DGOC.L Regulatory News (DGOC)

8 March 2021

DIVERSIFIED GAS & OIL PLC

("Diversified," "DGO" or the "Group")

Final Results for the Year Ended 31 December 2020

Diversified Gas & Oil PLC (LSE: DGOC) is pleased to announce its annual results for the full-year ended 31 December 2020.

Key Highlights

• December exit rate production of 103 MBoepd (617 MMcfepd), 8% higher than 2019 exit (95 MBoepd)

◦ Exceptionally low corporate annual decline rate of ~7% including both conventional and unconventional wells

◦ DGO stands as the largest independent producer on the London Stock Exchange ("LSE")

• Hedged Adjusted EBITDA1 of $301 million (up 10% over $273 million in 2019) bolstered by hedge cash settlements of $145 million that significantly offset low natural gas prices

◦ Indicative of the improved natural gas pricing outlook that creates a non-cash pre-tax mark-to-market hedge valuation loss of $239 million, the Group reported a net loss of $23 million in 2020 (2019: $99 million net income inclusive of a pre-tax non-cash mark-to-market hedge valuation gain of $20 million)

◦ Adjusted Net Income of $175 million represents an 83% increase over prior year (2019: $96 million) and excludes the mark-to-market valuation change and other non-cash and non-recurring items

• Adjusted Total Revenue (which includes $145 million of cash hedge settlements) of $553 million was 8% higher in 2020 vs 2019 ($512 million including $49 million of hedge cash settlements)

◦ Total revenue (which excludes hedge settlements) of $409 million in 2020 vs. $462 million in 2019 due to lower commodity prices in 2020 partially offset by higher production from our acquired production (Carbon and EQT assets)

• Cash Margin1 of 54% driven by a 10% reduction in total cash expenses2 to $1.15/Mcfe ($6.92/Boe) and hedge cash settlements

• Dividend increased >14% with two consecutive quarterly raises during 2020

• Recommending a final quarterly dividend of $0.04/share, bringing the full-year 2020 dividend to $0.1525/share, 10% higher than 2019 ($0.1392/share), supported by accretive growth of its low-decline, long-life assets

Other Operational Highlights

• Record full-year average daily net production of ~100 MBoepd, up 18% vs 2019 (85 MBoepd)

◦ Average daily production from conventional (Legacy3) assets consistent with 2019 at ~69 MBoepd reflective of effective Smarter Asset Management

• Acquired and fully integrated ~$243 million (gross) of assets which expand scale and reduce unit costs:

◦ May 2020 conventional upstream and midstream assets from Carbon ($110 million) and primarily unconventional upstream assets from EQT ($125 million)

◦ 4Q20 acquisition of five unconventional wells in Ohio for $8 million

• ESG enhancements included broader leak detection and repair programme and progress on further refining the Group's comprehensive facilities inventory contributing to lower reported emissions

• Exceeded our 80-well annual well retirement commitment by retiring 92 wells averaging ~$25K each

◦ Proactively worked with regulators in Ohio to extend our retirement agreement to 10-year term

Other Financial Highlights

• Remain proactive and opportunistic to protect cash flows and provide dividend stability through hedging:

◦ ~90% of 2020 production protected by natural gas hedges, with current forward hedge positions including:

▪ ~90% of 2021 natural gas hedged at a weighted average floor price of $2.94/Mcfe ($2.67/MMBtu)

▪ ~65% of 1H2022 natural gas hedged at a weighted average floor price of $2.84/Mcfe ($2.59/MMBtu)

• Significant field operating efficiencies reduced total unit cash costs inclusive of higher Adjusted G&A1. The additional administrative expense supports the enlarged business, positions the Group with a scalable corporate platform for additional growth and reflects enhanced corporate governance following its transition from AIM to the Premium Segment of the Main Market:

◦ Base lease operating expense down 24%: $0.42/Mcfe ($2.53/Boe) (2019: $0.55/Mcfe ($3.31/Boe)

◦ Total operating expense down 15%: $0.93/Mcfe ($5.58/Boe) (2019: $1.09/Mcfe ($6.54/Boe)

◦ Adjusted G&A1 expense up 14%: $0.22/Mcfe ($1.33/Boe) (2019: $0.19/Mcfe ($1.17/Boe)

• Distributions benefiting shareholders in 2020 totalled $115 million

◦ Dividends paid in 2020: $99 million ($0.1425/share), up 5% (2019: $0.1362/share)

◦ Share repurchases: $16 million (~13 million shares) (2019: $53 million)

• Net Debt of $725 million resulting in Net Debt-to-Hedged Adjusted EBITDA1 of 2.2x at 31 December 2020

◦ Debt reductions in 2020, adjusted for acquisitions, total $82 million, driven largely by repayments of scheduled amortising debt structures

• Year-end liquidity >$210 million

◦ Full reaffirmation of $425 million borrowing base twice during 2020, despite volatile commodity price market, with no changes to terms and full support of 17 lenders in the Credit Facility

Corporate Highlights

• Successful move to the Main Market of the London Stock Exchange

• Inclusion in FTSE250 Index

• Established strategic partnership with Oaktree Capital Management, L.P. who committed $1 billion to jointly identify and fund future proved developed producing ("PDP") acquisition opportunities as a non-operating working interest partner

◦ For completed acquisitions, the Agreement compensates DGO through an upfront promote and includes reversion interest opportunities to the Group

• Successful financings support growth platform: $200 million (gross) asset securitisation to term out a portion of the Group's revolving Credit Facility and the combination of an $85 million (gross) share placing and $160 million (gross) 10-year amortising secured term loan to primarily fund acquisitions during 2020

• Significant ESG initiatives reflect stewardship emphasis and transparency:

◦ Published inaugural year 2019 Sustainability Report with plans to issue the Group's 2020 Sustainability Report in April 2021

◦ Initiated comprehensive Enterprise Risk Management reviews

◦ Initiated Task Force for Climate-related Disclosure reporting practices

◦ Adopted new corporate policies on human rights, environmental, health and safety and corporate responsibility

1 This non-IFRS alternative performance measure referenced throughout is defined and reconciled within the Group's Final Results under the caption "Alternative Performance Measures".

2 Total cash expenses represent total operating expense plus recurring general and administrative costs. Total operating expense includes base lease operating expense, production taxes, midstream operating expense and transportation expense. Recurring administrative expenses is a non-IFRS financial measure defined as total administrative expenses excluding non-recurring acquisition & integration costs and non-cash equity compensation.

3 Legacy Assets owned as at 31 December 2018 and excluding the Group's 2020 acquisitions of Carbon and EQT and 2019 acquisitions of HG Energy and EdgeMarc.

Commenting on the results, CEO Rusty Hutson, Jr. said:

"I am exceptionally pleased with our results in 2020 as they reflect the resilience of our business model and its proven ability to consistently deliver shareholder value and returns, even in the most challenging of markets. Our commitment to value-accretive growth, operational excellence, cost discipline, and risk mitigation drove the Group's solid performance through turbulent times. Our long-standing strategy of focusing on low-risk assets and reliable cash flows position DGO for further growth, and enables us to maintain our firm commitment to shareholder returns, evidenced by the increase in our per-share dividend, which we raised twice, or 14%, during the year.

"With a business model grounded in asset and environmental stewardship, we made significant strides in developing plans and adopting disclosure frameworks aimed at improving our environmental footprint. Additionally, we strengthened our track record of accretive growth with the successful acquisitions of both upstream and midstream assets, contributing to a consistent, strong cash margin and enlarging our portfolio of Smarter Asset Management opportunities on a base of assets with an exceptionally low corporate decline rate of ~7%. Our commitment to acquire low-decline assets enables us to replace production declines with approximately 10% of our Adjusted EBITDA while meeting our operating and ESG commitments, reducing our debt and making consistent quarterly dividend payments to shareholders.

"Our move in May 2020 to the premium segment of the Main Market and subsequent inclusion in FTSE250 reflects the evolution of our business and enables us to solidify our position as the leading independent producer on the LSE. Even so, with the shifting market dynamics of the last few years, we are seeing a generational opportunity to accelerate our accretive consolidation strategy, and our strategic partnership with Oaktree Capital uniquely positions us to capitalise on these opportunities, whether within or outside the Appalachian Basin. The positive fundamentals and outlook for US natural gas are creating a supportive tailwind, which gives us confidence in our ability to sustain our dividend and create value for our stakeholders."

Results Presentation and Audiocasts

DGO will host a conference call today at 2:00pm GMT (9:00am EST) to discuss these results. The conference call details are as follows:

Additionally, on 10 March 2021 at 6:00pm GMT (1:00pm EST), DGO is pleased to host an investor webinar featuring CEO Rusty Hutson, COO Brad Gray and CFO Eric Williams during which management will discuss the full-year results. To register for the webinar, please contact Yellowstone Advisory at info@yellowstoneadvisory.com, or refer to the following link:

https://us02web.zoom.us/webinar/register/5816106105281/WN_u6UZAWCXTXaT_8uqF9rPEg

About Diversified Gas & Oil PLC

Diversified Gas & Oil PLC is an independent energy company engaged in the production, marketing and transportation of primarily natural gas related to its synergistic US onshore upstream and midstream assets.

CHAIRMAN'S STATEMENT

I am delighted to report another year of tremendous progress for the Group. Against both a challenging industry backdrop and the extraordinary impact of the Covid-19 pandemic, our business model has proven not only to be resilient and sustainable but also extremely strong.

We have continued with the relentless focus on our strategy to deliver consistent, profitable cash flow from our low-cost asset base. During the year we made three accretive acquisitions which have been successfully integrated. We also enhanced our borrowing base with a securitised and fully-amortising financing, and entered into an innovative joint arrangement with Oaktree Capital, which positions us well for future acquisitions earning enhanced returns. Our Smarter Asset Management programme has once again been effective in maintaining steady production to offset natural declines.

We successfully obtained admission of our shares to the Premium Listing Segment of the Official List of the Financial Conduct Authority and to trading on the Main Market of the LSE, and subsequently entered the LSE FTSE 250 Index. In advance of this move, and as reported last year, we appointed three new Independent Non-Executive Directors to the Board. The current Board has seven members, with four being independent. I am extremely pleased with how the Board and Committees have functioned this year, in particular given the difficulties of meeting in person. Each Board member demonstrated a clear commitment to the Group and support for its strategy while being willing to challenge each other as we strive to continue building a business that benefits all stakeholders. We appointed Leadership Advisor Group to conduct an external Board Performance Review, and we will use their advice to further examine our corporate governance and strategic thinking. At present, two of our seven Board members (or approximately 30%) are women. We are mindful of the recommendations of the Hampton-Alexander Review and the Parker Review, and will be looking to comply with them in the coming year as we strive to further enhance our Board's diversity, experience, and knowledge base.

During the year we launched our inaugural Sustainability Report which detailed the economic, environmental, social and governance impacts of our activities. The report describes our firm commitment to sustainability and to the communities in which we operate and outlines our plans to remain fully engaged on these important initiatives. We also embarked on a project with Critical Resource, a global consultancy focused on climate strategies, to ensure that our metrics and targets, as well as our governance, risk management, and strategic planning align with the Task Force on Climate Related Financial Disclosures ("TCFD") recommendations. Additionally, we are examining investments in technology and operational changes to help further reduce emissions, as well as evaluating various offset measures with our target to achieve a net zero carbon footprint by 2050. You can find additional details of our ongoing sustainability efforts in our upcoming 2020 Sustainability Report.

We fully support the desire to reduce the world's carbon emissions, and believe that our unique business model continues to be well positioned to help us do so. Natural gas in the US has been a major contributor to the substantial reductions in CO2 emissions as energy supplies have switched from coal and oil. Future energy demands must be met from multiple sources, including renewables, nuclear, hydro, and our own low-carbon natural gas, which will continue to be affordable and reliable. As such, we believe that natural gas is an ideal partner to renewable energy sources like wind and solar, thereby providing a solution to a more sustainable world for future generations.

Our business model is based on sustainability. We are one of the lowest cost operators in the industry, and we are well positioned to perform in even the toughest of markets. We acquire undervalued assets, that are non-core to other operators, and then focus on optimising their productivity or usefulness until the end of their natural lives. We are responsible operators with a commitment to the safety of our employees and the public at large, the well-being and vibrancy of the communities in which we live and work, and the care of the natural world around us. This is what we do. As we acquire more assets, we believe we can play a key role in improving the environmental stewardship of them, as well as reducing the need for further exploration and drilling elsewhere, with its resultant impact on emissions and risk of stranded assets. We also continue to embrace our responsibility to safely retire wells at the end of their productive lives, and we've demonstrated this commitment to the states in which we operate each year through our exceptional well retirement programme.

Our extensive hedge portfolio and low-cost debt profile has meant that our cash flow has remained stable and strong this year. Combined with our accretive acquisitions, we increased our quarterly dividend twice, and by 14% since the start of the year from $0.0350 per share to $0.0400 per share. Accordingly, the Board is recommending a final quarter dividend of $0.0400 per share, making the total dividend attributable to the full-year $0.1525 per share (2019: $0.1392 per share.) If approved, the final dividend will be paid on 24 June 2021 to those shareholders on the register on 28 May 2021.

This year was another very successful one for DGO, and I would like to thank our executive team and all our employees for the hard work and dedication that continues to drive our performance. They represent the best in our industry and are a credit to the Group. We understand the extraordinary impacts of the Covid-19 pandemic on the personal lives of our employees and recognise that their continued commitment has ensured we have not only delivered a successful 2020 but are well positioned to continue to deliver the long term sustainable success of our business. I also wish to thank our shareholders, debt holders and other stakeholders for their support. Looking ahead, the opportunities to continue our growth are significant, and we are well placed to capitalise on them. We along with the entire Diversified team will remain focused in 2021 and beyond on our strategy and continue to deliver sustainable value to our shareholders.

David E. Johnson

Chairman of the Board 

CHIEF EXECUTIVE'S STATEMENT

This past year was unlike any other in the history of our company. In a year filled with global uncertainty, driven largely by the Covid-19 pandemic, political unrest and economic disruption, which led to the lowest NYMEX natural gas prices in 25 years, our consistent performance and the strength of our business model proved among the few certainties. From our founding nearly 20 years ago, we've proactively and intentionally built our business to reliably perform in any commodity price environment, and the result of our strategic actions is demonstrated through our ability to deliver significant financial results contrary to sector and macro-economic headwinds. Deemed an essential business in the midst of the pandemic, our company continues to successfully navigate the new economic and social environment in which we now find ourselves. Our success is reflective of a resilient, vertically integrated business model and strategy executed by dedicated personnel, who are focused on delivering strong operational and financial results, resulting in significant shareholder value.

Our resilience demonstrates the solid foundations upon which DGO is built. Our unwavering focus on opportunistic yet disciplined acquisitive growth, portfolio optimisation and shareholder returns differentiates us from our peers. The Board's commitment to shareholder returns is resolved and represents a core principle of our strategy and investment thesis. Currently, our dividend yield is one of the most compelling amongst LSE listed companies, evidenced by two dividend increases during a period when many of our peers reduced or cancelled dividends, highlighting the strength of our business model and the effectiveness of our execution.

A relentless focus on operational excellence across our portfolio continues to serve as the bedrock of our stable performance. During the year, our operations team delivered impressive results through the successful application of our Smarter Asset Management programme. Production remained steady throughout the year as we effectively offset natural declines in our portfolio through our operational techniques to optimise production and to drive efficiency, and we achieved this result while simultaneously reducing our emissions. These effective operations continue to drive solid financial performance by ensuring we remain a low-cost operator with clear visibility to reliable cash flows. The capabilities of our midstream activities continue to expand and were further bolstered by the acquisitions in May, which increased opportunities for margin-enhancing diversification, pricing optionality and third-party revenue generation.

Even with the recovery and stabilisation of prices through the fourth quarter of 2020 and into the start of 2021, the market backdrop remains challenging for the natural gas industry. Despite these headwinds, our business model gives us comfort, knowing that we are uniquely positioned to make the most of the numerous opportunities we see in the market today.

Positive momentum is building for natural gas pricing which bodes well for our business. For many however, the positive momentum may have come too late, and consolidation will be a natural consequence. As a result, we continue to evaluate a robust acquisition pipeline as we look to capitalise on market opportunities, seeking value accretive growth.

With this backdrop, we established a major strategic partnership through our agreement with Oaktree Capital. The agreement aligns us with a strong partner with whom we can capitalise on the growing pipeline of opportunities, both in the near-term and over the long-term. The agreement validates our strategy, and helps to expand our market intelligence and network through Oaktree's unrivalled standing in the market. The partnership also strengthens our acquisition bid credibility, and enables us to comfortably pursue larger transactions that can deliver a measurable change in accretive cash flow growth and shareholder returns. The deal structure positions us to capture long-term value for our shareholders as Oaktree's co-ownership of assets presents a foreseeable inventory of acquisition opportunities whereby DGO, as the operator of those assets, is the natural buyer when Oaktree seeks to monetise its investment.

The strong position that we have established for ourself through years of delivering results aligned with our stated commitments leaves us well placed to maintain our growth trajectory. Financial discipline at the corporate and operational levels remains a key tenet to our strategy. We will seek to continue to maintain a healthy balance sheet with appropriate liquidity to safeguard our dividend, and reduce Leverage while working to capture prudent growth opportunities.

I am very proud that we have been able to maintain our progress through the economic and social challenges we faced during the last year. The Board's focus on continuous improvement of all aspects of governance has enabled us to take considerable strides forward and provides a springboard for future growth. Our move to the Main Market and subsequent inclusion in the FTSE 250 Index reflects our evolution, maturity and growth into the largest independent producer by volume on the London market, and I am excited for the opportunities that lie ahead for our company.

Robert R. ("Rusty") Hutson Jr.

Chief Executive Officer 

FINANCIAL REVIEW

A MESSAGE FROM OUR CHIEF FINANCIAL OFFICER

We have spoken to the challenges and opportunities that 2020 presented to companies across all sectors. I echo Rusty's pride in our dedicated and talented employees who delivered exceptional results. In a year marked by uncertainty and unprecedented commodity demand and price volatility, we steadied ourselves, remained focused on our strategic objectives and used the many tools within our chest to advance our business while many companies around us struggled. Ultimately, we achieved record production and Hedged Adjusted EBITDA, closed three acquisitions, repaid borrowings, and raised our dividend twice… all during a pandemic and amidst the lowest natural gas commodity price environment we have seen in the past two decades.

By design, we built Diversified to be resilient in even the most challenging environments. Our strategy to acquire and nurture mature producing assets not only affords us a stable positive Free Cash Flow profile, but importantly it provides us with a highly predictable and largely controllable cost structure that we can comfortably hedge to secure healthy margins. If any series of events were to reinforce the importance of responsible hedging, it was those we witnessed during 2020, when we observed even the largest, investment-grade established names within our industry dramatically cut spending, reduce staffing, increase borrowings and lower - or even eliminate - their dividends to shareholders. By contrast, we not only expanded our team as we added additional high-quality producing assets to our portfolio, but we also responsibly managed our debt and increased our quarterly dividend twice and by over 14% to $0.04 per share or $0.16 per share annualised. In fact, since our IPO four years ago and demonstrating the true accretive nature of our growth, we have increased our per-share dividend nine times and grown it by nearly 70% compounded annually.

The past few years, and 2020 in particular, have reinforced the importance of hedging, which you have come to appreciate is part of our strategic DNA. Our hedge portfolio extends more than a decade to support each of our long-term, fixed rate and fully amortising financing structures, which today comprise approximately 70% of our total borrowings. We were rewarded handsomely for our decision to hedge approximately 90% of our natural gas production this year, receiving nearly $145 million in hedge proceeds that significantly adds to our $409 million of total revenue. Not only were we able to fund our growth, reduce our borrowings adjusting for acquisitions and maintain a strong balance sheet, we also paid $99 million of dividend distributions to our shareholders and repurchased $16 million of our outstanding shares.Recognising that acquiring quality producing assets, rather than drilling and completing wells, fuels our growth, we actively manage our balance sheet by using a prudent mix of debt and equity financing to maintain Leverage below our stated limit of 2.5x Net Debt-to-Hedged Adjusted EBITDA. In fact, we ended 2020 and sit today at just 2.2x. During 2020, we were rewarded for our fiscal discipline with investors willing to entrust additional debt and equity growth capital to DGO when others had no access. We also enjoy a healthy and supportive bank group and lenders like Munich Re and Nuveen, a TIAA company. Not only did we term-out $200 million of borrowings on our Credit Facility through a low-cost asset-backed securitisation, we successfully raised $160 million of long-term financings and $85 million of equity proceeds to fund our acquisition of assets from EQT Corporation, Carbon Energy Corporation and other sellers. We also exited the year strong with a full re-affirmation of our $425 million Credit Facility borrowing base and more than $210 million of liquidity.

Importantly, we enter 2021 with optimism underpinned by our past success, lean operating costs, solid financial footing and an enhanced platform following investments in people, processes and technology to become a Premium Listed, Main Market company. We are further encouraged to see higher commodity prices on the forward curve as positive sentiment regarding natural gas' longer-term outlook creates an improved price outlook. This optimism is particularly impactful to us since natural gas comprises over 91% of our production. In a higher price environment, not only will we realise the full value of the hedged prices we locked as part of our commitment to protect our cash flow, we'll also benefit from higher market prices on our unhedged volumes.

As I turn to a discussion of our reported earnings, it is important to link the positive price momentum I discussed to its associated earnings impact. As we adjust our 10+ year derivative portfolio to their fair values, we recognised a $239 million non-cash charge that we report in our earnings, which represents the change in the fair value of our entire unsettled hedge portfolio from 31 December 2019 to 31 December 2020. This non-cash valuation change primarily relates to higher prices on the forward price curve for natural gas, and drives our $87 million gross profit into a $137 million pre-tax loss. When excluding this non-cash loss, just as we have excluded our valuation-related non-cash gains in prior years, we report a $102 million pre-tax gain compared to $131 million in 2019. Ultimately, while we report a net loss in 2020 of $24 million compared to net income in 2019 of $99 million, we grew Hedged Adjusted EBITDA by 10% to $301 million compared to $273 million in 2019.

Protecting our cash flow and its payment of dividends and debt will always be paramount. While hedging may, at times, cause us to forgo upside to commodity prices, we believe our shareholders and lenders value the high visibility into our distributions that hedging affords us. Importantly and as I mentioned earlier, not only do we stand to earn a healthy Cash Margin in 2021 from our natural gas hedges' weighted average floor price of $2.93 per Mcf compared to Total Cash Cost per Mcfe $1.15 ($6.92 per Boe), but should prices settle higher than this value, the earnings and cash flow on our unhedged volumes will increase. You will find the full financial results of our operations in the following pages, which I hope will be helpful as you review our performance.

In summary, 2021 is shaping up to be another exceptional year for Diversified, and I look forward to serving alongside a team eager to deliver the same excellence you have come to expect from us.

Eric Williams

Chief Financial Officer 

RESULTS OF OPERATIONS

Please refer to the APMs section for information on how these metrics are calculated and reconciled to IFRS measures.

Production, Revenue and Hedging

Total revenue in the year ended 31 December 2020 of $409 million decreased 12% from $462 million reported for the year ended 31 December 2019, primarily due to a 26% decrease in the average realised sales price, partially offset by 18% higher production. Including commodity hedge settlements of $145 million and $49 million in 2020 and 2019, respectively, Total Adjusted Revenue increased by 8% to $553 million in 2020 from $512 million in 2019.

We sold approximately 36,538 MBoe in 2020 versus approximately 30,944 MBoe in 2019 with the increase driven by the full integration of the previously acquired HG Energy and EdgeMarc assets in 2019 and the Carbon and EQT assets we acquired in May 2020. Lower commodity prices drove our average realised sales prices lower as reflected in the table below for the periods presented:

Refer to Note 5 in the Notes to the Group Financial Information for additional information regarding our acquisitions.

Commodity Revenue

The following table reconciles the change in commodity revenue (excluding the impact of hedges settled in cash) for the year ended 31 December 2020 by reflecting the effect of changes in volume and in the underlying prices:

To manage our cash flows in a volatile commodity price environment, we utilise derivative contracts which allow us to fix the sales prices at a Boe level for approximately 90% of our production to mitigate commodity risk. The tables below set forth the commodity hedge impact on commodity revenue, excluding and including cash received for commodity hedge settlements with natural gas on a per Mcfe basis and NGLs and oil on a per Bbls basis:

Refer to Note 14 in the Notes to the Group Financial Information for additional information regarding our hedging portfolio.

Expenses

(a) Base lease operating expense is defined as the sum of employee and benefit expenses, well operating expense (net), automobile expense and insurance cost.

(b) Production taxes include severance and property taxes. Severance taxes are generally paid on natural gas, NGLs and oil production at fixed rates established by federal, state or local taxing authorities. Property taxes are generally based on the taxing jurisdictions' valuation of our natural gas and oil properties and midstream assets.

(c) Midstream operating expenses are daily costs incurred to operate our owned midstream assets inclusive of employee and benefit expenses.

(d) Transportation expenses are daily costs incurred to third parties to gather, process and transport the Group's natural gas, NGLs and oil.

(e) Base G&A includes payroll and benefits for our administrative and corporate staff, costs of maintaining administrative and corporate offices, costs of managing our production operations, franchise taxes, public company costs, non-cash equity issuance, fees for audit and other professional services, and legal compliance.

(f) Non-recurring and/or non-cash G&A includes costs related to acquisitions, our up-list to the Main Market of the LSE, hedge modifications, non-cash equity compensation and one-time projects.

(g) Allowance for credit losses consists of expected credit losses and a non-recurring increase in the reserve of joint interest owner receivable.

Our value-focused growth and disciplined operating approach reduced per unit expenses by 3%, or $0.40 per Boe, including:

• Lower per Boe base lease operating expenses, which declined 24%, or $0.78 per Boe, through a mixture of disciplined cost reductions and economies of scale, whereby fixed operating costs were spread across a larger base of producing assets;

• Lower per Boe production taxes, which declined 28%, or $0.15 per Boe, primarily due to a decrease in severance taxes as a result of a decrease in revenue. Declines also resulted from taxes on our midstream assets, that are generally fixed, being spread across a larger base of producing assets; and

• Lower per Boe transportation expense related to efficiencies of scale gained on the fixed cost components associated with transportation expense.

Partially offsetting the per Boe declines were increases due to:

• Higher per Boe midstream operating expense, which increased 2%, or $0.03 per Boe, primarily due to increases in the size of our midstream workforce to meet the needs of the expanded midstream capabilities gained in the Carbon and EQT acquisitions;

• Higher Adjusted G&A as a result of investments made in staff and systems to support our enlarged operation; and

• Higher non-recurring and/or non-cash G&A due to costs associated with our transition from listing on AIM to the Premium Segment of the Main Market on the LSE, acquisition and integration expenses related to Carbon and EQT, and costs to modify certain derivative contracts.

Refer to Notes 5 and 14 in the Notes to the Group Financial Information for additional information regarding our acquisitions and derivative contracts, respectively.

Derivative Financial Instruments

We recorded the following gain (loss) on derivative financial instruments in the Consolidated Statement of Comprehensive Income for the periods presented:

(a) Represents the cash settlement of hedges that settled during the period.

(b) Represents the change in fair value of financial instruments net of removing the carrying value of hedges that settled during the period.

For the year ended 31 December 2020, the total loss on derivative financial instruments of $94 million decreased by $168 million compared to a gain of $74 million in 2019. Adjusting our unsettled derivative contracts to their fair values drove a loss of $239 million in 2020, a decrease of $259 million, as compared to a gain of $20 million in 2019.

While the change in fair value is significant and reflective of higher prices on the forward price curve, our derivative contracts position us to not only fully realise the healthy cash flows we hedged but also earn higher cash flow on our unhedged production.

Additionally, a large portion of the unsettled hedge loss relates to time option value of our long-dated portfolio. Specifically, approximately $70 million of the $166 million net liability reflected on our balance sheet relates to the time value rather than their settlement value based on the current futures price strip.

Offsetting the non-cash valuation loss was a cash gain of $144 million on settled derivative instruments for the year ended 31 December 2020, an increase of $91 million over 2019.

For the year ended 31 December 2020, the gain on settled derivative instruments, representing 26% of Adjusted Total Revenue, validates our hedge portfolio objective to provide downside commodity risk protection. While year-end 2020 prices experienced modest recovery, the rising forward price curve results in a shift of our overall, long-dated derivative contract portfolio from an asset to a liability. For 2021, we have significant downside protection, including approximately 90% of our natural gas production hedged at a weighted average floor price of $2.93 per Mcfe, securing our cash flows, future dividend distributions and debt repayments.

Refer to Note 14 in the Notes to the Group Financial Information for additional information regarding our derivative financial instruments.

Gain on Bargain Purchase

We recorded the following gains on bargain purchase in the Consolidated Statement of Comprehensive Income for the periods presented:

While gains on bargain purchases are uncommon, the E&P segment of the broader energy sector has been in a period of transition and rebalancing for the past few years, creating opportunities for healthy companies like Diversified to acquire high quality assets for less than their fair values. We have established a track record of being disciplined in our bidding to acquire assets that meet our strict asset profile and are accretive to our overall corporate value.

Refer to Note 5 in the Notes to the Group Financial Information for additional information regarding our acquisitions and bargain purchase gains.

Finance Costs

For the year ended 31 December 2020, interest expense on borrowings of $34 million increased $2 million compared to $33 million in 2019, primarily due to the increase in borrowings used to fund our previously mentioned acquisitions. As of 31 December 2020 and 2019, total borrowings were $746 million and $645 million, respectively. For the year ended 31 December 2020, the weighted average interest rate on borrowings was 4.70% as compared to 4.52% in 2019, as a result of entering into additional fixed rate financing structures as we sought to capitalise on depressed markets and secure advantageous financing.

The increase in other finance costs was primarily due to an increase in interest expense on leases. During the year ended 31 December 2020, we expanded our fleet and transitioned owned vehicles to a fleet management lease programme.

Refer to Notes 5, 21, and 22 in the Notes to the Group Financial Information for additional information regarding our acquisitions, capital leases and borrowings, respectively.

Taxation

The effective tax rate is calculated on the face of the Statement of Comprehensive Income by dividing income (loss) before taxation by the amount of recorded income tax benefit (expense) as follows:

The differences between the statutory US federal income tax rate and the effective tax rates are summarised as follows:

For the year ended 31 December 2020, we reported a tax benefit of $113 million, a change of $145 million, compared to an expense of $32 million in 2019. The resulting effective tax rates for the years ended 31 December 2020 and 2019 were 83% and 24%, respectively. The effective tax rate is primarily impacted by recognition of the federal well tax credit available to qualified producers in 2020, who operate lower-volume wells during a low commodity pricing environment. The federal government provides these credits to encourage companies to continue producing lower-volume wells during periods of low prices to maintain the underlying jobs they create and the state and local tax revenues they generate for communities to support schools, social programmes, law enforcement and other similar public services.

Refer to Note 8 in the Notes to the Group Financial Information for additional information regarding taxation.

Operating Profit, Net Income, EPS, Adjusted Net Income, Adjusted EPS and Hedged Adjusted EBITDA

For the year ended 31 December 2020, we reported a net loss of $23 million and a loss per share of $0.03 compared to income of $99 million and EPS of $0.15 in 2019, a decrease of 124% and 120%, respectively. We also reported an operating loss of $78 million compared with an operating profit of $181 million for the year ended 31 December 2020 and 2019. This year-over-year decline in net income was attributable to a mark-to-market loss of $239 million.

Excluding the mark-to-market loss as well as other non-cash and non-recurring items, we reported Adjusted Net Income of $175 million and Adjusted EPS of $0.25 per share compared to Adjusted Net Income of $96 million and Adjusted EPS of $0.15 per share in 2019, increases of 83% and 67%, respectively.

Additional adjustments for depletion, depreciation, amortisation, interest, and taxes resulted in Hedged Adjusted EBITDA of $301 million and Hedged Adjusted EBITDA per Share of $0.44 compared to $273 million and $0.42 in 2019, representing increases of 10% and 5%, respectively. The increases in Adjusted Net Income and Hedged Adjusted EBITDA metrics year-over-year were driven by a strong execution of our stated strategy, resulting in consistent growth of earnings at the share level.

Refer to Note 9 in the Notes to the Group Financial Information for information regarding Adjusted Net Income, Adjusted EPS, and Hedged Adjusted EBITDA. Please refer to the APMs section for information on how these metrics are calculated and reconciled to IFRS measures.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity have historically been cash generated from operating activities. To minimise financing costs, we apply our excess cash flow to reduce borrowings on our Credit Facility. When we acquire assets to grow, we complement our Credit Facility with long-term, fixed-rate, fully-amortising debt structures that better match the long-life nature of our assets. These structures not only afford us lower interest rates than more traditional E&P financing like high-yield bonds, but also provide a visible path for reducing leverage as we make scheduled principal payments. For larger acquisitions, and to ensure we maintain a leverage profile that we believe is appropriate for the type of assets we acquire, we will also raise equity proceeds through a secondary offering.

We monitor our working capital to ensure that the levels remain adequate to operate the business with excess cash primarily being utilised for the repayment of debt or shareholder distributions. In addition to working capital management, we have a disciplined approach to managing operating costs and allocating capital resources, ensuring that we are generating return on our capital investments to support the strategic initiatives in our business operations.

Net Cash Provided by Operating Activities

For the year ended 31 December 2020, net cash provided by operating activities of $242 million decreased $37 million, or 13%, as compared to $279 million in 2019. The reduction in net cash provided by operating activities was predominantly attributable to the following:

• A decrease in revenue, largely offset by an increase in settlements of hedges;

• An increase in Adjusted G&A for investments in staffing and systems to support our growth;

• An increase in non-recurring and/or non-cash G&A associated with a variety of items including (1) the costs to transition from our AIM listing to a Premium Listing on the Main Market of the LSE, (2) acquisition and integration expenses related to Carbon and EQT, and (3) derivative commodity contract modifications costs associated with our ABS II financing and with similar portfolio optimisation initiatives; and

• The timing of working capital payments and receipts.

Refer to Notes 5 and 14 in the Notes to the Group Financial Information for additional information regarding our acquisitions and derivative financial instruments, respectively.

Net Cash Used in Investing Activities

For the year ended 31 December 2020, net cash used in investing activities of $257 million decreased $210 million, or 45%, from $467 million in 2019. The change in net cash used in investing activities was primarily attributable to the following:

• For the year ended 31 December 2020, we paid cash purchase consideration of approximately $100 million and $123 million for business combinations (Carbon) and asset acquisitions (primarily EQT), respectively. For the year ended 31 December 2019, we paid purchase consideration of $439 million for business combinations (primarily HG Energy & Edgemark). Refer to Note 5 in the Notes to the Group Financial Information for additional information regarding our acquisitions.

• Capital expenditures were $22 million for the year ended 31 December 2020 compared to $32 million for the year ended 31 December 2019. Prior-year expenditures included "Project Delta," our system modernisation initiative whereby we planned, designed, tested, and implemented a network of accounting, production, land and measurement systems into a single data platform. Having completed most of that work during 2019, we had less similar expenditures in 2020.

• Restricted cash increased by $7 million year-over-year as a result of the interest expense reserve required by our long-term financing agreements including ABS I, ABS II and Term Loan financing. For more information refer to Note 3 in the Notes to the Group Financial Information.

• Investments were made in our marketing and operations groups in 2020 as we looked to expand these to better manage our growth. We invested in two service providers that had previously been providing contracting services for us. These acquisitions resulted in a cash outflow of $3 million. For more information refer to Note 13 in the Notes to the Group Financial Information.

Net Cash Provided by Financing Activities

For the year ended 31 December 2020, net cash provided by financing activities of $15 million decreased $173 million, or 92%, as compared to $188 million in FY19. The change in net cash provided by financing activities was primarily attributable to the following:

• Our Credit Facility activity resulted in net repayments of $223 million in 2020 versus net repayments of $59 million in 2019, with much of the increase attributed to a $200 million refinancing of Credit Facility borrowings through ABS II;

• Proceeds from borrowings, net of repayments, on our new debt facilities were $318 million in 2020, an increase of $112 million as compared to 2019;

• A decrease of $140 million in proceeds from equity issuances that raised $81 million in 2020 as compared to $222 million raised in 2019.

• An increase of $16 million in dividends paid in 2020 as compared to 2019; and

• A decrease of $37 million in the repurchase of shares in 2020 as compared to 2019.

Refer to Notes 17, 19 and 22 in the Notes to the Group Financial Information for additional information regarding share capital, dividends and borrowings, respectively.

GROUP FINANCIAL INFORMATION

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Amounts in thousands, except per share and per unit data)

The notes are an integral part of this Group Financial Information.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(Amounts in thousands, except per share and per unit data)

The notes are an integral part of this Group Financial Information. 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(Amounts in thousands, except per share and per unit data)