DGOC.L Regulatory News (DGOC)

11 September 2018

DIVERSIFIED GAS & OIL PLC

("DGO" or the "Company")

Interim Results

Diversified Gas & Oil PLC (AIM: DGOC), the US based gas and oil producer with a focus on the Appalachian Basin, is pleased to announce its interim results for the six-month period ended 30 June 2018.

Period Highlights:

• Revenue of $58.0m (2017: $10.9m*)

• Adjusted EBITDA of $22.87m

• Materially increased production through acquisition

• Average daily production of 19.3 kboed

• Exit rate of approximately 27 kboed at period end (June average)

• Current net production of approximately 60 kboed (July average)

• Strong adjusted EBITDA margins of 40%

• Continued success of value accretive acquisitions:

• Alliance Petroleum for $80.7m completed in early March

• Conventional assets from CNX Resources for $89.3m completed in early April

• $575m of gas, oil and midstream assets from EQT Corporation completed post period (July)

• Commencement of quarterly dividend payment

• Q1'18 dividend of 1.725 cents per share announced previously to be paid on 24 September 2018 to shareholders on the register at 13 July 2018

• Q2 '18 dividend declared of 2.8 cents per share to be paid on 19 December 2018

• Significantly strengthened balance sheet & liquidity

• $439m of new gross equity raised (inclusive of July 2018 equity raise)

• Enlarged credit facility of $1bn with a $600m committed borrowing base

• Maintains 1.7x leverage ratio on prospective basis

• Strong liquidity position of $187m

• Successful integration process of acquired assets delivering operating synergies:

• Lower unit costs (H1'17 vs H1'18)

• Enhanced operating margins (H1'17 vs H1'18)

* figures have been restated to reflect the revisions for operator revenue, cost of sales and administrative expenses. Operator revenue of $641k has been reclassified as reductions in operator expenses included in cost of sales for the six months to 30 June 2017. This represents operator expenses recharged to and recovered from holders of working interests.

Commenting on the Results, CEO Rusty Hutson said:

"We would define the first half of 2018 as a period of transformative growth resulting in a material step-change for our operational and financial profile. We continued to deliver on our growth strategy and capitalised on compelling, per-share accretive acquisition opportunities in the Appalachian Basin to grow our production by more than 90% since year end, and we accomplished this growth without risking the balance sheet. Instead, our financial strength has been improved with the addition of our low cost credit facility and a leverage profile of less than two times adjusted EBITDA. The real impact of these game-changing acquisitions will be achieved in the second half of the year and beyond, as we realise the benefits of scale in the form of materially increased cash flow, lower costs and enhanced EBITDA margins, all of which underpin the reliable and peer-leading quarterly dividend. Our near-term focus will remain on extracting maximum value from our enlarged portfolio by leveraging operating synergies to drive both top line growth and further cost reductions that collectively elevate our already compelling margins. Our operating environment is increasingly positive, and we continue to screen a robust pipeline of growth opportunities from our position as the consolidator of choice in the Appalachian Basin."

Results presentation and audiocast

An analyst presentation will be held at 10:30am BST on 11 September 2018 at the offices of Buchanan (107 Cheapside, London, EC2V 6DN).

The presentation will be made available on the Company website, www.dgoc.com.

An audiocast of the presentation can be accessed shortly after the live presentation concludes through the following link: http://webcasting.buchanan.uk.com/broadcast/5b800ba90f6d547ed12e613c

This announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014.

Introduction

The first half of 2018 saw DGO accelerate the speed of its growth through a series of transformative events. Although the Half Year Results tell the story of dramatic growth in the period, they do not reflect the scale of DGO's current operational footprint and financial profile, following the completion of two major acquisitions in the second quarter, and yet another game-changing transaction that made DGO one of the largest producers by volume, listed in London.

The focus for the business throughout the period has been on positioning the Company to grow production, cashflow and EBITDA margins, all with a view to generating long-term value for its shareholders through capital appreciation and a competitive dividend yield. As highlighted by these results, DGO has been successful in every measure and is well placed to demonstrate a step-change in all key metrics as it benefits from its recently expanded operational footprint and associated operating efficiencies.

The Board is pleased to announce a dividend for the second quarter of 2.8 cents per share, payable on 19 December 2018 to those shareholders on the Company's register on 30 November 2018. This represents an increase of 62 per cent over the 2018 Q1 dividend of 1.725 cents. Together these dividends are an increase of 128 per cent over the first half of 2017.

Accelerating our strategy

Throughout the period, the Company continued to effectively implement its growth strategy by leveraging its highly visible growth profile within both the Appalachian Basin and the Capital Markets to capitalise on the acquisition opportunities created by often larger, drilling-oriented companies wishing to divest of non-core assets, particularly within its focus region of Appalachia.

DGO has cemented its position as the leading consolidator for mature, cash-flowing assets in the region to become the largest producer from conventional assets in the Appalachian Basin. The Company has successfully leveraged its established dividend-paying investment case and track record for closing value-creating acquisitions to access the capital required to continue targeting sizeable transactions through a combination of new equity and debt.

In January, DGO announced the nearly simultaneous and highly complementary acquisitions of Alliance Petroleum for $80.7m and certain producing assets from CNX for $89.3m, which it funded through a placing raising gross proceeds of $189m. These transactions took net production to over 26 kboepd on a historical pro forma basis, an increase of 170% from year-end 2017.

Even more transformative still was the $575m acquisition of assets from EQT Corporation announced just prior to the period-end, which again more than doubled the already elevated production levels and increased DGO's PDP Reserves to 393 mmboe. The Company funded this transaction, which was immediately accretive to cash and earnings, through a placing which raised $250m, and with low-cost funding from its existing credit facility, which was doubled to $1 billion with a $600m borrowing base. After the completion of the EQT acquisition in July, DGO's current net production of approximately 60 kboepd has made it the largest producer on AIM by some margin and one of the largest independent producers in terms of volumes quoted in London. Demonstrating the value creating nature of the transaction, DGO's declared dividend for the second quarter of 2018 is 62% higher than its previous first quarter dividend, and is compelling evidence of its commitment to its dividend policy to provide robust income for shareholders.

The EQT acquisition also included more than 6,400 miles of gathering pipe, incorporating some 59 compression stations. This acquisition enhanced the economics of the Company's production in the region and will form a basis from which to develop the Company's mid-stream operations.

Leveraging an expanded operational footprint

The opportunity to acquire complementary and operationally compatible assets in the Appalachian Basin from Alliance and CNX was compelling. Building on DGO's enhanced experience of completing the acquisition of Titan the previous year, our team quickly set about integrating and optimising these newly acquired assets.

The focus throughout the integration process has been to further realise the financial and operating benefits of enlarged scale - elements central to DGO's investment strategy. The integration of these assets, acquired in March 2018, was facilitated by the high-quality teams that came with the respective acquisitions, particularly the Alliance team that included a number of talented corporate support personnel including accounting, treasury and land personnel. By taking on a combination of experienced senior management and highly skilled field workers with in-depth knowledge of the assets, DGO has been able to identify and prioritise the areas of integration that maximise synergies and optimise production.

In addition to maintaining and increasing production from existing wells through workover initiatives, the operations team has successfully returned wells into production, many of which came within the Alliance and CNX packages. Returning these previously unproductive wells to production has the dual benefit of partially offsetting overall natural decline rates, whilst also removing the wells from decommissioning. Over the last 18 months, DGO has brought over 500 wells back into production across its expanded acreage, resulting in prolonged production and deferred Plugging & Abandonment ("P&A") liabilities.

Decommissioning

The topic of decommissioning has always been a key consideration for DGO given the mature asset focus of the business. The issue has increased in relevance as the Company has expanded its acreage and therefore the scale of future liabilities. The State regulatory bodies typically establish the requirements around P&A liabilities, and DGO maintains constructive dialogue with those relevant authorities to ensure compliance and to agree on mutually beneficial long-term plugging programmes over the life of DGO's diverse portfolio.

The cost of plugging activities varies according to the depth of a well. Over 98% of DGO's well portfolio will be at the lower end of the range at around $25k per well. The Company continually reviews ways in which plugging costs can be reduced further and is likely to expand its internal P&A capabilities to minimise the role of third party vendors whose work inherently carries its own profit margins, an action that is expected to further reduce the average plugging costs.

In line with DGO's approach to risk mitigation and visibility on key financial metrics, DGO is actively pursuing agreements with state authorities in the states in which it operates. In this regard, the Company can budget accordingly for the long-term costs and logistical efforts associated with plugging wells, with costs representing a fraction of the annual earnings generated by the portfolio. Of the more than 50,000 wells in the current portfolio, we expect to plug fewer than 2,000 wells over the next 15 years, with the vast majority producing for many decades based on the low natural decline profile of the wells comprising our portfolio.

A transformational acquisition

The completion of the acquisition of assets from EQT Corporation in July represented a material step change in DGO's operating footprint and financial profile. This transaction gives DGO unparalleled scale in the conventional gas space in the Appalachian Basin, an enhanced exposure to liquids, and an expansive wholly owned midstream infrastructure.

The upstream assets are consistent with the wider portfolio profile in terms of long well-life (average 50 years) and low decline rates of around 4% to 7% per annum. The midstream assets provide DGO with its initial ownership of gathering systems that span a significant portion of its Kentucky acreage position and eliminate a meaningful portion of third party gathering expenses. Importantly, they also provide DGO with significant takeaway capacity to multiple end markets and processing capacity to support both existing and future potential development across the portfolio. For example, the ability to move a significant portion of its Kentucky natural gas production to a local liquids processing plant allows the Company to realize the economics of its natural gas liquids, providing an estimated net 56% uplift in the realized price it receives for this production. It is this type of value-creating element of the acquisition that is driving DGO's adjusted EBITDA margins from approximately 40% to approximately 60%. As with previous acquisitions, DGO has assumed related operating personnel to expedite integration of these assets to realize these higher margins.

The EQT acquisition represented a continuation of DGO's track record to source, progress and complete value accretive acquisitions. The Company's purchase price for the assets represents an attractive valuation multiple of just 3.5x annual operating cash flow, which is consistent with DGO's recent track record for acquisitions and is particularly impressive for an acquisition of this size and including midstream assets. As DGO successfully integrates the assets, the Company expects to demonstrate a further reduction in its operating costs, which will further enhance its EBITDA margins.

Outlook

DGO continues to progress from one position of strength to another, and is already unrecognisable from the company that floated on AIM just over 18 months ago. The Company has achieved a significant level of growth, surpassing market forecasts through a series of high quality, earnings accretive acquisitions.

The window for further M&A opportunities in the Appalachian Basin remains open, and the Company continues to review value accretive acquisitions in line with its proven growth strategy. With its growing list of successfully completed, sizeable acquisitions in the region, DGO has access to an increasingly robust pipeline of growth opportunities to consider. The Board remains steadfast in its focus to only consider new opportunities that complement and enhance the existing business and often passes on growth opportunities not suited to the Company's current asset portfolio. Importantly, DGO benefits from a strong balance sheet, liquidity and the demonstrated ability to move quickly on large packages of exceptional assets should it identify compelling opportunities.

The long-term outlook for natural gas prices in the region remains stable with investments being made in expanded take-away capacity coming online in the region providing a catalyst for higher realized prices as basin basis differential begins to decline. Consistent with its commitment to always protect its cash flow and the underlying dividend funded by its stable production base, DGO will continue to implement its hedging strategy, whilst also retaining upside exposure on a portion of its production to realise pricing increases.

Presently, DGO is intensely focused on the complete and efficient integration of assets acquired from EQT, and expects the addition of these assets and the achieved operating synergies to enhance revenue, cashflow and EBITDA margins whilst reducing operating costs.

Overall, DGO has created long-term value for shareholders by stewarding its capital to enlarge a strong platform of stable, cashflow producing assets, and is well positioned to deliver a materially stronger second half as it realises the benefits of the transformative acquisitions completed in the first seven months of 2018.

Financial Review

Production, Revenue and Hedging

Total revenue in 1H18 of $58.0m increased 432.4% from $10.9m reported for 1H17 primarily due to a 502.2% increase in barrel of oil equivalent sales partially offset by a 7.7% decrease in the average realised sales price. DGO ended 1H18 with net MBOE sales of approximately 3,499 vs. the prior year sales of approximately 581. The increase in production was driven by the increase in producing wells from our acquisitions of assets from Titan Energy, EnerVest Energy, Alliance Petroleum Company, and CNX Resources LLC in 2H17 and 1H18. See Note 9 tor additional information regarding DGO's acquisitions.

The following table is intended to reconcile the change in oil and natural gas revenue for 1H18 by reflecting the effect of changes in volume and in the underlying prices.

To manage its cash flows in a volatile commodity price environment, DGO uses a combination of physical and financial derivative instruments. As required by its Senior Secured Credit Facility, DGO executed a combination of fixed price physical contracts, price swap financial contracts and two-way collar financial contracts to hedge between 75% and 90% of the Company's forecasted production volumes for a 36-month rolling period. Refer to Note 13 for additional information regarding DGO's hedge portfolio.

Expenses

As a result of DGO's significant, value-focused growth, unit operating expenses decreased 32% or $5.98 per BOE. These reductions include:

• Lower per BOE lease operating expenses, which declined 14% or $1.12 per BOE through a mixture of disciplined cost reductions and through achieving an enlarged scale in the region whereby fixed operating costs were spread across a larger base of producing assets.

• Lower per BOE production taxes, which declines 84% or $1.05 per BOE.

• Lower per BOE depreciation and depletion, which declined 38% or $1.47 per BOE due to the acquisition of reserves at attractive valuations resulting in a lower unit depletion charge for each unit produced.

• Lower per BOE administrative expenses, which decreased 62% or $3.55 per BOE due to the significant growth in our production base.

Partially offsetting these significant per BOE declines were increases in non-controllable costs related to gathering and transportation costs to deliver our production to market.

Refer to Note 9 for additional information regarding DGO's acquisitions.

Finance costs

DGO's finance costs include interest expense on borrowings and non-cash amortization of deferred financing costs. In March 2018, the Company closed a new $500 million five-year senior secured revolving credit facility with an initial base borrowing base of $140 million increasing to $200 million with the closing of the CNX acquisition. The facility has an initial interest rate of 2.50% plus LIBOR and is subject to a grid that fluctuates based upon utilisation with a pricing of 2.25% - 3.25% plus LIBOR.

In 1H18 and using the proceeds from the March 2018 credit facility, DGO repaid its previous outstanding debt. Accordingly, DGO incurred a non-recurring loss on the early extinguishment of debt of $8.36 million. In 1H17 using the proceeds from our successful AIM IPO, DGO repaid its publicly traded bonds and other outstanding debt. Accordingly, DGO incurred a non-recurring loss on the early extinguishment of debt, which primarily included a $3.8m charge for the accelerated amortization of the remaining deferred financing costs and $0.6m in premiums paid to redeem convertible bonds prior to DGO's admission to AIM.

For more information on DGO's acquisitions, secondary offering and borrowings, refer to Notes 9, 8 and 16, respectively

Income before taxation, EPS and Adjusted EBITDA

DGO reported income before taxation of $21.4m in 1H18 compared to $29.4m in 1H17, a decrease of 27%, and reported statutory earnings for 1H18 per diluted ordinary share of $0.09 compared to $0.24 per diluted ordinary share in 1H17. However, when adjusted for certain non-cash items such as gains on bargain purchases and similar items, DGO reported adjusted EBITDA per diluted ordinary share of $0.09 per diluted ordinary share, a 125.0% increase over the prior year's $0.04 adjusted EBITDA per diluted ordinary share. DGO's adjusted EBITDA for 1H18 was $22.9m, a 462.2% increase over $4.1m in 1H17. Refer to Note 6 for additional information regarding DGO's adjusted EBITDA.

Conclusion

We have already enjoyed an eventful and successful 2018, and we look forward to continued progress as we focus our attention towards 2019. I would like to thank the growing Diversified family for its commitment to safe and efficient operations, the Board for its diligent oversight and guidance, and our shareholders and stakeholders who entrust to us the capital to fuel our growth. I will look forward to reporting back to you with our full-year results.

Rusty Hutson Jr.

Chief Executive Officer

AUDITORS' REVIEW REPORT

Introduction

We have been engaged by the company to review the condensed set of financial statements in the interim financial report for the 6 months ended 30 June 2018 which comprises the Condensed Interim Consolidated Statement of Profit or Loss and Other Comprehensive Income, the Condensed Interim Consolidated Statement of Financial Position, the Condensed Interim Consolidated Statement of Changes in Equity, the Condensed Interim Consolidated Statement of Cash Flow and the related explanatory notes. We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company, in accordance with our instructions. Our review has been undertaken so that we might state to the company those matters we are required to state to them in a review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the opinions we have reached.

Directors' Responsibilities

The interim financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim financial report in accordance with the AIM Rules of the London Stock Exchange.

As disclosed in note 3, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting," as adopted by the European Union.

Our Responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the interim financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity, issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim financial report for the 6 months ended 30 June 2018 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the AIM Rules of the London Stock Exchange.

Crowe U.K. LLP

Statutory Auditor

DIVERSIFIED GAS & OIL PLC

Interim Consolidated Statements of Profit or Loss and Other Comprehensive Income

(Amounts in thousands, except per-share amounts)

The notes are an integral part of these consolidated financial statements.

DIVERSIFIED GAS & OIL PLC

Interim Consolidated Statements of Financial Position

(Amounts in thousands)

The notes are an integral part of these consolidated financial statements.

DIVERSIFIED GAS & OIL PLC

Interim Consolidated Statements of Changes in Equity

(Amounts in thousands)

The notes are an integral part of these consolidated financial statements.

DIVERSIFIED GAS & OIL PLC

Interim Consolidated Statements of Cash Flow

(Amounts in thousands)