Roadmap to Main Market

Diversified Gas and Oil 6 December 2019 Update
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Diversified Gas and Oil

Roadmap to Main Market

Acquisitions

Oil & gas

6 December 2019

Price

98p

Market cap

£643m

US$1.23/£

Net debt ($m) at 30 June 2019

610

Shares in issue

658.6m

Free float

88%

Code

DGOC

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.5)

(7.1)

(16.5)

Rel (local)

(1.2)

(6.6)

(20.3)

52-week high/low

134p

97p

Business description

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

Next events

FY19 results

Q120

Move to Main Market

Q120

Analysts

Carlos Gomes

+44 (0)20 3077 5700

Elaine Reynolds

+44 (0)20 3077 5713

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

Diversified Gas and Oil (DGO) has announced the successful completion of its securitised financing arrangement with a 5% coupon and 10-year maturity. The company issued $200m in notes secured by c 22% working interest of certain upstream assets’ cash flows. DGO also announced its Q319 results delivering a 10% q-o-q increase in production to c 91kboed and hedge adjusted EBITDA of $64m. Since our previous note, the company has completed three acquisitions encompassing assets located near DGO operations and announced it is pursuing a move to the Premium segment of the Main Market of the London Stock Exchange. We update our valuation to 157.2p/share affected by a decrease in short-term gas price assumptions and lower production in H119 compared to our last note.

Year-end

Revenue
($m)

Adjusted
EBITDA* ($m)

PBT*
($m)

Net debt/
(cash) ($m)

Dividend yield** (%)

Capex***
($m)

12/17

41.8

17.5

(1.5)

55.8

4.3

(93.1)

12/18

289.8

146.2

71.0

481.4

8.6

(766.8)

12/19e

516.8

262.6

144.1

625.2

12.4

(476.8)

12/20e

519.9

256.7

127.1

548.5

13.2

(26.5)

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

Securitised financing to enhance flexibility

DGO closed its inaugural BBB- investment grade securitised financing arrangement with a coupon of 5%, rated by both Fitch and Morningstar, having a 10-year scheduled maturity although providing for a longer, 17-year final legal maturity. DGO issued $200m in notes through its SPV secured by c 22% working interest of certain upstream assets whose cash flows remain fully owned and controlled by the company. Management estimate the notes create c $60m of additional liquidity and provide for flexible and limited financial covenants tied only to the performance of the securitised assets.

Three more acquisitions in H219

Since H119 results, DGO acquired EdgeMarc assets via a ‘stalking-horse’ bid for 13.5mmboe in proven developed producing (PDP) reserves for a gross cash consideration of $50m and through two separate deals secured 1,700 miles of natural gas gathering systems for net $7.7m located near DGO operations. The EdgeMarc acquisition included three drilled and uncompleted (DUC) wells and undeveloped acreage, which DGO sold for $10m, improving the acquisition metrics and aligning the acquisition with DGO’s strategy of focusing on its PDP reserves.

Valuation: Base case at 157.2p/share

Edison’s updated base case valuation stands at 157.2p/share, from 166.3p/share, on inclusion of the H219 acquisitions and H119 results, which reflected lower production than in our previous note driven by Q119 unplanned stoppages related to weather conditions. Our valuation is based on an EIA gas price forecast of $2.67/mcf in 2019 and $2.61/mcf in 2020, 9% and 6% lower than in our previous note, resulting in a 5% decrease in our valuation. We forecast an FY19 dividend yield of 12.4% at the current share price.

Liquidity increase from securitised financing

DGO announced the successful completion of its securitised financing arrangement. The company closed its Fitch- and Morningstar-rated inaugural BBB- investment grade securitised financing arrangement with a coupon of 5%, 10-year scheduled maturity and 17-year final legal maturity. DGO issued $200m in notes through its wholly owned, fully consolidated SPV, Diversified ABS, secured by c 22% working interest of certain upstream producing assets whose cash flows remain 100% owned and controlled by the company. DGO agreed to hedge 85% of the production of the collateralised assets for 10 years to secure the cash flows; however, this is not new to DGO, which has a record of strategically hedging company revenue streams. According to management, the notes create approximately $60m of additional liquidity and provide for flexible and limited financial covenants tied only to the securitised assets performance.

Proposed move to the Main Market

DGO started formally pursuing a move to the Premium segment of the Main Market of the London Stock Exchange in September 2019. It expects to complete the move after the publication of its FY19 results, expected in Q120, subject to the approval of the UK’s Financial Conduct Authority. As part of this process, it has also identified and appointed a preferred Big Four audit firm, PwC, and is undertaking a full review of its corporate governance with external advisers.

Share buyback programme

In April 2019, DGO’s board of directors approved the terms of a share buyback programme with an aggregate market value of up to $68.2m and a maximum number of shares of 54,265,394 over a 12-month period. Since the beginning of the programme, DGO has acquired 36,184,100 (c 5% of pre-buyback outstanding shares) and spent c £39.3m (c $48m) at an average price of 109p/share, a c 30% discount to our valuation of 157.2p/share. All repurchased shares were cancelled.

H219 acquisitions and disposals

EdgeMarc Energy

On 25 July 2019, DGO announced it had entered into a ‘stalking-horse’ asset purchase agreement with EdgeMarc Energy to acquire 12 gross producing unconventional natural gas wells and related facilities within the State of Ohio, as well as certain undeveloped lands containing deep Utica rights for a gross cash consideration of $50m. Production is c 99% natural gas with direct access to multiple interstate pipelines with the potential for higher realised pricing. The acquired wells are located near DGO’s existing wells in Ohio and will benefit from economies of scale within the Appalachian Basin, and as such, no incremental administration costs are expected to be attributable to these assets. Since the acquired wells’ lease operating expenses (LOE) are lower than DGO’s consolidated LOE, the acquisition is expected to reduce DGO’s consolidated LOE per boe and enhance DGO’s cash margins.

In line with its acquisition valuation methodology, DGO has attributed value only to EdgeMarc’s PDP reserves, and no value to proved-undeveloped (PUD) reserves or undeveloped acreage. The acquisition included three drilled and uncompleted (DUC) wells, classified as PUD. DGO sold the DUC wells and undeveloped acreage for $10m on 7 November 2019, improving the acquisition metrics. Prior to the disposal EV/EBITDA was 1.6x, decreasing to 1.3x while EV/flowing barrel and EV/1P PDP decreased from $6.5k/boed and $3.7/boe to $5.2k/boed and $3.0/boe respectively.

Exhibit 1: Key transaction metrics and multiples post-DUCs sale

Key transaction metrics

No. of producing wells acquired

12

No. of drilled and uncompleted (DUC) wells acquired

3

August 2019 net production (net revenue interest)*

7.7kboed

PDP reserves

13.5mmboe

Management PDP reserve value

$58m

Standalone opex

$4.05/boe

Transaction pricing

Total purchase price (gross)

$50m

Sales price of DUCs and undeveloped acreage

$10m

Transaction multiples after DUCs sale

EV/EBITDA**

1.3x

EV/flowing barrel

$5.2k/boed

EV/1P PDP

$3.0/boe

EV/management PDP reserve value

0.69x

Key transaction metrics

No. of producing wells acquired

No. of drilled and uncompleted (DUC) wells acquired

August 2019 net production (net revenue interest)*

PDP reserves

Management PDP reserve value

Standalone opex

Transaction pricing

Total purchase price (gross)

Sales price of DUCs and undeveloped acreage

Transaction multiples after DUCs sale

EV/EBITDA**

EV/flowing barrel

EV/1P PDP

EV/management PDP reserve value

12

3

7.7kboed

13.5mmboe

$58m

$4.05/boe

$50m

$10m

1.3x

$5.2k/boed

$3.0/boe

0.69x

Source: DGO, Edison Investment Research. Note: Multiples calculated based on transaction metrics. *Based on actual average daily production from 1 to 25 August 2019 **Based on management FY18 EBITDA estimate.

Compared to DGO’s previous acquisitions, the EdgeMarc assets were at lower cost per flowing barrel, but slightly higher per 1P reserves relative to DGO’s 2018 acquisitions, as can be seen in Exhibit 2. This is line with the fact that these wells are unconventional, with a higher current depletion rate than DGO’s conventional mature acquisitions from the previous year.

Exhibit 2: Transaction metrics vs FY19 acquisitions and DGO pre-FY19 acquisitions

Source: Edison Investment Research. Note: Green indicates acquisitions in 2019; grey indicates acquisitions pre-2019.

Natural gas gathering systems

Following the announcement on EdgeMarc Energy assets, on 27 August 2019, DGO announced its second acquisition so far in H219. The company entered into binding agreements to acquire two separate packages of margin enhancing natural gas gathering systems in Pennsylvania and West Virginia for a net cash consideration of $7.7m. The assets comprise c 1,700 miles of low-pressure wet and dry gas pipelines, compressors, measurement stations and related facilities and equipment of which DGO currently produces c 60% of the transported capacity, with the remaining being utilised by third-party suppliers. DGO expects these assets to increase the company’s margins by increasing third-party revenues by over $3m per year in tariffs and will also allow DGO to control the flow of production, increasing optionality to re-route gas to sales points with higher realised prices. The acquisitions were completed on 27 September 2019.


Business model proving value accretive

H119 was an eventful half-year for DGO with the acquisition of HG Energy and consolidation of 2018 acquisitions. Following the close of H119, DGO acquired EdgeMarc Energy assets through a ‘stalking-horse’ bid and natural gas gathering systems from Dominion Gathering and Processing and Equitrans.

As such, since the Titan acquisition in late 2017, DGO has completed seven oil and gas asset and natural gas gathering system acquisitions, investing c $1.5bn. DGO has proven to be a resilient, dividend-paying oil and gas stock, outperforming the market, as shown in Exhibit 3. It has maintained its share price stability despite the decrease in natural gas prices in the US, and overall global negative sentiment towards oil and gas companies, which have seen a drop in value even though oil prices have remained relatively stable since the beginning of 2019. Contributing to this share price stability is the delivery of results in line with market expectations and the ability to generate strong cash flows and return cash to shareholders through dividends and share buybacks, while reducing debt. Post the EQT acquisition, DGO shares have been relatively stable compared to its oil and gas peers, outperforming the S&P oil and gas index. We note that DGO is sensitive to Henry Hub gas prices and fluctuations in its share price tend to follow the benchmark, even though DGO has a highly hedged portfolio to protect its cash flow.

Exhibit 3: DGO share price performance vs S&P oil and gas peers and HH since January 2018

Source: Edison Investment Research, Bloomberg

Changes to estimates

Exhibit 4 provides our updated forecasts for FY19, FY20 and FY21. The integration of EdgeMarc and the natural gas gathering systems acquisitions into our model leads to an increase in our production estimates to 83.9kboed for FY19 (+5%), 88.3kboed in FY20 (+8%) and 83.3kboed in FY21 (+7%). Our forecast increase in FY19 production includes uncontrollable negative Q119 effects due to weather, subsequently more than offset by Q319 production of c 91kboed, representing an increase of 10% from Q219. Legacy assets production was c 71kboed and shows the success of DGO's Smarter Well Management Programme, which has offset natural declines since Q218. The increase in yearly production has not translated into an increase in earnings, in part due to our lower oil and gas price assumptions based on the latest EIA estimates, which fell by 9% for HH and 6% for WTI for FY20 compared to our previous note from April 2019. We have also updated our now outdated cost estimates from our previous note based on DGO’s latest acquisition metrics with total cash costs (base LOE, production taxes, gathering and compression, gathering and transportation and administration costs).

Exhibit 4: Edison updated forecasts

New

Old

Change

2019e

2020e

2021e

2019e

2020e

2021e

2019e

2020e

2021e

Production (kboed)

83.9

88.3

83.3

79.8

81.8

78.0

5%

8%

7%

Revenue ($m)

517

520

496

515

509

501

0%

2%

(1%)

EBITDA* ($m)

273

257

244

300

296

296

(9%)

(13%)

(18%)

Adjusted EBITDA ($m)

263

257

244

300

296

296

(12%)

(13%)

(18%)

FCF ($m) – excluding acquisitions

238

221

178

260

258

223

(9%)

(14%)

(20%)

P&A expenditure ($m)

3.0

3.1

3.2

2.8

2.8

2.9

9%

9%

9%

Revenue/boe ($/boe)

16.87

16.08

16.31

17.70

17.01

17.59

(5%)

(5%)

(7%)

Opex**/boe ($/boe)

6.39

6.28

6.41

6.77

6.49

6.57

(6%)

(3%)

(2%)

G&A/boe ($/boe)

1.33

1.28

1.29

0.97

0.97

0.97

37%

32%

33%

Cash costs/boe ($/boe)

7.71

7.56

7.70

7.74

7.46

7.54

0%

1%

2%

Capex/boe ($/boe)

1.02

0.82

0.83

1.24

0.96

0.97

(18%)

(14%)

(14%)

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

2.67

2.61

2.85

2.92

2.88

2.99

(9%)

(9%)

(5%)

WTI ($/bbl)

56.26

54.43

62.04

58.80

58.00

63.87

(4%)

(6%)

(3%)

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. The NAV table below, in Exhibit 5, provides a breakdown of our valuation by asset, using data available in the company’s last published prospectus and CPR as well as state public sources.

We break down the assets into DGO Legacy assets (conventional, late-life, low-decline rate), and the 2019 acquired assets (early life assets) instead of a state breakdown as presented in our previous notes. We note that DGO has now over 12,000 miles of pipeline with related compressor stations, following the August 2019 acquisitions, which provides for optionality and represents a competitive advantage when it comes to assessing future deals in the region. This is reflected in our discounted value for payments DGO receives for third-party use of services and midstream assets and respective operating costs in our valuation – currently estimated at a NAV of $49.1m. We also include the hedging impact based on DGO’s available information on hedging volumes, and the impact of the 2019 equity raise, acquisitions costs and disposals revenues, and the share buyback programme.

Exhibit 5: Edison detailed NAV breakdown for DGO

Asset

Country

Diluted WI

CoS

Net recoverable reserves

NPV10/boe

Net risked value

Risked value per share

%

%

mmboe

$/boe

$m

p/share

Net debt end 2018

(481.4)

(59.3)

SG&A – NPV10 of three years

(100.6)

(12.4)

Hedging Impact

85.4

10.5

Third-party volume discounted FCF

49.1

6.1

Share buyback expense

(48.4)

(6.0)

2019 acquisitions & disposals

(435.7)

(53.7)

2019 equity raise

225.0

27.7

Production

DGO Legacy

US

100%

100%

474.6

3.2

1,538.7

189.7

HG Energy

US

87%

100%

91.5

4.2

381.6

47.0

EdgeMarc

US

79%

100%

13.4

4.6

61.8

7.6

Core NAV

579.5

1,275.3

157.2

Source: Edison Investment Research. Note: Number of shares = 658.6m, FX: $1.23/£ (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 6 breaks down our valuation by asset class showing where our base case core NAV sits relative to the current share price. Our valuation suggests that the market is not fully valuing DGO’s 1P PDP reserves (579mmboe = 474mmboe DGO Legacy + 92mmboe HG Energy + 14mmboe EdgeMarc), nor its third-party revenues from midstream assets, and may be overestimating the NPV of decommissioning liabilities.

Exhibit 6: NAV waterfall

Source: Edison Investment Research

Key sensitivities: Gas price and LOE

Key drivers of DGO’s valuation are the gas price and LOE. Our base assumes a long-term (2022) gas price of $3.10/mcf and short-term gas assumptions based on the EIA short-term energy outlook of $2.67/mcf for FY19 and $2.61/mcf for FY20. Our LOE assumptions are specific for DGO Legacy assets, HG Energy and EdgeMarc until all assets are fully consolidated. Our LOE assumptions are based on acquisition metrics for HG Energy of $0.63/boe and EdgeMarc of $1.56/boe and we estimate DGO base LOE at $3.6/boe. Our LOE assumption excludes gathering and transport, SG&A and production taxes. The table below provides a base case valuation sensitivity to these key drivers.

Exhibit 7: Valuation sensitivity to LOE and gas price assumption (p/share)

LOE* $/boe

-20%

-10%

0%

10%

20%

$/mcf long-term

2.48

117.6

105.9

94.2

82.6

70.9

2.79

149.0

137.3

125.7

114.0

102.3

3.10

180.5

168.8

157.2

145.5

133.9

3.41

212.1

200.4

188.8

177.1

165.4

3.72

243.5

231.9

220.2

208.5

196.9

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 above, DGO’s key drivers of free cash flow (FCF) and dividends will be gas realisations and LOE. Below we provide our net debt, net debt/EBITDA and FCF forecasts based on our underlying commodity price assumptions. We forecast a quarterly dividend payment resulting in an annualised 13.6c/share dividend in 2019, and 16.0c/share going forward, equating to an FY19e yield of 12.4% at the current share price. We also assume FCF is used to reduce net debt and gearing with net debt/EBITDA falling from 2.4x in FY19 (management targets a 2.0–2.5x net debt/adjusted EBITDA leverage ratio) in the absence of further acquisitions. The proposed asset securitisation will generate proceeds to reduce DGO’s borrowings on its existing credit facilities.

Exhibit 8: Net debt and net debt/EBITDA estimates

Source: Edison Investment Research

Exhibit 9: Financial summary

 

US$m

 

2017

2018

2019e

2020e

2021e

Year-end: 31 December

 

 

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

41.8

289.8

516.8

519.9

495.9

Cost of sales

(28.4)

(149.8)

(287.3)

(297.0)

(284.1)

Gross profit

13.3

140.0

229.5

223.0

211.7

General & admin

(8.9)

(40.5)

(40.6)

(41.4)

(39.3)

Other

(0.4)

18.0

-

-

-

Exceptionals inc gain on acquisitions

37.2

177.6

10.0

-

-

Reported EBITDA*

 

 

48.7

337.0

272.6

256.7

243.6

EBITDA*

 

 

17.5

146.2

262.6

256.7

243.6

Depreciation

(7.5)

(42.0)

(73.6)

(75.1)

(71.2)

Operating Profit (before amort. and except.)

 

 

10.0

104.2

188.9

181.6

172.4

Reported EBIT

41.2

295.0

198.9

181.6

172.4

Net interest

(11.5)

(33.2)

(44.8)

(54.5)

(51.6)

Profit Before Tax (norm)

 

 

(1.5)

71.0

144.1

127.1

120.8

Profit Before Tax (reported)

 

 

29.7

261.8

154.1

127.1

120.8

Tax

(2.3)

(60.7)

(41.6)

(34.3)

(32.6)

Profit After Tax (adjusted non-IFRS)

(3.7)

10.3

102.5

92.8

88.2

Profit After Tax (reported)

27.5

201.1

112.5

92.8

88.2

Average Number of Shares Outstanding (m)

120.1

386.6

631.0

658.2

658.2

Average Number of Shares Outstanding fully diluted (m)

120.3

387.9

631.6

658.2

658.2

EPS - normalised (c)

 

 

(3.1)

2.7

16.2

14.1

13.4

EPS - normalised fully diluted (c)

 

 

(3.1)

2.7

16.2

14.1

13.4

EPS - (IFRS) (c)

 

 

22.9

52.0

17.8

14.1

13.4

Dividend per share declared (c)

5.4

11.2

14.9

16.0

16.0

Gross margin (%)

31.9

48.3

44.4

42.9

42.7

EBITDA margin (%)

116.6

116.3

52.7

49.4

49.1

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

23.9

36.0

36.6

34.9

34.8

BALANCE SHEET

Non current assets

 

 

223.3

1,445.4

1,848.5

1,799.9

1,754.1

Intangible assets

215.3

1,093.0

1,496.1

1,447.5

1,401.6

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

110.2

110.2

110.2

Stocks

-

-

-

-

-

Debtors

13.9

78.5

78.5

78.5

78.5

Cash

15.2

1.4

-**

-**

-**

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)

(938.4)

(902.3)

(873.6)

Long term borrowings

(70.6)

(482.5)

(625.0)

(548.2)

(510.1)

Other long term liabilities (inc. decomm.)

(52.5)

(261.3)

(313.4)

(354.1)

(363.5)

Net assets

 

 

114.4

748.9

956.1

943.5

926.4

CASH FLOW

Operating cash flow

 

 

6.9

87.7

269.1

247.7

203.5

Capex inc acquisitions

(93.1)

(766.8)

(476.8)

(26.5)

(25.4)

Other

-

-

-

-

-

Equity issued

77.0

425.6

176.6

-

-

Financing expense

(3.3)

(32.6)

(30.8)

(39.1)

(34.7)

Dividends

(5.8)

(31.3)

(81.9)

(105.3)

(105.3)

Net cash flow

(18.3)

(317.4)

(143.8)

76.8

38.1

Opening net debt/(cash)

 

 

37.1

55.8

481.4

625.2

548.5

HP finance leases initiated

-

-

-

-

-

Other

(0.5)

(108.2)

(0.0)

(0.0)

(0.0)

Closing net debt/(cash)

 

 

55.8

481.4

625.2

548.5

510.4

Source: Diversified Gas and Oil accounts, Edison Investment Research. Note: *Includes hedging; **assumes DGO uses all cash balance to pay down debt.


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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 Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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

This document is prepared and provided by Edison 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.

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.

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

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 and Oil and prepared and issued by Edison, in consideration of a fee payable by Diversified Gas and 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 research department of Edison 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 Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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

This document is prepared and provided by Edison 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.

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.

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

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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