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 in June was 90,200 barrels per day equivalent
It operates 12,000 miles of gas gathering and transporting pipelines across the Appalachian Basin
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.
In 2019, it acquired EdgeMarc Energy Holdings, comprising twelve Utica gas wells and related facilities, for US$48mln, plus US$1.6mln for its natural gas financial hedge portfolio.
It also purchased two separate gas gathering systems in Pennsylvania and West Virginia for a total value of US$7.7mln, gaining 1,700 miles of low-pressure wet and dry gas gathering pipelines.
In October, DGOC extended its definitive asset retirement agreement with the Commonwealth of Kentucky, adding a further five years to the term. It means that the company will address at least 50 gas and oil wells per year – by either returning them to production or plugging them.
“The deal represents another incremental step forward in defining DGOC’s long term asset retirement commitments and shows a willingness by the regulator to work proactively with the company,” said broker Mirabaud.
In September, the AIM-listed firm announced plans to move from the small caps to the premium segment of London’s main market after the publication of its full-year results for this year, to be released during the first quarter of 2020.
As part of the preparations for the main market, the company has completed a tender process to sign-up with a ‘big four’ accounting and auditing firms, for the fiscal year to end 31 December 2020.
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 of 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."
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.
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.