Diversified Gas & Oil PLC – Commodity price volatility causing significant uncertainties.

Diversified Gas & Oil PLC (LON: DGOC) is a FTSE 250-listed Company, which owns and operates natural gas and oil production assets across the Appalachian Basin (hydrocarbon producing region in the United States).

Investment Rationale – Sell at GBX 105.00

• From trading multiples perspective (EV/Sales, Price/Earnings, Price/Book, and Price/Cash Flow), the stock seems overvalued as compared to the Energy industry.
• From a technical perspective, 14-Day RSI (51.28) and 20-Day SMA (105.70), reflecting a downward trend.
• The Covid-19 pandemic continued to create material uncertainties for the trading environment.
• Over the past two years, stock has given a negative return of ~9.65% while the benchmark index (FTSE 250) has only fallen by ~4.36%.
• Over the past four years, the gross margin has remained below the industry median. In H1 FY20, DGOC’s gross margin was 16.30%.

Risk Assessment

• US gas market continues to operate in a difficult environment due to abundant supply and low gas prices.
• Moreover, any failure to generate substantial free cash flow can affect the business prospects of the Company.
• Besides the liquidity risk, the Company operations are subject to regulatory and environmental risk. The Company operates in multiple geographies, and profits can be impacted negatively due to foreign exchange rate fluctuations.

Recent News

5 October 2020: DGOC signed a definitive participation agreement with funds managed by Oaktree Capital Management, L.P. to identify future proved developed producing acquisition opportunities.

Interim Results (for the six months ended 30 June 2020, as on 10 August 2020)

(Source: Company Website)

• During H1 FY20, Net Income declined by 71% year-on-year.
• The legacy asset maintained ~70 MBoepd for the eighth consecutive year.
• The interim dividend was stood at US$0.0375 per share, representing 7% increase against Q1 FY20.
• As of 30 June 2020, the Company had liquidity of US$220 million, with Net debt to Adjusted EBITDA of 2.2x.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion – Take Profits Off the Table

The lingering period low commodity prices continued to create a challenging trading environment for natural gas and oil industry players. The Company has been striving to minimise cost and maximise production. Moreover, the performance is subject to various risk and uncertainties, such as oversupply and low gas prices in the US gas market, liquidity risk arising from the inability to meet financial obligations, and stringent environmental legislation imposing regulatory risk. Despite the current market backdrop, the stock has already yielded a ~18% price return in the last six months, and it is advisable to book profit now. Stock 52 week High and Low were GBX 113.80 and GBX 52.69, respectively.

Given the heightened level of uncertainties, we recommend a “Sell” stance on Diversified Gas & Oil  PLC at the current price of GBX 105.00 (as on 20 October 2020, before the market close at 10.55 AM GMT+1), while we look forward to reviewing the support from upcoming catalysts to reinvest.   

*All forecasted figures and Industry/Peer information have been taken from Refinitiv, Thomson Reuters.

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