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 |
Share price performance
Business description
Next events
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Diversified Gas & Oil is a research client of Edison Investment Research Limited |
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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* |
Net cash/ |
Dividend yield** (%) |
Capex |
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.
|
|
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