantly, the transaction also delivered midstream assets and operations including some 6,400 miles of pipeline.

Core Appalachia

The most recent transaction came in October. DGOC paid US$183mln for 5,000 wells in Kentucky, West Virginia and Virginia.

It boosted production by 11,000 boepd and delivered another 100mln barrel in reserves and like with the EQT deal, it came with mid-stream assets too – adding an additional 4,100 miles of pipeline.

More deals to come?

There’s no shortage of producing yet maturing oil fields in North America, after all the drilling boom of past years saw unprecedented growth. 

At the same time, it is fair to say that the dynamics of the oil market and the economics of running oil operations have been changeable in the more recent times.

Peak production years are now behind many fields, and, it is unlikely that all the sector’s deal making is done.

It can’t be hard to imagine there are more maturing opportunities to plug into the DGOC model.

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Diversified Gas & Oil PLC Timeline

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