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Diversified Gas & Oil PLC

Diversified Gas & Oil to become buyer of choice for Appalachian shale assets

Snapshot

Production now at 90,000 barrels per day equivalent

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Quick facts: Diversified Gas & Oil PLC

Price: £1.14

Market: AIM
Market Cap: £748.85 m
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  • Diversified Gas & Oil PLC (LON:DGOC) is not focused on single big risk, big reward drilling projects

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

  • The wells are relatively simple, mature and located in developed regions in the US 

  • No one well is prolific and all are some way down the decline curve, albeit they are still said to have long operating lifespans

  • Production now at 90,000 barrels per day equivalent

  • Prospective dividend yield more than 10% on broker Mirabaud's forecasts

 

How is it doing?

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 credit facility.

HG Energy deal

April saw the latest deal off the rank as DGOC completed a US$400mln acquisition of assets from HG Energy II Appalacia LLC, delivering some 107 producing wells to the company’s portfolio.

That transaction grows daily production by around 30% to over 90,000 barrels oil equivalent per day.

The deal was paid for via a draw-down of existing financing facilities and a placing of 151.5mln new shares at 117p each to raise £170.5mln (US$225mln) net.

HG brought 21,000 barrels daily of net production (100% gas) and US$96m of annual EBITDA (underlying profit), lifting the group's EBITDA run-rate to US$343mln.

 

What the boss said: Rusty Hutson, chief executive

"This is yet another transformative transaction consistent with our ambitious and proven growth strategy.

“With liquidity exceeding $330 million and a lower interest rate on borrowings, we can complete meaningful acquisitions without the need for additional share placings while simultaneously maintaining our commitment to low leverage with Net Debt-to-EBITDA of approximately 2x."

 

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Inflection points

In April, Diversified Gas & Oil announced a maiden share buyback scheme of up to 54.3m shares representing some 7.8% of the company’s outstanding share cap. 

The move is essentially a call on the relative merits of buying back stock versus using excess cash after dividends for further acquisitions, said broker Mirabaud. 

On the assumption that the full campaign is executed, the broker's divided forecast dividend goes up to 17.4c./shr –  from 16c/shr – implying a dividend yield of more than 10.5% at 126p. 

 

Blue sky 

Mirabaud expects more shale deals in Appalachia by DGOC.

“With the wider US shale industry increasingly focused on spending within cash flow and looking at ways to monetise non-core assets, this represents a huge opportunity set for a proven acquirer such as DGOC.”

Mirabaud adds that DGOC has no interest in retaining the undeveloped shale rights that sit amongst the producing wells and can establish itself as the “buyer of choice” among companies seeking to shed mature shale assets to raise drilling funds.

At 126p, the company is valued at £850mln.

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