The management team of Diversified Gas and Oil plc (DGOC) presented their HY results at one of our Yellowstone Advisory webinars on Wednesday and the more I hear them talk the more impressed I am.
The company listed in 2017 and moved to a premium listing on the main market of the LSE earlier this year with every chance they could enter the all-share and FTSE250 indices at the next review in September. Whilst the name, Diversified Gas & Oil plc suggests a mixture of assets, in fact 99% of revenues are generated from natural gas all concentrated in the Appalachian Basin in the United States.
DGOC is different from its peers because it doesn’t drill new wells, instead it acquires existing wells and produces more efficiently under careful stewardship. The company has a greater focus on improving the decline rates so that the wells can produce for longer; the average asset life is over 50 years. The difference in the operating model comes through in significantly better financial metrics.
In these latest HY results the company reported 55% EBITDA margins, despite the fall in gas prices due to a conservative hedging policy and a reduction in operating expenses per barrels of oil equivalent (boe) of 8%. The company operates a policy of distributing 40% of FCF to shareholders through a dividend and this resulted in a 7% increase to the quarterly dividend, something that not many companies in the sector, or indeed the market, can report. Since listing, DGOC has paid regular and increasing dividends to shareholders and the shares yield over 10%.
The focus on operational excellence really came through during the presentation. The business model is one which has been used successfully since the start of the company and is actually quite simple but management execute it well. Once an asset is acquired, the focus is on integration, making improvements to the production profile of the acquired wells and improving the operational costs associated with each well. DGOC call this the ‘Smarter Well Management Program’ and it seems to work. Overall, this means they are one of the lowest cost producers enabling them to operate profitably in any price environment.
On that front, management talked about their hedging program which they use to reduce risk and provide predictability. This hedging program may reduce the potential for higher revenues at times but it also removes the risks from sharp price falls as we have witnessed recently. The forward curve also illustrates that prices are coming back and in the fourth quarter this year getting back to $2.70 before settling in the $2.5-2.6 range. They add hedges gradually and are 80% hedged for the current year falling to 45% hedged in 2023.
Acquisitions are a key part of the growth strategy, essential really given they don’t drill new wells. DGOC made two acquisitions in the half year acquiring assets from EQT and Carbon. Both of these assets have been integrated, well performance improved and management are very happy with them.
Acquisitions are paid for from a mix of debt and equity and the current average cost of debt is 4.7%. Their significant cash generation enables the company to pay down debt at regular intervals and this is a policy they believe adds further discipline to the business.
A question was asked about provisions for the liabilities associated with decommissioning wells at the end of their life. Management responded that they have a comprehensive retirement asset program and have done a lot of work on this. They said they had met with every State regulatory agency and worked with them to agree plans for decommissioning and plugging wells. They now have 10-15 year agreements with all the States with a minimum number of wells to be plugged annually and minimum to return to production. Consequently, they have very good visibility on these costs.
Overall it was a very interesting and informative webinar from a management team that have consistently delivered and do exactly what they say they’re going to do.
A recording of the webinar can be found on the Yellowstone Advisory YouTube channel or by clicking here.