Diversified Gas & Oil — Transaction first thoughts and metrics

Diversified Gas & Oil — Transaction first thoughts and metrics

Diversified Gas & Oil (DGO) has announced the acquisition of 107 gross producing wells in Appalachia with combined 2018 net production of 21kboed (100% gas) and proven developed producing (PDP) reserves of 92mmboe for a total purchase price of $400m. This consideration is to be funded through $234m of new equity and drawdown under DGO’s existing RBL facility. Management expects the transaction to be accretive to FCF/share (+19%), with the potential to increase dividend payments to an annualised $0.16/share. Management estimates that leverage would remain below a target range of 2–2.5x at 1.8x net debt to pro forma FY18 adjusted EBITDA. New shares are to be admitted for trading on 18 April 2019. Our forecasts and valuation are under review (see our last published note).

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Diversified Gas & Oil

Transaction first thoughts and metrics

Transaction overview

Oil & gas

28 March 2019

Price

117p

Market cap

£635m

US$/£ 1.3

Net debt ($m) at 28 February 2019

451

Shares in issue

542.7m

Free float

92%

Code

DGOC

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(4.7)

0.0

26.9

Rel (local)

(5.2)

(7.0)

26.7

52-week high/low

129p

81p

Business description

Diversified Gas & Oil is a conventional natural gas and oil producer with a main focus in the US onshore. The company possesses long-life, low operational cost, mature producing assets with slow decline profiles in the Appalachian region, in the states of Pennsylvania, West Virginia and Ohio.

Next events

Q1 results

Q219

Analysts

Sanjeev Bahl

+44 (0)20 3077 5742

Carlos Gomes

+44 (0)20 3077 5700

Elaine Reynolds

+44 (0)20 3077 5713

Diversified Gas & Oil is a research client of Edison Investment Research Limited

Diversified Gas & Oil (DGO) has announced the acquisition of 107 gross producing wells in Appalachia with combined 2018 net production of 21kboed (100% gas) and proven developed producing (PDP) reserves of 92mmboe for a total purchase price of $400m. This consideration is to be funded through $234m of new equity and drawdown under DGO’s existing RBL facility. Management expects the transaction to be accretive to FCF/share (+19%), with the potential to increase dividend payments to an annualised $0.16/share. Management estimates that leverage would remain below a target range of 2–2.5x at 1.8x net debt to pro forma FY18 adjusted EBITDA. New shares are to be admitted for trading on 18 April 2019. Our forecasts and valuation are under review (see our last published note).

Year-end

Revenue ($m)

Adjusted EBITDA* ($m)

PBT*
($m)

Net cash/
(debt) ($m)

Dividend yield** (%)

Capex
($m)

12/17

41.8

17.5

(1.5)

(55.8)

3.5

(93.1)

12/18

289.8

146.2

71.0

(481.4)

7.1

(766.8)

12/19e

449.0

240.6

128.1

(380.7)

8.8

(32.3)

12/20e

418.8

219.0

113.5

(293.1)

8.8

(23.5)

Note: *EBITDA and PBT normalised for exceptional items including acquisition activity. **Dividend yield based on dividend declared for the period.

Deal merits and synergies

The acquired asset base of 107 wells includes an inventory with an average well age of five years and average production per well of 1.2mmscfd. Given the limited number of wells, associated plugging and abandonment (P&A) liability is small at an NPV10 of c $300k. Management has not quantified potential synergies with existing operations, but expects immediate benefits from the consolidation of transportation expense and elimination of redundant marketing. DGO will also benefit from seller-financed capital projects, which include two recently completed wells and upgraded compression.

Valuation metrics versus historical acquisitions

Comparing the transaction to historical acquisitions, it appears to be broadly in line with previous deals and DGO prior to acquisition at EV/flowing barrel of $19.0k/boed, but at a premium on the basis of EV/PDP reserves at $4.4/boe. This is likely to be due to the high productivity of the wells being acquired, which drives relatively low unit opex ($4.5/boe), limited associated decommissioning liability (c $300k NPV10) and favourable differentials (average $0.38/mmbtu).

Material further acquisition opportunities

DGO has published a list of 10 potential Appalachian acquisition targets, which range from packages of 150–650 wells spanning production from 50kboed to 150kboed. Post the announced acquisition, DGO expects to have c $100m of debt capacity under its existing borrowing base, which management anticipates could be expanded by a further $150m once the transaction closes. We expect further acquisitions from the prospects identified to be funded through a combination of debt and new equity.

Transaction metrics

We highlight key transaction metrics in the table below:

Exhibit 1: Key transaction metrics and multiples

Key transaction metrics

No. of wells being acquired

107

2018 net production

21kboed

PDP reserves

92mmboe

Management PDP reserve value

$462m

2018 EBITDA (acquired assets)

$96m

Standalone opex

4.49$/boe

P&A PV10%

$300k

Basis differential

$0.38/mmbtu

Transaction pricing

 

Purchase price (equity and RBL drawdown)

$400m

Effective date

Feb-19

Transaction multiples

 

EV/EBITDA FY18

4.2

EV/flowing barrel

$19.0k/boed

EV/1P

$4.4/boe

EV/management PDP reserve value

0.9

Key transaction metrics

No. of wells being acquired

2018 net production

PDP reserves

Management PDP reserve value

2018 EBITDA (acquired assets)

Standalone opex

P&A PV10%

Basis differential

Transaction pricing

Purchase price (equity and RBL drawdown)

Effective date

Transaction multiples

EV/EBITDA FY18

EV/flowing barrel

EV/1P

EV/management PDP reserve value

107

21kboed

92mmboe

$462m

$96m

4.49$/boe

$300k

$0.38/mmbtu

 

$400m

Feb-19

 

4.2

$19.0k/boed

$4.4/boe

0.9

Source: DGO, Edison Investment Research

Comparing the transaction to historical acquisitions, it appears to be broadly in line with previous deals and DGO pre-acquisition at EV/flowing barrel of $19.0k/boed, but at a premium on the basis on EV/PDP reserves at $4.4/boe. This is likely to be due to the productivity of the wells being acquired, which drives relatively low unit opex, limited associated decommissioning liability and lower differentials.

Exhibit 2: Transaction metrics versus historical DGO acquisitions and DGO pre-acquisition

Source: DGO, Edison Investment Research

Looking at the transaction versus historical acquisitions on the basis of EV/ trailing EBITDA it is priced at discount to Core at 6.4x, but at a premium to prior acquisitions made earlier in 2018 and through 2016/17.

Exhibit 3: Transaction metrics versus historical DGO acquisitions

Source: DGO, Edison Investment Research

Financial forecasts and timetable

Our forecasts on the following page are as last published and do not include the impact of the acquired assets. Please refer to our update note published on 26 March 2019 for more detail.

Key dates include a general meeting on 17 April 2019, together with the settlement and admission of new shares on 18 April 2019.

Last published financials

Exhibit 4: Financial summary

 

 

US$m

2016

2017

2018

2019e

2020e

Year-end December

 

 

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

17.1

41.8

289.8

449.0

418.8

Cost of sales

(15.3)

(28.4)

(149.8)

(244.0)

(233.8)

Gross profit

1.7

13.3

140.0

205.1

185.0

General & admin

(2.8)

(8.9)

(40.5)

(32.1)

(30.9)

Other

(0.8)

(0.4)

18.0

-

-

Exceptionals inc gain on acquisitions

24.3

37.2

177.6

-

-

Reported EBITDA

 

 

26.5

48.7

337.0

240.6

219.0

Adjusted EBITDA (non-IFRS)

 

 

4.3

17.5

146.2

240.6

219.0

Depreciation

(4.0)

(7.5)

(42.0)

(67.7)

(65.0)

Operating Profit (adjusted non-IFRS)

 

 

0.3

10.0

104.2

172.9

154.0

Reported EBIT

22.5

41.2

295.0

172.9

154.0

Net interest

10.1

(11.5)

(33.2)

(44.8)

(40.5)

Profit Before Tax (adjusted non-IFRS)

 

 

10.3

(1.5)

71.0

128.1

113.5

Profit Before Tax (reported)

 

 

32.5

29.7

261.8

128.1

113.5

Tax

(14.8)

(2.3)

(60.7)

(34.6)

(30.6)

Profit After Tax (adjusted non-IFRS)

(4.5)

(3.7)

10.3

93.5

82.8

Profit After Tax (reported)

17.7

27.5

201.1

93.5

82.8

Average Number of Shares Outstanding basic (m)

42.0

120.1

386.6

542.6

542.6

Average Number of Shares Outstanding fully diluted (m)

42.0

120.3

387.9

541.8

541.8

EPS - normalised (c)

 

 

(10.7)

(3.1)

2.7

17.2

15.3

EPS - normalised fully diluted (c)

 

 

(10.7)

(3.1)

2.7

17.3

15.3

EPS - (IFRS) (c)

 

 

42.1

22.9

52.0

17.2

15.3

Dividend per share declared (c)

-

5.4

11.2

13.6

13.6

Gross margin (%)

10.2

31.9

48.3

45.7

44.2

EBITDA margin (%)

155.0

116.6

116.3

53.6

52.3

Operating margin (before GW and except.) (%)

1.5

23.9

36.0

38.5

36.8

BALANCE SHEET

Non-current assets

 

 

81.1

223.3

1,445.4

1,410.0

1,368.5

Intangible assets

76.8

215.3

1,093.0

1,057.6

1,016.1

Tangible assets

3.3

6.9

324.8

324.8

324.8

Investments

1.0

1.0

27.7

27.7

27.7

Current assets

 

 

4.7

29.6

111.6

111.6

111.6

Stocks

-

-

-

-

-

Debtors

3.1

13.9

78.5

78.5

78.5

Cash

0.2

15.2

1.4*

1.4*

1.4*

Other/ restricted cash

1.4

0.5

31.8

31.8

31.8

Current liabilities

 

 

(38.5)

(15.3)

(64.3)

(64.3)

(64.3)

Creditors

(11.3)

(15.0)

(64.0)

(64.0)

(64.0)

Short term borrowings

(27.2)

(0.4)

(0.3)

(0.3)

(0.3)

Long term liabilities

 

 

(38.2)

(123.1)

(743.8)

(688.2)

(637.7)

Long term borrowings

(10.1)

(70.6)

(482.5)

(381.8)

(294.2)

Other long term liabilities (inc. decomm.)

(28.1)

(52.5)

(261.3)

(306.4)

(343.4)

Net assets

 

 

9.2

114.4

748.9

769.1

778.2

CASH FLOW

Operating cash flow

 

 

5.1

6.9

87.7

237.1

210.0

Capex inc acquisitions

(9.2)

(93.1)

(766.8)

(32.3)

(23.5)

Other

0.1

-

-

-

-

Equity issued

(3.2)

73.7

393.0

(30.8)

(25.1)

Dividends

(1.0)

(5.8)

(31.3)

(73.3)

(73.8)

Net cash flow

(8.2)

(18.3)

(317.4)

100.7

87.6

Opening net debt/(cash)

 

 

42.8

37.1

55.8

481.4

380.7

HP finance leases initiated

-

-

-

-

-

Other

13.9

(0.5)

(108.2)

0.0

(0.0)

Closing net debt/(cash)

 

 

37.1

55.8

481.4

380.7

293.1

Source: DGO, Edison Investment Research. Note: *Assumes DGO maintains a minimum cash balance of $1m and pays down debt.

General disclaimer and copyright

This report has been commissioned by Diversified Gas & Oil and prepared and issued by Edison, in consideration of a fee payable by Diversified Gas & Oil. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. 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.

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General disclaimer and copyright

This report has been commissioned by Diversified Gas & Oil and prepared and issued by Edison, in consideration of a fee payable by Diversified Gas & Oil. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

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United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Healthcare

Transgene — Defining data from lead assets by year-end

Key inflection points from lead assets Pexa-Vec, TG4010 and TG4001 by year-end will continue to inform the validity of Transgene’s IO strategy. Notably, a futility analysis expected mid-year for the Phase III trial with Pexa-Vec (+sorafenib) in first-line hepatocellular carcinoma (HCC) and efficacy data from the Phase II TG4010 (+nivolumab + chemotherapy) trial in first-line non-small cell lung cancer (NSCLC) will be key to driving value in 2019. Early-stage development continues with both the expansion of its Invir.IO collaboration with BioInvent and the announcement of the first product candidate (TG4050) from the company’s myvac platform (initiating clinical trials in H219). Net profit for FY18 was €8.0m, compared with a €32.3m loss in FY17, mainly as a result of the non-cash gain of €35.6m in FY18 from the allocation of Tasly shares. We value Transgene at €312m.

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