Post-acquisition valuation update

Diversified Gas & Oil 12 April 2019 Update
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Diversified Gas & Oil

Post-acquisition valuation update

Transaction update

Oil & gas

12 April 2019

Price

125p

Market cap

£678m

£0.77/US$

Net debt ($m) at 28 February 2019

453

Shares in issue
(pre new issuance)

542.7m

Free float

85%

Code

DGOC

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

11.6

5.5

54.6

Rel (local)

7.2

(1.1)

52.3

52-week high/low

130p

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 event

General meeting

17 April 2019

Analysts

Sanjeev Bahl

+44 (0)20 3077 5700

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) recently announced the acquisition of 107 gross unconventional producing wells in Pennsylvania and West Virginia with combined 2018 net production of approximately 21kboed and proven developed producing (PDP) reserves of 92mmboe. The $400m acquisition is to be funded through a combination of new equity and draw down of existing borrowing capacity. We estimate that leverage will remain below a target range of 2.0–2.5x at 1.7x FY19e net debt/adjusted EBITDA. We expect the transaction to be accretive to FCF/share for FY20 (+8%) with potential to support an increased dividend payout – management indicates there is potential for a post-acquisition annualised payment of 16.0c/share. On addition of the acquired assets, assumption of incremental group debt and new equity, our valuation rises to 166.3p/share (+2%).

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)

3.4

(93.1)

12/18

289.8

146.2

71.0

(481.4)

6.8

(766.8)

12/19e

515.4

299.9

174.8

(508.9)

9.5

(420.1)

12/20e

509.2

296.0

165.1

(394.7)

9.9

(28.7)

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

Acquired assets: Highlights and potential 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 196boed. Given the limited number and long-life nature of wells, the associated abandonment liability equates to an NPV10 of just c $300k. Management has not quantified potential synergies with existing operations, but expects immediate benefits from the consolidated assets, which are located near DGO’s legacy assets in Pennsylvania and West Virginia.

Further Appalachian acquisition opportunities

DGO published a list of 10 potential acquisition targets in the Appalachia region, which range from packages of 150–650 wells spanning production from 50kboed to 150kboed. Post the acquisition of the HG Energy assets, DGO expects to have c $300m of debt capacity under its expanded borrowing base. We expect further acquisitions from the prospects identified to be funded through a combination of debt and new equity.

Valuation: Base case increases to 168.0p/share

Edison’s base case valuation of 162.7p/share rises to 168.0p/share on inclusion of the HG Energy asset transaction, making the deal 3% accretive to our NAV. Our valuation is based on an EIA gas price forecast of $2.92/mcf in 2019 and $2.88/mcf in 2020, with a long-term gas price of $3.10/mcf (2022) and a WACC of 10%. Assuming management increases the quarterly dividend to 4.00c/share, we forecast an FY19 dividend yield of 9.5% at the current share price, which can be funded from cash flows materially below current strip for FY19e and FY20e.

HG Energy assets’ acquisition impact

On 27 March 2019, DGO announced the acquisition of 107 gross producing unconventional gas wells in Appalachia with combined 2018 net production of approximately 21kboed and PDP reserves of 92mmboe for a total purchase price of $400m, from HG Energy. The acquired assets are located in Pennsylvania (56 wells) and West Virginia (51 wells), and the consideration is to be funded through a combination of $234m of new equity (151.5m new shares at 117p/share) and a drawdown under DGO’s existing RBL facility. As at 28 February 2019, the amount drawn down by DGO was $455m from a borrowing base of $725m. Edison estimates leverage would remain below a target range of 2.0–2.5x at 1.7x net debt to FY19e adjusted EBITDA, and FY19 net debt to PDP PV10 of 28%. New shares from the equity placing are to be admitted for trading on 18 April 2019.

Exhibit 1: Key transaction metrics and multiples

Key transaction metrics

No. of wells being acquired

107

2018 net production (net revenue interest)

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

February 2019

Adjusted purchase price based on DGO expected cash flows between effective and close date

$384m

Expected close date

Early Q219

Transaction multiples

EV/EBITDA

4.2x

EV/flowing barrel

$19.0k/boed

EV/1P PDP

$4.4/boe

EV/management PDP reserve value

0.9x

Key transaction metrics

No. of wells being acquired

2018 net production (net revenue interest)

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

Adjusted purchase price based on DGO expected cash flows between effective and close date

Expected close date

Transaction multiples

EV/EBITDA

EV/flowing barrel

EV/1P PDP

EV/management PDP reserve value

107

21kboed

92mmboe

$462m

$96m

$4.49/boe

$300k

$0.38/mmBtu

$400m

February 2019

$384m

Early Q219

4.2x

$19.0k/boed

$4.4/boe

0.9x

Source: DGO, Edison Investment Research. Note: Transaction multiples calculated based on transaction metrics.

Acquisition highlights

The acquired asset base of 107 wells includes an inventory with an average well age of five years and average production per well of 196boed (1.2mmscfd). Given the limited number of wells, associated plugging & abandonment (P&A) liability is small at an NPV10 of c $300k. Operating costs are significantly lower than DGO’s existing portfolio and the integration of the assets does not require incremental G&A. Acquired unconventional wells open a new opportunity for DGO within the basin, reinforcing DGO’s positioning not only as a conventional, but also as an unconventional gas player in the region. The acquired assets are located close to existing operations suggesting the potential for operational synergies. Management has not quantified potential synergies, but expects immediate benefits from the consolidation of transportation expense, with fixed cost spread over an increased production base, and elimination of redundant marketing. DGO will also benefit from seller-financed capital projects, which include two recently completed wells and upgraded compression.

Acquisition metrics versus historical acquisitions

Comparing the acquisition of the HG Energy assets to DGO’s historical transactions, it appears to be broadly in line with the previous deals at EV/flowing barrel of $19.0kboed, but at a premium on the basis of EV/1P PDP reserves at $4.4/boe. Based on EV/trailing EBITDA it is priced at a discount to DGO’s previous acquisition of Core Appalachia at 6.4x, but at a slight premium to prior acquisitions made earlier in 2018 and through 2016/17. This is likely to be due to the high productivity of the wells being acquired, which drives relatively low unit opex ($4.49/boe), limited associated decommissioning liability at c $300k NPV10 and favourable differentials averaging $0.38/mmBtu.

Exhibit 2: Transaction metrics versus historical DGO acquisitions

Source: DGO, Edison Investment Research

Post-acquisition FY19 updated forecasts

Exhibit 3 provides our updated forecasts for FY19, FY20 and introduces our FY21 forecasts. The integration of the HG Energy assets into our model leads to an increase in annualised production of approximately 18% for FY19, which rises to 79.8kboed. The acquired assets produce virtually 100% gas compared to DGO’s existing production mix, which has liquids content, hence the slightly lower realised price per boe compared to prior forecasts. EBITDA and free cash flow (FCF) increase by 25% and 27% reflecting the lower unit operating costs of the consolidated assets and consolidation of central functions included within unit G&A. Acquired asset lease operating expense (base LOE) per boe is $0.50 and $1.01 (before production taxes and gathering and transport, G&T) for the Pennsylvania and West Virginia assets, respectively; this is below DGO’s pre-acquisition asset LOE of $4.17/boe. Our forecasts exclude the potential uplift from further M&A opportunities. We have also updated our short-term commodities assumption based on an EIA gas price forecast of $2.92/mcf in 2019 and $2.88/mcf in 2020, representing a 1% decrease in relation to our previous valuation.

Exhibit 3: Edison updated forecasts

New

Old

Change

2019e

2020e

2021e

2019e

2020e

2019e

2020e

Production (kboed)

79.8

81.8

78.0

67.7

65.0

18%

26%

Revenue ($m)

515

509

501

449

419

15%

22%

EBITDA* ($m)

300

296

296

241

219

25%

35%

Adjusted EBITDA* ($m)

300

296

296

241

219

25%

35%

FCF ($m) – excluding acquisitions

260

258

223

205

186

27%

38%

P&A expenditure ($m)

2.8

2.8

2.9

2.8

2.8

0%

0%

Revenue/boe ($/boe)

17.70

17.01

17.59

18.16

17.60

(3%)

(3%)

Opex**/boe ($/boe)

6.77

6.49

6.57

7.02

6.98

(4%)

(7%)

G&A/boe ($/boe)

0.97

0.97

0.97

1.30

1.30

(25%)

(25%)

Cash costs/boe ($/boe)

7.74

7.46

7.54

8.32

8.28

(7%)

(10%)

Capex/boe ($/boe)

1.24

0.96

0.97

1.31

0.99

(5%)

(3%)

HH*** gas price assumption ($/mcf)

2.92

2.88

2.99

2.95

2.91

(1%)

(1%)

WTI ($/bbl)

58.80

58.00

63.87

56.13

58.00

5%

0%

Source: Edison Investment Research. Note: *Edison adjusted EBITDA excludes reported acquisition gains. **Includes LOE, G&T, G&C and ad valorem and severance taxes. ***HH=Henry Hub.


Valuation

We value DGO using a conventional NAV approach based on the NPV10 of the company’s producing assets minus overheads and net financial liabilities. A full breakdown of our NAV is provided in Exhibit 4, using data available in the company’s last published prospectus and Competent Person’s Report (CPR), as well as public sources, with net PDP reserves for DGO’s pre-acquisition assets updated to 474mmboe as per the 2018 annual report. In this valuation, we show a breakdown between DGO pre-acquisition assets and the newly acquired assets. We also include a discounted value for payments DGO receives for third-party use of services and midstream assets in our valuation – currently estimated at c $26m pa or $215m in our NAV.

We do not include any incremental value for M&A potential or infill drilling in excess to the latest acquisition. However, it is important to recognise that management has created material value for shareholders through the acquisition of assets at attractive valuations and is constantly evaluating possible inorganic growth opportunities in Appalachia that can enhance FCF per share. The value of M&A upside potential or risked infill drilling NPV is uncertain but likely more than zero.

Exhibit 4: Edison detailed NAV breakdown for DGO

Recoverable reserves

Net risked value

Risked value

Asset

Country

Diluted WI

CoS

Net post royalty

NPV10/boe

%

%

mmboe

$/boe

$m

p/share

Net (debt)/cash end-2018

(481.4)

(53.6)

SG&A – NPV10 of three years

(70.4)

(7.8)

Hedging impact

16.5

1.8

Third-party volume discounted revenues

214.7

23.9

DGO pre-acquisition assets

Kentucky

US

90%

100%

205

5.1

796.1

88.6

Ohio

US

82%

100%

15

5.5

84.1

9.4

Pennsylvania

US

82%

100%

103

2.3

231.5

25.8

Tennessee

US

82%

100%

4

4.6

20.5

2.3

Virginia

US

81%

100%

10

5.7

35.8

4.0

West Virginia

US

84%

100%

136

5.7

243.3

27.1

Acquired assets

Pennsylvania

US

88%

100%

61

4.7

290.9

32.4

West Virginia

US

86%

100%

31

3.6

111.9

12.5

Core NAV

566

1,493.4

166.3

Source: Edison Investment Research. Note: Number of shares = 694.2m (542.7m actual plus 151.5m from placing), FX: £0.77/US$ (due to the recent volatility in exchange rates and for the sake of consistency, we assume FX based on the average of the last six months before the end of each quarter).

Exhibit 5 breaks down our valuation by asset class showing where our base case core NAV sits relative to the current share price. The waterfall suggests that the market is not fully valuing DGO’s 1P PDP reserves (566mmboe = 474mmboe DGO pre-acquisition + 92mmboe HG Energy), nor its third-party revenues from midstream assets, and may be overpricing the NPV of decommissioning liabilities.

Exhibit 5: NAV waterfall

Source: Edison Investment Research

Key sensitivities: Gas price and LOE

Key drivers of DGO’s valuation are the gas price and LOE and these do not change after the acquisition. The table below provides a base case valuation sensitivity to these key drivers. Our base assumes a long-term (2022) gas price of $3.10/mcf and LOE of $5.06/boe (LOE excludes gathering and transport, SG&A and production taxes).

Our oil and gas base case price assumptions are in line with the EIA’s latest forecasts for 2019 at $58.80/bbl, rising to $70.00/bbl long term (2022). For Henry Hub, we assume a gas price of $2.92/mcf in 2019 and $3.10/mcf long term (2022).

Exhibit 6: Valuation sensitivity to LOE and gas price assumption (p/share)

LOE* $/boe

-25%

-15%

5.06

+15%

+25%

$/mcf long-term

-25%

132.5

124.1

111.5

98.8

90.3

-15%

154.6

146.2

133.6

120.9

112.5

3.10

187.3

178.9

166.3

153.6

145.2

+15%

220.7

212.2

199.6

187.0

178.6

+25%

242.7

234.3

221.6

209.0

200.6

Source: Edison Investment Research, Note: *Includes base LOE and gathering/compression costs (G&C), and excludes gathering and transportation (G&T), SG&A and production taxes.

Financials

As mentioned earlier in this note, DGO will fund the $400m consideration for HG Energy assets with the combination of net proceeds from its $234m placing ($225m net of fees) and a draw under its $1.5bn KeyBank credit facility. Subject to approval at the 17 April general meeting, the shares will be admitted to AIM on 18 April. The new shares represent around 21.8% of the enlarged share capital.

As at 28 February 2019, the amount drawn down by the company was $455m, as per the HG Energy assets acquisition presentation, from a borrowing base of $725m and DGO expects to draw $159m from the revolving credit facility to fund the acquisition. DGO anticipates a downward purchase price adjustment associated with the operating cash flow between effective date and close, estimated at $16m, which would lead to a total purchase cash consideration of $384m after adjustments.

On conclusion of the acquisition, the amount drawn from the borrowing base is expected to total $614m, leaving c $111m of debt capacity available at close. However, management expects the transaction to provide c $200m of incremental borrowing base capacity, resulting in post-acquisition liquidity of more than $300m, which will provide liquidity for further bolt-on acquisitions.

DGO’s existing $1.5bn KeyBank senior secured facility has an interest rate of Libor +2.25/3.25% based upon utilisation, and has a borrowing base determined by the value of DGO’s PDP reserves.

Exhibit 7: DGO’s net debt and credit facility liquidity before and after acquisition

Exhibit 8: Edison’s estimate for DGO’s net debt/cash and net debt/EBITDA

$m

As at
28 Feb 2019

Transaction adjustments

Pro forma

Cash

2

-

2

Revolving credit facility

455

159

614

Net debt

453

159

612

Liquidity

Revolving credit facility

– Total borrowing base

725

tbd

tbd

– Drawn

455

159

614

Total available liquidity

272

tbd

tbd

Source: DGO, Edison Investment Research

Source: Edison Investment Research

Exhibit 7: DGO’s net debt and credit facility liquidity before and after acquisition

$m

As at
28 Feb 2019

Transaction adjustments

Pro forma

Cash

2

-

2

Revolving credit facility

455

159

614

Net debt

453

159

612

Liquidity

Revolving credit facility

– Total borrowing base

725

tbd

tbd

– Drawn

455

159

614

Total available liquidity

272

tbd

tbd

Source: DGO, Edison Investment Research

Exhibit 8: Edison’s estimate for DGO’s net debt/cash and net debt/EBITDA

Source: Edison Investment Research

We expect the transaction to be accretive to FCF/share for FY20 (+8%) with the potential to support an increased dividend payout – management indicates the potential for a post-acquisition annualised payment of 16.0c/share. Assuming management increases the quarterly dividend to 4.00c/share, we forecast an FY19 dividend yield of 9.5% at the current share price.

Below we take a look at the short-term sustainability of DGO’s dividend. Our current forecasts suggest ample FCF to pay a 16.0c/share dividend, fund sustaining capex and reduce leverage at realised gas prices well below strip. Hedging of up to 75% of FY19 gas production and over 50% in FY20 also provides strong visibility of short-term cash generation. Longer-term sustainability of the dividend will be driven by DGO’s ability to manage fixed unit LOE as production declines, in addition to prevailing US gas prices and regional price differentials. Unconventional wells have the benefit of greater production per well location in comparison to DGO’s legacy conventional assets; therefore we see potential for DGO to reduce unit LOE in the short term as it pursues further unconventional acquisitions. Based on current Edison expectations for realised gas prices and unit costs, we believe DGO is able to sustain a 16.0c/share dividend as well as cover sustaining capex through to the middle of the next decade.

Exhibit 9: DGO’s dividend sustainability FY19

Exhibit 10: DGO’s dividend sustainability FY20

Source: Edison Investment Research. Note: HH = Henry Hub

Source: Edison Investment Research. Note: HH = Henry Hub

Exhibit 9: DGO’s dividend sustainability FY19

Source: Edison Investment Research. Note: HH = Henry Hub

Exhibit 10: DGO’s dividend sustainability FY20

Source: Edison Investment Research. Note: HH = Henry Hub


Exhibit 11: Financial summary

 

 

$m

2017

2018

2019e

2020e

2021e

Year-end December

 

 

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

41.8

289.8

515.4

509.2

500.5

Cost of sales

(28.4)

(149.8)

(267.6)

(266.6)

(255.5)

Gross profit

13.3

140.0

247.9

242.6

245.0

General & admin

(8.9)

(40.5)

(28.3)

(29.0)

(27.6)

Other

(0.4)

18.0

-

-

-

Exceptionals inc gain on acquisitions

37.2

177.6

-

-

-

Reported EBITDA

 

 

48.7

337.0

299.9

296.0

296.0

Adjusted EBITDA (non-IFRS)

 

 

17.5

146.2

299.9

296.0

296.0

Depreciation

(7.5)

(42.0)

(80.3)

(82.5)

(78.6)

Operating Profit (adjusted non-IFRS)

 

 

10.0

104.2

219.6

213.5

217.4

Reported EBIT

41.2

295.0

219.6

213.5

217.4

Net interest

(11.5)

(33.2)

(44.8)

(48.4)

(43.4)

Profit Before Tax (adjusted non-IFRS)

 

 

(1.5)

71.0

174.8

165.1

174.1

Profit Before Tax (reported)

 

 

29.7

261.8

174.8

165.1

174.1

Tax

(2.3)

(60.7)

(47.2)

(44.6)

(47.0)

Profit After Tax (adjusted non-IFRS)

(3.7)

10.3

127.6

120.5

127.1

Profit After Tax (reported)

27.5

201.1

127.6

120.5

127.1

Average Number of Shares Outstanding basic (m)

120.1

386.6

649.7

694.2

694.2

Average Number of Shares Outstanding fully diluted (m)

120.3

387.9

649.7

694.2

694.2

EPS - normalised (c)

 

 

(3.1)

2.7

19.6

17.4

18.3

EPS - normalised fully diluted (c)

 

 

(3.1)

2.7

19.6

17.4

18.3

EPS - (IFRS) (c)

 

 

22.9

52.0

19.6

17.4

18.3

Dividend per share declared (c)

5.4

11.2

15.4

16.0

16.0

Gross margin (%)

31.9

48.3

48.1

47.6

49.0

EBITDA margin (%)

116.6

116.3

58.2

58.1

59.1

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

23.9

36.0

42.6

41.9

43.4

BALANCE SHEET

Non current assets

 

 

223.3

1,445.4

1,785.2

1,731.5

1,680.4

Intangible assets

215.3

1,093.0

1,432.8

1,379.0

1,328.0

Tangible assets

6.9

324.8

324.8

324.8

324.8

Investments

1.0

27.7

27.7

27.7

27.7

Current assets

 

 

29.6

111.6

120.2

120.2

120.2

Stocks

-

-

-

-

-

Debtors

13.9

78.5

78.5

78.5

78.5

Cash

15.2

1.4

10.0*

10.0*

10.0*

Other/ restricted cash

0.5

31.8

31.8

31.8

31.8

Current liabilities

 

 

(15.3)

(64.3)

(64.3)

(64.3)

(64.3)

Creditors

(15.0)

(64.0)

(64.0)

(64.0)

(64.0)

Short term borrowings

(0.4)

(0.3)

(0.3)

(0.3)

(0.3)

Long term liabilities

 

 

(123.1)

(743.8)

(837.5)

(774.3)

(707.3)

Long term borrowings

(70.6)

(482.5)

(518.6)

(404.4)

(319.0)

Other long term liabilities (inc. decomm.)

(52.5)

(261.3)

(319.0)

(370.0)

(388.3)

Net assets

 

 

114.4

748.9

1,003.6

1,013.0

1,029.0

CASH FLOW

Operating cash flow

 

 

6.9

87.7

296.4

287.0

250.4

Capex inc acquisitions

(93.1)

(766.8)

(420.1)

(28.7)

(27.6)

Other

-

-

-

-

-

Equity issued

77.0

425.6

225.0

-

-

Financing expense

(3.3)

(32.6)

(30.8)

(33.0)

(26.4)

Dividends

(5.8)

(31.3)

(97.9)

(111.1)

(111.1)

Net cash flow

(18.3)

(317.4)

(27.4)

114.2

85.3

Opening net debt/(cash)

 

 

37.1

55.8

481.4

508.9

394.7

HP finance leases initiated

-

-

-

-

-

Other

(0.5)

(108.2)

0.0

(0.0)

(0.0)

Closing net debt/(cash)

 

 

55.8

481.4

508.9

394.7

309.3

Source: DGO, Edison Investment Research. Note: *Assumes DGO maintains a minimum cash balance of $10m and pays down debt.

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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.

Australia

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

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

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

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.

Australia

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

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

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

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