DGOC.L Regulatory News (DGOC)

11 September 2017

Diversified Gas & Oil PLC

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

 Interim Results for the six-month period ended 30 June 2017

Diversified Gas & Oil PLC (AIM: DGOC), the US based gas and oil producer, is pleased to announce the publication of its interim results for the six-month period ended 30 June 2017.

 Highlights:

• Successful float on AIM in February 2017 raising $50m

• First post-IPO acquisition in April of a package of 1,300 producing wells which added approximately 743 barrels of oil equivalent per day ("boepd") to the DGO portfolio.

• $84.2m reverse takeover and readmission to AIM through the acquisition of additional assets from Titan Energy LLC ("Titan Energy") in June 2017, increasing production by 6,800 boepd, an increase of 161% over legacy production. The acquisition was financed through an oversubscribed $35m secondary share placing and with a $64m draw on our $110m debt facility

• Increased Proved Developed Producing reserves to approximately 59.4mmboe

• Operating costs reduced 6.4% to $7.73 per barrel of oil equivalent ("boe") in 1H17 vs $8.26 per boe in our readmission document for the last three months of 2016

• Adjusted EBITDA (a) increase of 209% to $4.1m (2016: $1.3m); Pro forma for the Titan acquisition, Adjusted EBITDA increased nearly 900% to $12.9m

• Adjusted EBITDA (a) per share increase of 33% to $0.04 (2016: $0.03)

• Proforma Adjusted EBITDA (c) increase of 878% to $12.9m (2016: $1.3m)

• Reduced net debt by 17.3% with a leverage ratio of Net debt / Pro forma adjusted EBITDA of just 1.4x, a significant improvement over the 16.2x as at 30 June 2016

• Paid a dividend to shareholders of $0.0199 per ordinary share or $2.9m on 31 July 2017

• Declared a dividend of $0.0199 per ordinary share to be paid on 20 December 2017

• Strong balance sheet with $4.6m cash, $24.9m in our AIM offering equity placing receivable and $64m debt with $46m undrawn on the $110m credit facility (d)

• Enhanced liquidity position totaling $75.4m including $29.5m cash and near cash equivalent ($4.6m cash plus the $24.9m in our AIM offering equity placing receivable) and $46m undrawn on our $110m credit facility

These objectives have been delivered with the assistance of a strengthened management team as the Company continues to progress its acquisitive growth strategy.

Financial Summary:

Commenting on the results, CEO Rusty Hutson said:

"The DGO team has been incredibly active and highly focused in 1H17, delivering on a number of important corporate and strategic objectives for the benefit of our shareholders. Following our successful listing on AIM at the beginning of the year, we continue to concentrate on delivering the stated objectives included within our IPO admission document. Importantly, we returned nearly $3m through our inaugural dividend paid in July, which is strong evidence of our successful business model and a major differentiating factor of our investment proposition. DGO is now one of only two AIM companies amongst the 90 constituent companies in the Oil & Gas Production sector that pays a dividend to its shareholders.

In April, we closed on the acquisition of nearly 1,300 additional oil and natural gas wells, and after quickly and successfully integrating these assets into our continuing operations, we maintained the momentum by closing on a much larger, transformational acquisition of nearly 8,240 producing natural gas and oil wells. Collectively, these 1H17 acquisitions more than doubled our high-quality, long-life and low-decline asset base, while significantly enhancing DGO's production base and operating cash flows. DGO enters 2H17 owning a portfolio capable of producing a net 11,000 boepd of highly predictable and profitable volumes of gas and oil, which places DGO amongst the largest producers on AIM, and underpins our stable business model. The integration of the Titan assets is progressing well and 2H17 will see a material step-change in revenue and Adjusted EBITDA as we reap the full benefit of that acquisition, the cost of which has largely been taken in the first half of the year."

Strategic Report

Delivering on our strategic objectives

These 1H17 results reflect DGO's solid performance, delivering on our stated objectives and builds upon our already strong platform for additional growth. When we came to market in February 2017, we communicated a clear strategic vision for DGO: leverage our established position in the Appalachian Basin to capitalise on unique market conditions and acquire complementary producing assets on attractive valuation metrics to in turn grow production and cash flow, which DOG will use to fund a bi-annual dividend to shareholders. We are proud to say that we have already delivered on these objectives and have rapidly transformed the business to become what we believe to be a unique investment proposition on AIM: a low-risk, cash flow positive, dividend paying Exploration and Production Company ("E&P").

Results summary

DGO's first financial results since becoming a listed company reflect solid growth in numerous key financial metrics. Revenues are up more than 50% to $11.5m (2016: $7.7m) while adjusted EBITDA was up more than 200% to $4.1m (2016: $1.3m). Similarly, Adjusted EBITDA margin is significantly improved at 35.2% (2016: 17.2%), up 18 points over the corresponding period in 2016.

Whilst these half-year results demonstrate the Company's steady progress through to 30 June, they do not reflect the significantly enhanced financial and operational capabilities that we expect to report in 2H17, following the completion of our transformational acquisition of certain Titan Energy Appalachian Basin assets. The acquisition closed on the final day of the period and as such no contribution is reflected in our reported results although the costs associated with that transaction are included. To illustrate the significance of this acquisition, we have included below within the Outlook discussion a pro-forma table which that illustrates what DGO's financial results would have been had the Titan Energy acquisition occurred at the start of the period.

The Company's balance sheet and liquidity position have been transformed following the recent acquisitions together with the new $110m debt facility ($64m drawn at 30 June) and two share placings which raised gross proceeds of $85m. As at 30 June DGO had cash, and near cash equivalents, of $29.4m (2016: $0.02m) while total net assets stood at $87.1m (2016: $9.2m).

Consistent with the Board's stated policy, DGO paid a maiden dividend of 1.55 pence per ordinary share (1.99 cents) on 31 July, and the Board is pleased to announce that the Company will pay an interim dividend of 1.99 cents per ordinary share on 20 December 2017.

The Appalachian Basin opportunity

The prevailing market conditions in our regional focus on the Appalachian Basin, both before and increasingly more so following our IPO, have created a compelling buyer's market for well-capitalised, credible, local operators wishing to expand their portfolio of mature, producing assets. The Appalachian Basin, the oldest producing basin in the US with an abundance of existing infrastructure, has seen a rapid expansion of unconventional activity as large players focus their operations on the prolific Utica and Marcellus shale reservoirs located throughout the basin. This industry shift towards unconventional assets, the rights to which are held by production ("HBP"), means the mature, often conventional producing assets which routinely retain the rights to the unconventional assets, have become non-core to the larger industry players. As such, these parties are keen to offload these assets to buyers who can maintain the production while allowing them to retaining the rights to the unconventional reservoirs. With the maintenance of production and rights to the undeveloped, unconventional reservoirs being the main priority for the seller, this market dynamic creates particularly attractive valuation metrics for the appropriate buyers as price consideration is not always the seller's principal factor in completing transactions.

Having operated in the Appalachian Basin since 2001, DGO has developed a strong network and regional reputation as a proven and credible operator, providing it with a first-mover advantage in a small band of appropriate companies competing to capitalise on these unique buying opportunities. Furthermore, our proven ability to raise capital through the equity and debt markets puts us in an even smaller peer group capable of executing the material transactions of larger packages being offloaded.

Reducing operating costs

The conventional producing assets that represent the focus of DGO's operations are characterised as low-cost and long-life, capable of producing steady volumes of natural gas and oil for decades with minimal pressure decline and requiring limited operational management. The assets DGO seeks to acquire have often been managed inefficiently by larger operators, and present a unique opportunity for DGO to utilise its operational skillset and complementary regional footprint to reduce operating costs and improve the asset's profitability. DGO has a proven track record for driving down its unit operating costs as the Company expands its scale in the region, which enhances its resilience and profitability in a low-cost commodity environment. Accordingly, DGO's operating expenses in 1H17 were 6.4% lower at $7.73 per boe compared with $8.26 per boe reported in our readmission document for the last three months of 2016. We estimate that these costs will fall further as we begin to realize the benefit from various operational synergies and increased production from the Titan assets acquired on the last day of the 1H17 reporting period.

Growing through acquisition

Our successful share placing to raise gross proceeds of $50m and admission to AIM in February 2017 enabled us to significantly strengthen our balance sheet and liquidity and positioned us to transact on the opportunities stated above. We were pleased to complete our first post-IPO transaction only weeks after coming to market, as we acquired a package of 1,300 producing wells for $1.75m. The acquisition added production of 3,800 mcfd and 110bopd. We completed field operation integration for these wells in May, and more fully completed the integration of accounting operations in June.

In March 2017, DGO identified the opportunity to acquire certain Appalachian Basin gas and oil assets from Titan Energy that were consistent with our acquisition criteria and that had the potential to significantly enhance the Company's scale and profile in the region. DGO successfully raised an additional $35m through a further share placing and negotiated a new $110m senior secured credit facility to fund the $84.2mTitan Energy asset acquisition. The Company closed on $72.8m of the related assets on 30 June 2017 and continues to anticipate closing on the remaining $11.4m of assets by 30 September 2017 that are held within public partnership structures and that require regulatory approval within the US to close.

Inclusive of all Titan Energy assets, the Company's gross oil and gas production increases to approximately 18,300 boepd (11,000 BEOPD net) with total gross gas production increasing more than 260% to approximately 104,200 mcfpd and gross oil production increasing by 69% to approximately 931 bopd. These production levels position DGO as one of the largest producers on AIM. At these production levels, and even with the existing cost structure that Management is actively working to lower, the acquired wells are immediately accretive to Adjusted EBITDA. Importantly, the acquisition also increased PDP reserves to approximately 59.4mmboe.

Management continues to screen a pipeline of complementary and value accretive opportunities in the Appalachian Basin and DGO is well funded to execute on additional transactions should they be compelling and in the best interest of the Company and its shareholders.

Integration process

On the day of closing the Titan acquisition, we added 104 field operation employees from Titan Energy to our team. Led by newly appointed Senior Vice President of Operations, Bob Cayton, we restructured our field operations management team to reflect our scale and geographical size. Our legacy employees combined with these new additions to our team are unified in their focus to ensure a smooth and effective integration of the new assets into our operations processes. As part of this process, the now larger team is working to enhance production and strive to generate cost savings. The addition of many talented, experienced employees from Titan Energy was an important rationale in our strategy to acquire these assets, and we are very pleased to report that we are already seeing tangible benefits from their expertise.

As a part of the acquisition, we entered into a six-month transitional services agreement ("TSA") for accounting and other administrative services from Titan Energy. The TSA is operating as we anticipated and has proven to be an effective strategy to integrate the operations. In addition to the TSA, we engaged an energy consulting firm based in Houston, Texas to work with our teams on further integration strategies including accounting and technology needs. Our engagement with the consulting firm is producing favourable results and is helping prepare us for a post-TSA operating model.

Organic opportunity

Whilst DGO's growth strategy this year has focused on successfully achieving scale through acquisition, the Company's portfolio provides significant organic growth opportunities. As we complete the full integration of the newly acquired assets, our field management team will focus on maximising production by enhancing operational techniques. Our extensive leasehold, which now covers approximately 1.6m surface acres, has been sparsely drilled to date and therefore provides material running room for infill drilling to increase the production throughout the portfolio. Development wells are both low-risk and low-cost, ranging from $250k - $350k per well drill and placed on production. Management intends to initiate a development programme when drilling economics become more favourable and offer the Company higher rates of return than are currently provided through the compelling acquisition opportunities available at present valuations from which we have recently benefitted.

Enhancing the DGO team

An important aspect of successfully executing our strategy is ensuring we have leadership and management teams with the kills and experience necessary to oversee our rapid expansion. As such, we have placed a significant focus on adding depth to our team in the past six months through the hire of several highly quality professionals. With the acquisition of the Titan Energy assets, we added Bob Cayton as our Senior Vice President of Operations and John "Jack" Crook as our Senior Vice President of Environmental, Health & Safety. Both Bob and Jack each have over 30 years of experience operating in the Appalachian Basin and we have entrusted them with the responsibility of managing our entire Appalachian operations. We also extended our capital markets, accounting and financial reporting capabilities with the addition of Eric Williams as our new Chief Financial Officer. Eric's experience includes working with numerous SEC companies in the US, and was most recently the head of the investor relations function for a Permian based SEC oil and gas company. Eric will lead our investor relations, financial reporting and accounting operations. We were also pleased to enhance our middle management teams in both field operations and administrative functions.

Outlook

The second half of 2017 promises to represent a step-change in DGO's financial and operational profile as we reap the benefits from the transactions that we closed out in the first half of the year. Our growth trajectory has been rapid as we have grown the Company's gross production by nearly 240% over the past year. Near term, Management will remain highly focused on the successful integration of the acquired Titan Energy assets with a particular emphasis on the work required to ensure we maximise production whilst lowering our operating expenses.

After assuming control on 30 June 2017 of the Titan Energy assets, we have been working diligently to deliver improved operating results through initiatives to enhance asset performance while simultaneously reducing costs. The Company is pleased to report that in just the first month following the integration of Titan Energy's assets, operating margins have meaningfully improved and we believe we will continue to drive additional improvement.

For example, immediately upon closing, we lowered operating costs with a more than 22% reduction in the number of Titan Energy employees servicing the assets. To accomplish this reduction without a detrimental effect on operations, we leveraged our existing employees in the region resulting in more efficient allocation of responsibilities in the region to lower non-productive time. Additionally, we took steps to reduce chart expenses by implementing a better process for taking readings, and we reduced workover expense by utilizing a recently acquired service rig. Recognizing that costs are only half of the equation to improve margins, we also took steps to improve asset performance. For example, with de minimis investments, we returned wells to production that were previously left shut-in and non-producing. Additionally, we've enhanced production by properly sizing compressors to the wells they support.

The following table illustrates DGO's pro forma results assuming that the Titan Energy acquisition occurred at the beginning of the period on 1 January 2017. The pro forma results reflect Titan Energy's actual operating results for the acquired assets, and therefore reflect none of the synergies DGO expected upon the integration of the assets. Further, the pro forma results include substantially no contribution from our EnerVest Energy Acquisition.

The sector backdrop continues to be challenging and we are in a highly fortunate position to be operating in a safe jurisdiction, benefit from a strong balance sheet and have an effective business model that provides significant downside protection against the variables of commodity prices. Our low-cost operations ensure we are profitable in the current environment, and able to withstand a further decrease in commodity prices. We also take a prudent approach to the way the business is run in terms of cash management and hedging out our production to ensure visibility on predictable earnings. Ironically, we are uniquely positioned to benefit from the challenging sector backdrop as it creates very compelling acquisition opportunities as distressed companies seek to rationalise their portfolio.

Over the longer-term, we continue to work on our existing portfolio to seek in-fill opportunities and maximise the efficiency, production and longevity of our assets, activities that are a key aspect of company reputation and expertise. Further, we continue to seek attractive acquisition opportunities arising out of current market conditions that have already resulted in a number of strategic purchases for DGO in the past 18 months. As our acquisitive momentum has increased over the years, we seek to continue to deliver valuable additions to our portfolio in the Appalachian Basin and other suitable mature, hydrocarbon basins in the US.

Conclusion

In summary, the first six months of 2017 has been truly transformational for the Company. We have delivered on the strategic, corporate and operational objectives that we defined at the time of obtaining our admission to AIM in February 2017. We enter the second half of the year in a strong position. I wish to extend my gratitude to our shareholders who have demonstrated confidence in our defined strategy, management team and our focus on additional growth. I would also like to thank my colleagues for their hard work and commitment, without which we would not have been able to deliver such impressive growth. We are wholly focused on delivering value for all our stakeholders as we leverage the strong platform that we have created.

Rusty Hutson Jr

Chief Executive Officer

Financial Review

Revenue

Total revenues from natural gas and oil sales in 1H17 were $10.2m, a 48.9% increase over $6.8m for 1H16.The increase in this revenue was primarily attributable to a 45.6% increase in barrel of oil equivalent sales. DGO ended the first six months of 2017 with net boe sales of approximately 581,000 vs. the prior year sales of approximately 399,000. The increase in boe sales was driven by the successful acquisitions of the assets from Seneca Resources and Eclipse Resources.

Operating profit

DGO's operating profit in 1H17 was $9.7m compared to $23.9m in 1H16. The decrease of $14.2m reflects the decrease in non-recurring bargain purchase gains of $13.8m between the two periods. The Company recorded gains on bargain purchases of $24.2m in 1H16 as a result of the acquisitions of Seneca Resources and Eclipse Resources while recording gains on bargain purchases of $10.4m in 1H17 resulting from the Titan Energy and EnerVest Energy acquisitions.

The operating expenses incurred of $3.17m were significantly higher than the $0.89m for same period last year, due to the various costs of acquisition and corporate transactions in the period, but also reflecting the investment made in staff and systems to support the Company's growth.

Finance costs

DGO's finance costs include interest expense on borrowings, non-cash amortization of deferred financing costs and gains/losses on the early retirement of debt. In 1H17 and using the proceeds from our successful AIM IPO, DGO repaid its publicly traded bonds and the then 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.

Hedging

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 equal to approximately 75% of the Company's forecasted production volumes for a 36-month rolling period. Please refer to note 13 to our interim financial statements for additional information regarding DGO's hedge portfolio.

EPS and Adjusted EBITDA

DGO reported 1H17 statutory earnings per diluted ordinary share of $0.04 compared to $0.91 per diluted ordinary share in 1H16. 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 $0.04 per diluted ordinary share, a 33% increase over the prior year's $0.03 Adjusted EBITDA per diluted ordinary share.

Dividend

The Board has announced an interim dividend of 1.99 cents per ordinary share to be paid on 20 December 2017 to those shareholders in the register on 17 November 2017, and follows the dividend of 1.99 cents per ordinary share paid to shareholders on 31 July 2017.

Enquiries:

IMPORTANT NOTE REGARDING THE BASIS OF PRESENTATION --

The Company is pleased to present its interim consolidated financial statements. As discussed below in note 3, "Basis of Presentation," please be aware that unless otherwise stated, the all information included within the financial statements, including the notes to the financial statements, is presented in US Dollars, which is the currency of the primary economic environment in which the Company operates, and all values, including those in sentences, are rounded to the nearest thousand dollars except per unit amounts and where otherwise indicated.

Interim Consolidated Statements of Comprehensive Income

(Amounts in thousands, except per-share amounts)

Interim Consolidated Statements of Financial Position

(Amounts in thousands)

Interim Consolidated Statements of Changes in Equity

(Amounts in thousands)

Interim Consolidated Statements of Cash Flow

(Amounts in thousands)

Note 1 - General Information

Diversified Gas & Oil PLC ("DGO" or the "Company") is a natural gas and crude oil producer that is focused on acquiring and operating mature producing wells with long lives and slow decline profiles. Presently, our assets are exclusively located within the Appalachian Basin. The Company is headquartered in Birmingham, Alabama, USA with field offices located in Pennsylvania, Ohio, West Virginia and Tennessee. DGO was incorporated on 31 July 2014 in England and Wales as a private limited company under company number 09156132. DGO's registered office is located at 27/28 Eastcastle Street, London W1W 8DH, United Kingdom.

Note 2 - Business Consolidation

The interim consolidated financial statements reflect the following corporate structure of DGO:

• Diversified Gas & Oil PLC ("PLC"), and its wholly owned subsidiary,

◦ Diversified Gas & Oil Corporation ("DGOC'), as well as its wholly owned subsidiaries,

▪ Diversified Resources, Inc.

▪ M & R Investments, LLC;

▪ M & R Investments Ohio, LLC;

▪ Marshall Gas and Oil Corporation;

▪ R&K Oil and Gas, Inc.;

▪ Fund 1 DR, LLC

▪ Diversified Oil & Gas, LLC;

▪ Diversified Appalachian Group, LLC

▪ Diversified Energy, LLC (see note 9)

Note 3 - Basis of Preparation

The interim consolidated financial statements do not represent statutory accounts within the meaning of section 435 of the Companies Act 2016. The financial information for the period ended 30 June 2017 is based on the statutory accounts for the year ended 31 December 2016. Those accounts, upon which the auditors issued an unqualified opinion, have been delivered to the Registrar of Companies and did not contain statements under section 498(2) or (3) of the Companies Act 2006.

The interim consolidated financial information is unaudited and has been prepared on the basis of the accounting policies set out in the Group's 2016 statutory accounts in accordance with IAS 34 Interim Financial Reporting.

Unless otherwise stated, the financial statements are presented in US Dollars, which is the currency of the primary economic environment in which DGO operates, and all values are rounded to the nearest thousand dollars except per unit amounts and where otherwise indicated. Certain prior period amounts have been reclassified to conform with current presentation. Transactions in foreign currencies are translated into US Dollars at the rate of exchange on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange ruling at the balance sheet date. The resulting gain or loss is reflected in the income statement within Other comprehensive income - gain on foreign currency conversion.

The financial statements have been prepared under the historical cost convention, except for acquisitions and derivative financial instruments that have been measured at fair value through profit and loss.

The financial statements have been prepared on the going concern basis, which contemplates the continuity of normal business activity and the realization of assets and the settlement of liabilities in the normal course of business. The Directors have reviewed DGO's overall position and outlook and are of the opinion that DGO is sufficiently well funded to be able to operate as a going concern for at least the next twelve months from the date of approval of these financial statements. The Directors believe that the use of the going concern basis is appropriate. Accordingly, the Directors have prepared the financial statements on a going concern basis.

Note 4 - Revenue

DGO extracts and sells natural gas and crude oil to various customers. DGO also operates oil and natural gas wells for customers and other working interest owners. The following table reconciles the Company's revenues for the periods presented:

Note 5 - Expenses by Nature

The following table provides a detail of the Company's expenses: