Bwm. DGOC re IC article12 Jul 2018 01:16
BWM i see DGOC dropped 8 points today the
IG Update: Buy at 125p We said BUY at 58p on 16 Feb 2017 Appalachian Basin-focused Diversified Gas & Oil (DGOC) has received investor backing for a $575m (£437m) deal to buy a large portfolio of low-cost producing wells. The deal, which looks set to make DGO the largest producer on the junior market, is being funded by a $250m share placing that company advisers have said was three times oversubscribed. As the transaction was classed as a reverse takeover under listing rules, trading in DGO shares was suspended until last Friday (29 June). Ahead of re-listing, the targeted assets were revealed to be conventional wells, pipelines and compression stations owned by New York-listed EQT Corporation. The low-cost, long-life and low-volume wells are expected to almost quadruple cash profits, on a pro-forma basis. Proven reserves will also increase 142 per cent to 393m barrels of oil equivalent (mmboe). Further convinced that the shareholder register has been buffeted by yield-hungry institutional investors prepared to pay a premium for shares, the market promptly pushed up the stock 30 per cent to 125p. That approval appeared to overlook a few discrepancies in the counterparties’; description of the deal. According to EQT, it is selling around 12,000 wells with daily gas-equivalent output of approximately 200 million cubic feet (mmcfe), and which carry around $200m of decommissioning liabilities. On DGO’s numbers, these liabilities are just $69.9m, the well count is 11,250 (revised down from 11,350) and output is expected to hit 186mmcfe. Diversified Gas & Oil said the difference in well count and output was due to the non-operated nature of some of the licences, while decommissioning costs have been calculated on a longer-term basis, and on the assumption that wells can be plugged for less. Arriving shortly after the CVX and Alliance Petroleum purchases (for a combined $180m), investors seem content with a deal-making spree which obscures the underlying cash flow generation. DGO says the quicker it can transact, the more value it can extract from shale-focused explorers looking for a low-multiple cash windfall and a steward for their productive assets. We have also been told that institutional investors are pushing the company to find deals at similar earnings multiples. IC View It’s clear to see why investors are buying in above the placing price. On a pro-forma basis, DGO reckons its merged entities would have generated $129m in annual net income in 2017, equivalent to EPS of 25¢. At 125p, that puts the stock on seven times forward earnings, assuming no more deals are announced in 2018. The shares look a little pricier on a 50 per cent premium to pro-forma net asset value, though that’s arguably in line with expansive dividend payers with limited exploration or jurisdiction risk. We're comfortable with that, and remain buyers at these levels, though shareholders considering a bid should wait for new shares
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