Appendix 1: Appalachian Basin gas producer
DGO operates within the Appalachian Basin, onshore in the northeast US. The basin covers an area of c 120m acres, underlying ten states, and has been a major producer of oil and gas from conventional vertical wells since the late 19th century. However, it has only come to prominence following the shale gas reserves discovery in 2009, known as the Marcellus Shale. Since then, the primary target of the Appalachian for most oil and gas companies has been the horizontal drilling of the Marcellus and Utica shale formations. DGO’s main focus remains on conventional production from vertical wells.
Exhibit 33: Appalachian Basin
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Exhibit 34: DGO assets (June 2018)
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Exhibit 33: Appalachian Basin
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Exhibit 34: DGO assets (June 2018)
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The depositions for the Appalachian Basin are the erosional sediments from the once Acadian Mountains into the lower basin. The basin was limited to the west by an uplift in rock formation from the Late Ordovician and through the Devonian period known as the Cincinnati Arch. As the mountains eroded, the sediment was deposited in the basin with alternating layers of carbonates, limestones, sandstone, siltstone and shale intervals. As a result of these geological events, the Appalachian Basin is very thin to the west and very thick to the south and east, varying from 1,500ft to 8,000ft thickness.
DGO’s conventional wells, which comprise the vast majority of its current portfolio, are at shallow depths ranging from 2,200ft to 6,000ft (averaging c 4,000ft), with current production coming from the Devonian and Silurian ages. In Ohio, producing formations include the Berea, Bradford, Gants, Gordon, Rose Run and several other sands; however, the majority of the state production comes from the Clinton Sand. It is believed the Clinton Sand was formed as a nearshore deposit in the Silurian time. Its average depth is approximately 5,200ft, with depths ranging from 3,500ft to 6,000ft and a thickness of 150ft to 200ft with net productive pays ranging from 10ft to 100ft. The majority of production in Pennsylvania and West Virginia is from Devonian and Mississippian formations. In Pennsylvania, the major productive formations include the Balltown, Bayar, Bradford, Elk, Fifth, Sheffield Speechley, Tiona and Warren, and in West Virginia include the Alexander, Balltown, Benson, Big Injun, Big Lime, Elk, Fifth, Gordon, Riley and Warren. In general, the thickness for these reservoirs ranges from 5ft to 25ft for any individual zone, with a cumulative net sand thickness ranging from 40ft to 100ft.
The Marcellus Shale is a Devonian age formation, but due to its low porosity and extremely low permeability, has not been considered a major drilling target until 2009. Vertical wells in the Marcellus produce low volumes over a long life. Since 2009, through horizontal drilling the Marcellus has received a great deal of attention for its extremely high production rates, large estimated ultimate recovery volumes, and the statistical repeatability of the producing wells. Very large hydraulic fracture treatments are needed to make these commercial.
Drilling and completion operations are relatively straightforward with a low risk, due to the geology and extensive mapping of the formations, and consequently low cost with wells costing approximately $200,000. The producing wells are mature and expected to produce for 40–50 years with low-decline rates, averaging 3–5% per year with a low water content. Several of these wells are completed in multiple formations and production is commingled in the wellbore, therefore there is a potential upside for most of these wells because they may have additional productive formations up-hole from the existing producing formations and may allow for future completion opportunities and revenues.
Exhibit 35: Well Hatfield 2 type curve
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Midstream assets acquired
The EQT acquisition includes a gathering and compression system consisting of approximately 6,400 miles of pipeline and 59 compression stations in Kentucky, Virginia and West Virginia. These pipelines gather gas from EQT assets along with third-party gas from different operators in the region and deliver the aggregated volumes to Langley, Kentucky. Third-party access to EQT midstream facilities has been generating stable revenues of approximately $9m a year. Approximately 100mmcfd of gas from EQT assets is exported to Langley for NGLs processing. Once the NGLs are separated from the gas stream, the dry gas can be exported to multiple interconnections through the Big Sandy pipeline maximising its pricing and value. The value of mid-stream assets in our valuation is reflected in the netback DGO receives for its gas sales, which would otherwise be higher if they were reliant on third-party infrastructure.
Exhibit 36: Financial summary
US$m |
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2016 |
2017 |
2018e |
2019e |
2020e |
Year-end December |
|
|
|
|
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
PROFIT & LOSS |
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|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
17.1 |
41.8 |
215.2 |
370.8 |
360.4 |
Cost of sales |
|
|
|
|
(15.3) |
(27.9) |
(97.6) |
(151.7) |
(145.4) |
Gross profit |
|
|
|
|
|
1.7 |
13.9 |
117.5 |
219.1 |
215.1 |
General & admin |
|
|
|
|
(2.8) |
(8.9) |
(14.2) |
(23.9) |
(23.0) |
EBITDA |
|
|
|
|
|
26.5 |
23.2 |
113.8 |
212.7 |
208.9 |
Depreciation |
|
|
|
|
(4.0) |
(7.0) |
(10.9) |
(17.9) |
(17.2) |
Operating Profit (before amort. and except.) |
|
|
|
22.5 |
16.2 |
102.9 |
194.8 |
191.6 |
Intangible amortisation |
|
|
|
- |
- |
- |
- |
- |
Exceptionals |
|
|
|
|
- |
- |
- |
- |
- |
Other |
|
|
|
|
|
- |
- |
- |
- |
- |
EBIT |
|
|
|
|
|
22.5 |
16.2 |
102.9 |
194.8 |
191.6 |
Net interest |
|
|
|
|
10.1 |
(11.5) |
(32.4) |
(44.0) |
(36.5) |
Profit Before Tax (norm) |
|
|
|
|
32.5 |
4.7 |
70.5 |
150.8 |
155.2 |
Profit before tax (FRS 3) |
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32.5 |
4.7 |
70.5 |
150.8 |
155.2 |
Tax |
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|
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(14.8) |
4.1 |
-* |
-* |
-* |
Profit After Tax (norm) |
|
|
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32.5 |
9.2 |
70.5 |
150.8 |
155.2 |
Profit after tax (FRS 3) |
|
|
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32.5 |
8.9 |
70.5 |
150.8 |
155.2 |
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Average number of shares outstanding (m) |
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42.0 |
120.1 |
416.4 |
506.8 |
506.8 |
EPS - normalised (c) |
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44.2 |
7.7 |
16.9 |
29.8 |
30.6 |
EPS - normalised fully diluted (c) |
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34.3 |
5.6 |
12.3 |
21.6 |
22.2 |
EPS - (IFRS) (c) |
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42.1 |
7.4 |
16.9 |
29.8 |
30.6 |
Dividend per share (c) |
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|
- |
4.0 |
8.0 |
11.2 |
11.2 |
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Gross margin (%) |
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10.2 |
33.2 |
54.6 |
59.1 |
59.7 |
EBITDA margin (%) |
|
|
|
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155.0 |
55.5 |
52.9 |
57.4 |
57.9 |
Operating margin (before GW and except.) (%) |
|
131.4 |
38.8 |
47.8 |
52.5 |
53.2 |
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BALANCE SHEET |
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Non-current assets |
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81.1 |
198.3 |
1,090.3 |
1,088.7 |
1,087.2 |
Intangible assets |
|
|
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76.8 |
190.4 |
1,082.3 |
1,080.7 |
1,079.2 |
Tangible assets |
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3.3 |
6.9 |
6.9 |
6.9 |
6.9 |
Investments |
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1.0 |
1.0 |
1.0 |
1.0 |
1.0 |
Current assets |
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4.7 |
30.3 |
65.2 |
65.2 |
65.2 |
Stocks |
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|
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- |
- |
0.0 |
0.0 |
0.0 |
Debtors |
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|
|
|
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3.1 |
13.9 |
13.9 |
13.9 |
13.9 |
Cash |
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0.2 |
15.2 |
50.0 |
50.0 |
50.0 |
Other/ restricted cash |
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|
|
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1.4 |
1.3 |
1.3 |
1.3 |
1.3 |
Current liabilities |
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(38.5) |
(15.3) |
(15.3) |
(15.3) |
(15.3) |
Creditors |
|
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(11.3) |
(15.0) |
(15.0) |
(15.0) |
(15.0) |
Short term borrowings |
|
|
|
|
(27.2) |
(0.4) |
(0.4) |
(0.4) |
(0.4) |
Long term liabilities |
|
|
|
|
(38.2) |
(123.1) |
(593.6) |
(498.0) |
(398.1) |
Long term borrowings |
|
|
|
|
(10.1) |
(70.6) |
(403.1) |
(290.2) |
(171.2) |
Other long-term liabilities (inc. decomm.) |
|
|
|
(28.1) |
(52.5) |
(190.6) |
(207.9) |
(226.9) |
Net assets |
|
|
|
|
|
9.2 |
90.2 |
546.5 |
640.5 |
738.9 |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
|
|
|
|
Operating cash flow |
|
|
|
|
5.1 |
6.9 |
97.9 |
186.0 |
191.4 |
Capex inc acquisitions |
|
|
|
|
(9.2) |
(93.1) |
(781.8) |
(16.3) |
(15.7) |
Other |
|
|
|
|
|
0.1 |
- |
- |
- |
- |
Equity issued |
|
|
|
|
- |
77.0 |
420.0 |
- |
- |
Dividends |
|
|
|
|
|
(1.0) |
(5.8) |
(33.7) |
(56.8) |
(56.8) |
Net cash flow |
|
|
|
|
(4.9) |
(15.0) |
(297.6) |
112.9 |
119.0 |
Opening net debt/(cash) |
|
|
|
|
42.8 |
37.1 |
55.8 |
353.4 |
240.5 |
HP finance leases initiated |
|
|
|
- |
- |
- |
- |
- |
Other |
|
|
|
|
|
10.7 |
(3.8) |
- |
- |
- |
Closing net debt/(cash) |
|
|
|
|
37.1 |
55.8 |
353.4 |
240.5 |
121.6 |
Source: Diversified Gas & Oil accounts, Edison Investment Research. Note: *Company indication – net operating losses to shelter cash tax through to 2020.
Contact details |
Revenue by geography |
Diversified Gas & Oil 1100 Corporate Drive Birmingham, Alabama 35242 United States 1-205-408-0909 www.diversifiedgasandoil.com/ |
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Contact details |
Diversified Gas & Oil 1100 Corporate Drive Birmingham, Alabama 35242 United States 1-205-408-0909 www.diversifiedgasandoil.com/ |
Revenue by geography |
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Board members |
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Non-executive chairman: Robert Marshall Post |
Chief executive officer: Robert ‘Rusty’ Russell Hutson, Jr |
Mr Post has been the non-executive chairman since 2017. He has more than 20 years’ experience in the industry. Mr Post has a BS degree in accounting from Jacksonville State University, Alabama. |
Founder and CEO, Rusty Hutson Jr is the fourth generation in his family to immerse himself in the oil and gas industry. He graduated from Fairmont State College (WV) with a degree in accounting and earned his CPA License (Ohio). Prior to founding DGO in 2001, Rusty spent 13 years steadily progressing into multiple leadership roles at well-known banking institutions such as Bank One and Compass Bank. His final years in the banking industry were spent as CFO of Compass Financial Services. |
Chief operating officer and finance director: Bradley Grafton Gray |
Senior independent non-executive director: David Edward Johnson |
Prior to joining the company in 2016, Mr Gray worked in the petroleum distribution industry and held Executive Vice President and CFO positions. Mr Gray has a BS degree in accounting from the University of Alabama and is a licensed CPA |
Mr Johnson has enjoyed a long and successful career in the investment sector and is a non-executive director of AIM-quoted Bilby, a holding company providing a platform for strategic acquisitions in the gas heating and general building services industries. |
Independent non-executive director: Martin Keith Thomas |
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Martin Thomas is a partner in the corporate team of the law firm Wedlake Bell LLP in London. During his legal career of 30 years, Martin has also held senior management positions including seven years as the European managing partner of a global law firm in the US. |
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Principal shareholders |
(%) |
Sand Grove Capital Management |
8.88 |
Premier Asset Management |
6.86 |
BlackRock |
5.50 |
Miton Group |
5.50 |
Man Group |
4.14 |
Hutson, Robert Russell |
3.95 |
Post, Robert |
3.95 |
Pendal Group |
3.46 |
Standard Life Aberdeen |
2.84 |
Banco Santander |
2.64 |
|
|
|
Companies named in this report |
Antero Resources, Cabot Oil & Gas, Chesapeake, Devon Energy, EQT, Range Resources, Southwestern Energy, XTO |
|
Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com DISCLAIMER Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Diversified Gas & Oil and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. 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Sydney +61 (0)2 8249 8342 Level 4, Office 1205 95 Pitt Street, Sydney NSW 2000, Australia |
Frankfurt +49 (0)69 78 8076 960 Schumannstrasse 34b 60325 Frankfurt Germany |
London +44 (0)20 3077 5700 280 High Holborn London, WC1V 7EE United Kingdom |
New York +1 646 653 7026 295 Madison Avenue, 18th Floor 10017, New York US |
Sydney +61 (0)2 8249 8342 Level 4, Office 1205 95 Pitt Street, Sydney NSW 2000, Australia |
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Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com DISCLAIMER Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Diversified Gas & Oil and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent. |
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New York +1 646 653 7026 295 Madison Avenue, 18th Floor 10017, New York US |
Sydney +61 (0)2 8249 8342 Level 4, Office 1205 95 Pitt Street, Sydney NSW 2000, Australia |
Frankfurt +49 (0)69 78 8076 960 Schumannstrasse 34b 60325 Frankfurt Germany |
London +44 (0)20 3077 5700 280 High Holborn London, WC1V 7EE United Kingdom |
New York +1 646 653 7026 295 Madison Avenue, 18th Floor 10017, New York US |
Sydney +61 (0)2 8249 8342 Level 4, Office 1205 95 Pitt Street, Sydney NSW 2000, Australia |
|