Diversified Gas & Oil Plc

Diversified Gas & Oil Plc (LON: DGOC) is an Oil & Gas producers’ company in the Appalachian Basin in the United States. The company is a well-established operator and owns oil wells and is producing natural gas.

Operations Update
On 27th January 2020, Diversified Gas & Oil released an update for operations and trading. The company’s trading stood in line with the market estimates. The total production in Q4 FY2019 stood at 96.3 Mboepd versus 91.1 Mboepd in Q3 FY2019, reflecting an increase of 5.7 per cent. The production from Legacy Assets went up by 2.3 per cent to 70.8 Mboepd from 69.2 Mboepd in the third quarter of the financial year 2019.

Diversified Gas & Oil hedged 85 per cent of natural gas production at an average price of around USD 2.70 at the beginning of FY2020. The hedging demonstrates the company’s ability to generate the dividend and cash flow and reduction in the net debt. The company will announce its full-year results on 9th March 2020, Monday.

Share Price Performance

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

Diversified Gas & Oil Plc shares were trading at GBX 90.67 at the time of writing before the market close (at 2:21 PM GMT) on 21^st February 2020 and up by 0.74% versus the previous day closing price. Stock's 52 weeks High is GBX 135.00 and Low is GBX 84.00. The shares of the company have delivered a positive return of 3.55 per cent in the last week.

Valuation Methodology 
 


*Peers: Premier Oil Plc, Volga Gas Plc, Igas Energy Plc and President Energy Plc.
Growth Catalysts
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. The group 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 sector is exposed to political, financial and operational risks, each of which has the potential to impact company/industry performance significantly. The company has shown robust financial performance in the first half of the fiscal 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. 

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 method, we have given a “SPECULATIVE BUY” recommendation at the current price of GBX 89.60 (as on 21st February 2020, before the market close at 12:10 PM GMT) with single-digit upside potential based on 6.94x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.).
 
*All forecasted figures and peers have been taken from Thomson Reuters. Currency exchange rate taken for 1 USD = 0.77324 GBP.

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