Business Overview
Diversified Gas & Oil Plc (LON: DGOC), an Alabama, USA-headquartered, AIM-listed owner and operator of producing natural gas & oil assets, is one of the largest independent conventional oil producers in the prolific Appalachian Basin. The operations of the group are focused on the Appalachian Basin since its inception in 2001, where the group produces natural gas & oil wells and has grown to become an established independent owner and operator. The operations of the group are densely spread throughout the neighbouring states of Maryland, Pennsylvania, Ohio, West Virginia, Virginia, Kentucky, and Tennessee. The group focuses on stabilising production from a significant midstream operation and a low-risk, long-life portfolio of wells and seeks to acquire and enhance its gas and oil-producing assets in the Appalachian Basin, which are located in politically, and geologically at low-risk gas and oil basin. The wells of the group require low ongoing capital expenditures and benefit from simple and low-cost maintenance operations as they produce from shallow-depth, vertical wells, leading to a high-quality and reliable stream of free cash flow.

David E. Johnson is the Non-Executive Chairman of the group. Rusty Hutson, Jr. established Diversified Gas & Oil in 2001 and is currently the Chief Executive Officer of the group. Brad Gray joined the group in October 2016 and is the Chief Operating Officer and Executive Vice President of the group.

Key Statistics




Top Shareholders 
 
 

Recent News

On 19th December 2019, Diversified Gas & Oil Plc announced the selection of Melanie Little. Ms Little will join the group as an additional independent director non-executive with immediate effect.

On 14th November 2019, Diversified Gas & Oil Plc announced the completion of securitised financing arrangement. The securitised financing was of USD 200 million with a coupon rate of 5 per cent with an amortising note for 10 years and a final maturity of 17 years.

Trading and Operational Updates - Q3 2019

On 14th November 2019, Diversified Gas & Oil released trading and operations update for Q3 of the financial year 2019. The company confirmed the trading at current levels is in line with the market estimates. The company’s net production increased by 10 per cent to 91.1 Mboepd in Q3 FY2019 versus Q2 FY2019 data. The company’s net production in September 2019 is more than 94.4 Mboepd, reflecting an increase of 5 per cent versus June 2019 data. Driven by Smarter Well Management Programme of DGO, the company’s Legacy asset delivered production of 70.6 Mboepd. The company has been working hard to integrate recently acquired two separate packages of midstream assets and EdgeMarc Energy wells. In November 2019, the company sold EdgeMarc PUD and undeveloped land for USD10 million.

The adjusted EBITDA in Q3 FY2019 was reported at USD 64 million with an adjusted EBITDA margin of 51 per cent, reflecting an increase of 28 per cent versus Q3 FY2018 data. The net debt/adjusted EBITDA stood at 2.4x, including midstream asset and EdgeMarc acquisitions. The company distributed USD 51 million to shareholders in Q3 FY2019, which include USD 23 million and USD 28 million in dividends and share buybacks, respectively. The company’s current dividend yield is over 10 per cent for the period. The company’s base LOE (Lease Operating Expense) declined by 10 per cent to $0.54/Mcfe or $3.22/Boe versus Q2 FY2019 data. The recurring administrative expenses declined by 7 per cent to $0.20/Mcfe or $1.23/Boe versus Q2 FY2019 data. Initiatives taken by the company in 2020, resulted in higher revenues with lower costs. It resulted in an annual benefit of around USD 13.9 million for the group.

The company also announced the selection of Sandy Stash as an Independent Director Non-Executive, which will enhance the governance structure of the company. After the publication of FY2019 results, the company is looking to move into the Premium Segment of the London Stock Exchange. The movement is in the subject to approval by the UK Financial Conduct Authority.

Financial Highlights – H1 Financial Year 2019 (30^th June 2019, USD, thousand)



 (Source: Interim Report, Company Website)
 
In the first half of the financial year 2019, as the HG Energy assets acquired in the first half of 2019 and EQT and Core assets acquired in the second half of 2018 were fully integrated during the period, the company ended the period with net production of approximately 13,701 MBOE versus 3,499 MBOE in H1 FY2018. Total natural gas, NGL and oil revenue rose by 294 per cent to $223.3 million, while the acquisitive growth strategy positively impacted the production and increased midstream revenue, which helped in increasing total revenue by 309.2 per cent from the $58.0 million reported for H1 2018 to $237.5 million in H1 FY2019.

Gross profit for the period grew to $96.98 million against $20.23 million recorded last year, while operating profit increased to $107.7 million versus $36.1 million in the prior year. The group reported operating income per BOE of $9.58, up by 46.5 per cent over the year, with an operating margin of 53.6 per cent.

 Income before taxation grew by 293 per cent over the year from $21.4 million in H1 FY2018 to $84.0 million in H1 FY2019, while income after taxation available to ordinary shareholders was $62.1 million, corresponding to statutory earnings (basic and diluted) of $0.10 in H1 2019 against $0.09 per ordinary share in H1 2018. The adjusted EBITDA for H1 2019 reported an increase of 474 per cent over $22.87 million in H1 2018 to $131.3 million, while adjusted EBITDA per diluted ordinary share grew by 152 per cent to $0.22. For the second quarter, the company declared a dividend of 3.5 cents per share (2Q18: 2.8 cents per share), in addition to the dividend payment of 3.42 cents per share in the first quarter.

Key Performance Indicators

In the financial year 2018, the company increased its production by 521 per cent to 41.0 MBOE/day from 6.6 MBOE/day reported in the prior year, while proved-developed-producing reserves rose by 762 per cent to 474 MBOE. The company also aims to grow through accretive acquisitions, which was reported at $938 million, up by 957 per cent, while acres held by production grew by 388 per cent to 7.8 MM Acres. Unit lease operating costs reduced by 31 per cent to $4.83 in FY2018 from $7.02 in FY2017, while unit recurring G&A was down by 34 per cent to $1.34.

Financial Ratios

 

The reported gross margin in H1 FY2019 increased by 5.9 per cent to 40.80 per cent against 34.90 per cent reported last year for the same period. The reported EBITDA margin of 52.2 per cent for the H1 FY2019 stood lower than the industry median of 54.8 per cent. The reported operating margin in H1 FY2019 declined by 2.5 per cent to 45.4 per cent from 47.9 per cent reported last year for the same period.
 
The reported Pretax margin of 35.4 per cent for the H1 FY2019 stood higher than the industry median of 16.1 per cent. Net margin reported was 26.2 per cent for the first half of the financial year 2019, reflecting a decline of 14.4 per cent when comparedwith the last year data for the same period.
 
Return on equity for the first half of the Financial year 2019 stood at 7.2 per cent, which was significantly higher than the industry median of 4.7 per cent. On the liquidity front, Diversified Gas & Oil Plc’s current ratio of 2.28 was higher than the industry median of 1.53, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the Diversified Gas & Oil Plc’s was 0.63x, which was almost flat as compared to the industry median of 0.62x.

Share Price Performance


Daily Chart as of  January 21^st, 2020, before the market close (Source: Thomson Reuters)

Diversified Gas & Oil Plc shares were trading at GBX 102.00 at the time of writing before the market close (at 10:35 AM GMT) on 21^st January 2020 and were down by 0.97% versus the previous day closing price. Stock's 52 weeks High and Low are GBX 135.00/GBX 94.32. Stock’s average traded volume for 5 days was 751,406.80; 30 days – 930,814.87 and 90 days – 789,030.18. The traded (average) volume for five days was down by 19.27 per cent versus 30 days traded (average) volume. The outstanding market capitalisation was around £672.69 million, with a dividend yield of 10.31 per cent.

Valuation Methodology

Method 1: Price/Earnings Multiple Approach (NTM)



To compare Diversified Gas & Oil Plc with its peers, Price/Earnings multiple has been used. The peers are Premier Oil Plc (NTM Price/Earnings was 13.69), Volga Gas Plc (NTM Price/Earnings was 9.11), Igas Energy Plc (NTM Price/Earnings was 7.79), Victoria Oil & Gas Plc (NTM Price/Earnings was 6.51), and President Energy Plc (NTM Price/Earnings was 4.80). The mean of Price/Earnings (NTM) of the company’s peers was 8.38x (approx.).

Method 2: EV/Sales Multiple Approach (NTM) 
 


To compare Diversified Gas & Oil Plc with its peers, EV/Sales multiple has been used. The peers are Parkmead Group Plc (NTM EV/Sales was 4.59), Nostrum Oil & Gas Plc (NTM EV/Sales was 3.09), Premier Oil Plc (NTM EV/Sales was 2.90), Hurricane Energy Plc (NTM EV/Sales was 2.39) and Igas Energy Plc (NTM EV/Sales was 1.78). The mean of EV/Sales (NTM) of the company’s peers was 2.95x (approx.)

Risks Assessment and Growth Prospects

The prices of various commodities which the company markets and produces can be subject to significant fluctuations, and as the prices are affected by global supply and demand, the company does not have any influence on the market prices, which can lead to a significant impact on the financials and affect the business assumptions. Furthermore, the sector is exposed to political, financial and operational risks, each of which has the potential to impact company/industry performance significantly. However, the company aims to provide visibility and security on cash flow and protect the downside by engaging in hedging, at the cost of potential upside, which protects it from any adverse fluctuation in market prices. Even in an environment of lower commodity pricing, the company has been able to generate strong free cash flow as it seeks to manage risk through long-term agreements and hedging. By lowering costs through deploying new extraction technology and deploying rigorous field management programs, the company seeks to maximize output from its portfolio in an efficient way.

Conclusion

The company has shown robust financial performance in the first half of the financial year 2019. There had been substantially increased profit levels and has strong momentum in the market and delivered good top-line growth. The new acquisitions made by the company helped them to capture more customers, increased their capabilities and expansion in other markets as well. The securitisation of USD200 million has enhanced the company’s debt structure.

Over the course of 4 years (FY14 - FY18), the company’s revenue surged from $7.4 million in FY14 to $289.80 million in FY18. Compounded annual growth rate (CAGR) stood at 150.16 per cent.

Based on decent prospects and support from the valuation as done using the above two methods, we have given a “SPECULATIVE BUY” recommendation at the current price of GBX 101.60 (as on 21^st January 2020, before the market close at 10:15 AM GMT) with high single-digit upside potential based on 8.38x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.) and 2.95x NTM EV/Sales (approx.) on FY19E sales (approx.).
*All forecasted figures and peers have been taken from Thomson Reuters. Currency exchange rate taken for 1 USD = 0.76673 GBP

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