DGOC.L Regulatory News (DGOC)

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27 June 2018

Diversified Gas & Oil PLC

("DGO" or the "Company")

Update on $575 million acquisition of producing gas and oil assets in Appalachian Basin

Proposed Share Placing to raise up to $250m (the "Placing")at 97pence per share (the "Placing Price")

Restoration of trading on AIM

Diversified Gas & Oil PLC (AIM: DGOC), a US based gas and oil producer, announced on 14 June 2018 that it had signed a non-binding letter of intent to acquire a network of further gas and oil producing assets in the Appalachian Basin ( the "Target Assets") for a total cash consideration of approximately $575 million (the "Acquisition"). The Company is pleased to confirm that it has now finalised the terms of the agreement to acquire the Target Assets (the "Acquisition Agreement"), and anticipates that this agreement will be signed shortly. Details of the Acquisition will be set out in an admission document and circular to Shareholders which is expected to be published by not later than 7.00am on 29 June 2018 (the "Admission Document").

Highlights

* DGO will become one of the top producers on the London Stock Exchange on completion of what will be the Company's largest acquisition to date , with net production rising to approximately 58,381 boepd

* The $575 million acquisition will be the largest acquisition by an Oil & Gas company in the history of the AIM Market

* The Acquisition will more than double production and increases PDP Reserves to 393 mmboe

* The pro forma uplift in 2017 EBITDA is estimated to be approximately 225% (2)

* The Acquisition will be immediately accretive to per share cashflow and earnings.

The Acquisition is to be financed through an extension of the Company's existing syndicated bank facility and through a share placing to raise up to $250 million at a Placing Price of 97p per share.

As previously announced and upon completion, DGO's total net acreage under lease will increase from 4.0 million acres to 6.5 million acres. Proven developed producing reserves (PDP) will increase by 142% to 393 mmboe with a PV-10 value of $1,388 million from the current 163 mmboe with a PV-10 value of $589 million.

The Acquisition will include a significant extension to the Company's existing pipelines and network of compression stations. The Target Assets also include a wholly-owned midstream gathering and compression system with approximately 6,400 miles of pipeline and 59 compressor stations.

Further details of the Loan Facility and the Placing will be announced shortly and will be set out in full in the Admission Document.

Notes:

(1) Net daily production as at 31 March 2018 is a pro forma figure over the first quarter of 2018 to include the Alliance Petroleum Corporation and CNX asset acquisitions that closed on 7 March 2018 and 29 March 2018, respectively, presented as if closed on 1 January 2018.

(2) Based on pro forma estimate of 2017 EBITDA, including full year contributions from the Alliance Petroleum Corporation and CNX asset acquisitions.

(3) Figures in this announcement are based on a USD:GBP exchange rate of £1 = 1.3216, as at 27 June 2018

1. Introduction

As previously announced the Company had entered into a non-binding letter of interest to acquire certain gas, oil and NGL assets from a major US oil and gas operating group, located in the states of Kentucky, West Virginia and Virginia, comprising approximately 11,250 producing wells. The Target Assets are located close to the Company's existing operations comprising over 40,000 producing wells in the Appalachian Basin in the northeastern United States, principally in the states of Ohio, Pennsylvania, West Virginia and northeast Tennessee.

The Company has grown rapidly over the last few years, capitalising upon opportunities to acquire conventional gas and oil producing assets from larger US exploration and production companies which are today focused increasingly upon the opportunities from unconventional shale production.

The consideration for the Acquisition is $575 million (approximately £435.1 million) (subject to adjustment in accordance with the terms of the Acquisition Agreement). A deposit of $57.5 million will be paid upon entering into the Acquisition Agreement and the balance of $517.5 million is to be satisfied in cash at Completion, conditional, inter alia, upon Shareholder approval.

The Acquisition consideration will be funded by a combination of the new debt facility of up to $1 billion and a placing of new Ordinary Shares to raise proceeds of $240 million, net of placing costs.

The Company has arranged a five year, senior secured credit facility of up to $1 billion (approximately £756.7 million) from Key Bank National Association and a syndicate of lenders. It is intended that up to $600 million will be available to be drawn down at Completion to fund the Acquisition, to pay related costs.

In view of the size of the Target Assets relative to the Company, the Acquisition constitutes a reverse takeover of DGO under Rule 14 of the AIM Rules for Companies and accordingly the Existing Ordinary Shares were suspended from trading on AIM on 14 June 2018 pending publication an Admission Document. Trading in the Existing Ordinary Shares is expected to be restored following publication of the Admission Document on 29 June 2018. The issue of the Placing Shares is conditional, inter alia, on the passing of the Resolutions at the General Meeting. Shareholder approval for the Acquisition will also be sought at the General Meeting, in accordance the AIM Rules.

2. Background to, and reasons for, the Acquisition

The Acquisition will increase proved developed producing reserves by approximately 230 mmboe to 393 mmboe and the Company will be producing from licenses held by production over a total area of approximately 6.5 million acres, an increase of some 63 per cent.

The production figures in the table below show barrel of oil equivalent per day (boepd) for the Enlarged Group on a pro-forma basis:

*  DGO production numbers are stated on a pro forma basis including production from the Alliance Petroleum Acquisition and CNX Acquisition in March 2018

** Net production is stated after working interest and royalty adjustments

The Target Assets comprise approximately 11,250 producing gas wells located in the states of Kentucky, West Virginia and Virginia, close to the Group's existing operations in the Appalachian Basin in the northeastern United States, principally in the states of Ohio, Pennsylvania, West Virginia and northeast Tennessee.

The Target Assets also include a wholly-owned midstream gathering and compression system with approximately 6,400 miles of pipeline and 59 compressor stations located in Kentucky, Virginia, and West Virginia. This system is used to gather all of the Target Assets' current production, reducing the gathering expense as compared to using a third party midstream operator. In addition, third party volumes are also gathered through the system through long-term gathering and compression arrangements, enhancing system economics.

Currently, the Target's midstream assets allow delivery of approximately 100 mmcf/d to be processed for NGL. The plant allows NGLs to be separated from the high BTU gas produced by the Target's Assets which is then sold at a premium as compared to unprocessed gas.

The table below sets out detail on the wells by state comprising the Target Assets and the relative total proved reserve figures:

Source: Wright & Co.

Across all wells the average working interest is approximately 95 per cent., while the overall average net revenue interest is approximately 88 per cent. The average royalty rate is approximately 7.4 per cent. There are approximately 3,500 properties that include the royalty interest.

The Target Assets consist of approximately 230 mmboe of proved developed producing reserves with a pre-tax PV10 of $804 million and a post-tax NPV10 of $661 million as reported on by Wright & Co. The reserves are characterised by an average well life of approximately 50 years and a predictable production profile which declined approximately 5 per cent. per annum between 2011 and 2017. In addition, the Target Assets include a significant NGL and liquids component representing approximately 24 per cent. of total proved developed producing reserves and accounting for approximately 23 per cent. of 2017 production. The gas produced from the Target Assets has an average calorific value of approximately 1,170 btu, which allows the Target Assets to achieve a higher realised gas price as compared to similar assets with a lower gas btu content.

The table below sets out summary pro-forma financial information for the Target Assets for the year ended 31 December 2017 extracted from the Target Assets' unaudited management accounts, as adjusted by the Directors:

2017 ended with daily net production for the Group of 10,400 boepd, a 250 per cent. increase from the 2016 year end with current net overall production running at approximately 28,070 boepd. The Acquisition will add approximately 30,311 boepd to daily net production, an increase on current production of approximately 114 per cent.

In March 2018, DGO completed the acquisition of Alliance Petroleum Corp (the Alliance Petroleum Acquisition") and the acquisition of certain assets from CNX Gas Company LLC (the "CNX Acquisition") comprising 24,000 oil and gas wells in aggregate, principally in Pennsylvania and West Virginia. On completion of these two latest acquisitions, the Company's total net working interest production increased by 173 per cent. to approximately 28,133 boed and its net working interest PDP reserves grew by 217 per cent. to 173.2 mmboe.

During the year ended 31 December 2017, and as presented on a proforma adjusted basis, the Target Assets produced an average 30,200 boepd, with 29,379 boepd being produced in December 2017.

The Board is delivering on its stated acquisitive strategy as demonstrated with the significant acquisitions of Titan, Alliance Petroleum Corporation and CNX within the last 12 months.

Following completion of the Acquisition, the Company will produce approximately 58,381 boepd of daily net production, making the Company a material producer amongst its small-mid cap peer group and the largest gas and oil producer on AIM. Increased combined production, improved operational efficiencies and the corresponding earnings enhancing impact on the Enlarged Group, significantly enhances the future prospects of the Enlarged Group. The Directors continue to identify further suitable acquisition targets.

The Acquisition will be funded by a combination of draw down under an amendment to increase the Existing KeyBank Facility (the "Amended KeyBank Facility"), and from the net proceeds of the Placing.

As at the date of this announcement and excluding the funds available for draw down under the Amended KeyBank Facility Agreement, the Group currently has in place a $500 million, five-year senior secured revolving credit facility (the "Existing KeyBank Facility") with a syndicate of seven US banks, led by KeyBank National Association ("KeyBank"). The syndicate comprises KeyBank, Huntington National Bank, Citizens Bank, N.A., Branch Banking and Trust Company, Iberia Bank, CIT Bank, N.A. and First Tennessee Bank, N.A.

The Existing KeyBank Facility was subject to an initial borrowing limit of $140 million in conjunction with the closing of the Alliance Petroleum Acquisition, increasing to $200 million following closing of the CNX Acquisition.

The Group has in place total borrowings, as at the date of this announcement, of approximately $92 million.

The Company has arranged a five year, senior secured credit facility of up to $1 billion (approximately £755.8 million) from Key Bank and a syndicate of lenders. It is intended that up to $600 million will be available to be drawn down at Completion to fund the Acquisition, to pay related closing costs and to refinance indebtedness under the Existing KeyBank Facility.

The Amended KeyBank Facility Agreement stipulates that the loan proceeds are to be utilised for the Acquisition, refinancing of the Existing KeyBank Facility, capital expenditures programme, working capital and transaction costs. The Amended KeyBank Facility Agreement has an interest rate of LIBOR plus a margin based on a pricing grid of 2.25 per cent. to 3.25 per cent. based upon utilisation.

The Amended KeyBank Facility Agreement contains standard representations and warranties, affirmative and negative covenants and events of defaults, including financial reporting requirements and performance covenants all of which shall be comparable to those contained in the Existing KeyBank Facility.

The Company intends to raise up to $250 million (approximately £187.7 million), before expenses of the Placing, through the Placing being undertaken by Mirabaud Securities Ltd and Stifel Nicholaus Europe Ltd from certain existing and new institutional investors.

The Placing Price represents a premium of approximately 3.0 per cent. to the Company's closing mid-market price of 94.2p on 13 June 2018 being the date prior to which the existing ordinary shares were suspended from trading on AIM pending publication of the Admission Document.

The issue of the Placing Shares will be conditional, inter alia, on the passing of the relevant resolutions at a General Meeting of Shareholders.

Directors of the Company Martin Thomas and David Johnson have indicated that they will participate in the Placing

Dealings in the existing Ordinary Shares, which were suspended on 14 June 2018 are expected to recommence on publication of the Admission Document.