DGOC.L Regulatory News (DGOC)

8 August 2019

DIVERSIFIED GAS & OIL PLC

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

Interim Results

Diversified Gas & Oil PLC (AIM: DGOC), the US based owner and operator of natural gas, natural gas liquids and oil wells as well as midstream assets, announces its Interim Results for the six months ended 30 June 2019.

Highlights

Operational Highlights

• 1H19 net production averaged 76 MBoepd including ~2 months of production from the HG Energy assets, up ~292% compared to 1H18 (19 MBoepd) and up ~22% compared to 2H18 (62 MBoepd)

• June 2019 exit rate net production exceeded 90.2 MBoepd including 69.7 MBoepd from wells owned prior to the HG Energy II Appalachia, LLC ("HG-Energy") transaction, further documenting the effectiveness of the Company's "Smarter Well Management" programme

• The Company's Smarter Well Management ("SWM") Programme continued to offset natural production declines with ~430 previously non-producing wells placed back into production since 1 January 2019

• Completed the $400 million acquisition of certain gas producing assets from HG Energy adding c.20Mboepd (18 April 2019)

• Long-term asset retirement agreements signed with Pennsylvania and Kentucky that combined with the existing agreements with the states of Ohio and West Virginia cover 98% of the Company's owned and operated wells

Financial Highlights

• 1H19 adjusted EBITDA*, hedged, of $131 million (1H18: $22.8 million), including ~2 months of contribution from the HG Energy acquisition; month-ended June 2019 adjusted EBITDA*, hedged of $24 million

• Declared 2Q19 interim dividend of $0.035 per share (2Q18: $0.028 per share)

• Since 1 January 2019, paid $52 million in credit facility principal payments, with net debt of ~$613 million at 30 June 2019 and net debt-to-adjusted EBITDA*, hedged at 2.0x

• Cash margins in 1H19 and June 2019 remain consistent with 1Q19 at approximately 54%, hedged, despite a period of lower natural gas and natural gas liquids prices

• Lease operating expense ("LOE") of $5.44/BOE for 1H19 was ~35% lower compared to 1H18 ($8.42/BOE); base LOE was ~46% lower compared to the same period

• General and Administrative expense of $1.35/BOE in 1H19 was ~11% lower compared to 1H18 ($1.51/BOE)

• Borrowing base increased to $950 million from a syndicate of fourteen banks following the acquisition of assets from HG Energy providing strong liquidity of ~$335 million including cash and availability under the Company's revolving credit facility

Governance Highlights

• Appointment of David Johnson as Non-Executive Chairman and David Turner, Jr. as an independent Non-Executive Director and Chairman of the Audit Committee reflecting the Company's commitment to further strengthen its governance structure

Rusty Hutson, Jr., CEO of Diversified, commented:

"This was yet another highly active period for Diversified in which we delivered on a number of key corporate and operational milestones that progressed our long-term growth objectives. The acquisition of the HG Energy assets in April delivered another step-change in production volumes and cash flow generation, which took us into the top tier of London quoted independent producers.

"The Company's strategy to build scale within the Appalachia continues to prove successful, with positive trends on cost metrics demonstrating the economies of scale and efficiencies afforded by our business model. Our Smarter Well Management programme continues to yield positive results and our ability to hold production steady is a testament to our operating capabilities. Since 1 January 2019 approximately 430 previously non-producing wells were placed back into production. Similarly, our safe and systematic retirement programme also enjoyed excellent progress and completed approximately 55 well pluggings for less than $25,000 on average, in line with our budget and previously shared estimates for these projects.

"We continue to implement initiatives to ensure we have an appropriate framework in place to support our future growth ambitions, including strengthening our governance structure and policies.

"In summary, our first half 2019 results reflect another period of strategic progress as the Company remains exceptionally well positioned to generate consistent and sustainable value for our shareholders."

* Adjusted EBITDA, presented hedged and unaudited, represents earnings before interest, taxes, depletion, depreciation and amortisation and adjustments for non-recurring items such as gain on the sale of assets, acquisition related expenses and integration costs, mark-to-market adjustments related to the Company's hedge portfolio, non-cash equity compensation charges and items of a similar nature.

DIVERSIFIED GAS & OIL PLC

Strategic Review

Continued Operational Excellence

I am pleased to be providing the first report in my capacity as Chairman since assuming the role during this period ended 30 June. Consistent with Diversified Gas & Oil's performance since its admission to AIM in February 2017, the first half of 2019 has been another eventful and progressive six-month period during which we have delivered a number of key strategic and operational milestones, all of which support our long-term growth objectives. Our results are in line with market expectations and position us to maintain our commitment to leverage and utilise the exceptionally strong cash flow of the business to return cash to shareholders through dividends and share buybacks, whilst in parallel maintaining a healthy financial footing by reducing debt. Importantly, we achieved all of this despite the wider macro backdrop of commodity volatility in our market, which only serves to emphasise the strength and resilience of our business model and effective hedging policy.

Corporate milestones

In March 2019, we identified the opportunity to acquire a complementary package of unconventional assets from HG Energy for a total cash consideration of approximately $400 million funded through a combination of debt and equity, with $225 million raised via a placing with new and existing investors. This material and accretive acquisition added c.20Mboepd to our production and elevated us further into the top tier of independent producers quoted in London. Whilst the assets are unconventional and generate their production from considerably fewer wells than our previous acquisitions, the profile of the wells is consistent with the wider portfolio in terms of being mostly post hyperbolic decline wells that are synergistically compatible with the existing producing wells.

Following the acquisition of the HG Energy assets, we were pleased to announce our expanded and fully underwritten borrowing base of $950 million under its $1.5 billion revolving credit facility (the "Facility"), led by KeyBank National Association. We also negotiated a reduction to each tier of our Facility's pricing grid resulting in a lowering of the spread by 10%. We retain current liquidity of ~$335 million while ensuring we maintain comfortable leverage of ~2.0x, below our stated net debt-to-EBITDA ratio of less than 2.5x to evaluate potential complementary and accretive acquisition opportunities.

Early in the period we finalised long-term agreements with oil and gas regulatory entities for Kentucky and Pennsylvania setting out our asset retirement obligations in these respective states. These long-term agreements sit alongside those already in place with the states of Ohio and West Virginia, with 98% of the portfolio now covered by multi-year agreements. The agreements set out our undertakings to return certain wells to production under our Smarter Well Management Programme ("SWM") programme while safely and systematically retiring those wells that have reached the end of their productive life. Execution of the agreements followed lengthy discussions during which we were able to demonstrate our proven ability to successfully return to production wells acquired from previous operators and catalyse a positive socioeconomic impact in terms of job creation and contribution to the local economies in which we operate. Critically, the agreements provide long term visibility for all stakeholders, including the states and our shareholders, on the clear asset retirement parameters within which we can budget for and execute these obligations. These agreements complement our efforts in late 2018 to evaluate the remaining life of our well portfolio and the costs expected to retire these wells, supported by independent expert consultants.

Strong Cashflow

Our business model is defined by our ability to generate exceptionally strong free cash flow, even in an environment of lower commodity pricing. This period was no exception, and the addition of improved margin wells from the HG Energy acquisition will significantly increase cash flow, as demonstrated by the adjusted EBITDA of $24 million generated in the month of June 2019 despite lower natural gas and natural gas liquids prices. As we continue to grow in scale, we are able to better demonstrate the fundamentals of our business model and equity proposition; namely to drive cash flow generation and shareholder returns.

The combination of significant free cash flow generated from long-life, low-decline assets, and low capex intensity required to maintain that cash flow, results in our ability to distribute free cash flow for the benefit of shareholders. Our stated dividend policy is to target 40% of free cash flow to be returned to shareholders in reliable quarterly dividends, with another 40% used to pay down debt and maintain low leverage.

In April 2019, the Board approved the implementation of a share buyback programme which it deemed to be a value accretive use of our remaining free cash flow given the perceived value proposition resulting from our share price at the time. Since June 2019, we have repurchased $32 million of shares. The Board will keep the form and quantum of the programme under review while allowing us to maintain the current dividend policy.

Dividend

In June 2019, we announced a dividend payment for 1Q19 of 3.42 cents per share, totalling almost double the amount paid out in the corresponding period in 2018, demonstrating the step change in free cash flow and benefit to shareholders of recent acquisitive growth. I am also pleased to declare our 2019 dividend of 3.5 cents per share (2Q18: 2.8 cents per share), which will be paid on 18 December 2019 to those shareholders on the register as at 29 November 2019. Since our Admission to AIM, we have returned almost $100 million to shareholders in dividends declared and paid, $59 million of which has been returned since the start of this year, and paid $117 million towards reducing debt, of which $52 million was paid year to date.

I am pleased to announce that we are making available the ability for our shareholders to receive our dividend paid in sterling. This will commence with the Q1 dividend of which is due to be paid 27 September 2019. An announcement will be made shortly and election forms will be sent to shareholders in the coming days.

Commodity Volatility

The period was characterised by continued volatility in natural gas prices. Our hedging policy largely mitigated our exposure to the volatility with $7.4 million of commodity hedge cash settlements and highlighted the strategic rationale for having this policy in place. In line with our stated policy to use a mixture of physical and financial contracts to protect cash flow, and specifically those associated with the acquisition of HG Energy Assets, we successfully executed financial NYMEX gas hedges for the period of May 2019 through April 2020. At the period end, our net hedge portfolio was valued at $60.6 million, of which $47.1 million was current. Our philosophy with regards to hedging is that we are willing to forgo potential upside, protect the downside and provide visibility and security on cash flow.

Operating efficiencies

Another fundamental aspect of the business model is our ability to achieve operating efficiencies by leveraging economies of scale and maintaining a strict focus on cost discipline and operational excellence. Each material acquisition completed by us has resulted in a positive impact on costs. The completion of the HG Energy acquisition allowed us to reduce Base LOE, Total LOE and per unit G&A expenses, all key cost metrics for our business, by ~14%, ~6% and ~15% respectively compared with 4Q18. This reduction of costs enabled us to maintain a robust cash margin of 54% through the first half of the year, despite the lower natural gas and natural gas liquids prices that prevailed throughout the period.

One of the key operating highlights in the first half of the year was our ability to maintain flat organic production through the effective SWM programme. By optimising existing wells and bringing ~430 previously non-producing wells back into production since the start of 2019, we were able to offset the natural decline of the portfolio, representing a considerable achievement and testament to the quality of our field managers.

Another area of focus in terms of operational efficiency and cost control is our asset retirement obligations. In the first half of the year, we successfully plugged 55 wells, representing over 62% of our 2019 required plugging obligations per the long-term agreements with the four primary states in which almost all of our wells are located. These wells have been plugged at an average cost of $25 thousand per well, in line with our estimates. As we progress with our asset retirement programme, we benefit from the knowledge and data obtained in terms of cost and process which in turn help support our long term asset retirement obligation estimates. Since the beginning of 2018 through to 30 June 2019, we have plugged 90 wells at an average cost of $23 thousand per well, approximately 5% below our estimates.

Governance

To reflect the growth and maturing of the business, the Board continues to enhance its governance structures and policies. In this regard, I was pleased to assume the role of Non-Executive Chairman during the period, replacing Robert Post who assumed the role of Non-Executive Director. We also strengthened the Board with the appointment of another Independent Non-Executive Director, David J Turner, Jr, who brings a wealth of experience and skill to our Board. These changes reflect a wholesale strengthening of our internal policies, structures and protocols and we will continue to focus on improved governance structures in the second half of the year, including a strong focus on ensuring ESG best-practices.

Positive Outlook

At the half year stage, we are performing in line with market expectations. The near-term priorities for the remainder of the year will be the continued success of the SWM programme and value extraction from the HG Energy acquisition earlier this year. We will also continue to be opportunistic and agile in our approach to business development and remain well capitalised to move swiftly on opportunities that we deem to be value accretive and complementary. As an example, on 25 July 2019, we announced that we entered a Conditional Asset Purchase Agreement to acquire for $50 million certain oil and natural gas development, production and exploration assets located in Ohio from EdgeMarc Energy Holdings LLC ("EdgeMarc") and certain of its subsidiaries. Because EdgeMarc is undergoing liquidation under Chapter 11 of the US Bankruptcy code, we presently are unable to offer certainty that we will complete the transaction. However, if we are successful in acquiring these assets, consistent with our other acquisitions, we believe the assets will create long-term value for our shareholders. We expect to make a further announcement on or before 29 August 2019.

In summary, it has been another period of focused execution of our strategy and remarkable growth for the business. We continue to build a bigger, better and stronger business that is capable of delivering continued long-term, sustainable value for our shareholders.

Financial Review

Production, Revenue and Hedging

Total revenue in 1H19 of $237.5 million increased 309.2% from the $58.0 million reported for 1H18 primarily due to 291.5% higher production and an increase in midstream revenue, both of which were positively impacted by our acquisitive growth strategy. DGO ended 1H19 with net MBOE sales of approximately 13,701 vs. the prior year sales of approximately 3,499. The increase in production was driven by the full integration of the previously acquired EQT and Core assets in 2H18 and the HG Energy assets in 1H19. See Note 3 for additional information regarding DGO's acquisitions.

The following table is intended to reconcile the change in natural gas, NGL and oil revenue (excluding the impact of cash settled hedges) for 1H19 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. See the table below for our hedging impact on revenue and average realised prices:

Refer to Note 15 for additional information regarding DGO's hedge portfolio.

Expenses

As a result of DGO's significant, value-focused growth, unit operating expenses decreased 9% or $1.10 per BOE. These reductions are a result of:

• Lower per BOE lease operating expenses, which declined 46% or $3.23 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 gathering, processing and transportation expenses, which declined 7% or $0.08 per BOE.

• Lower per BOE administrative expenses, which decreased 26% or $0.56 per BOE due to the significant growth in our production base.

Partially offsetting these significant per BOE declines were increases to production taxes and depreciation and depletion caused by the increase in production associated with the EQT, Core and HG Energy acquisitions.

Refer to Note 3 for additional information regarding DGO's acquisitions.

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Finance costs, loss on early retirement of debt

DGO's finance costs include interest expense on borrowings and non-cash amortisation of deferred financing costs. Interest expense on borrowings of $15.7 million in 2019 increased $12.3 million compared to $3.4 million in 2018 primarily due to the increase in borrowings used to fund the Company's previously mentioned acquisitions.

In March 2018, the Company closed a new $500 million five year credit facility, initially subject to a borrowing limit of $140 million that stepped up within the same month to $200 million following the closing of the acquisition of certain assets of CNX. The new credit facility resulted in a non-recurring loss on early extinguishment of debt of $8.4 million, which included a $2.6 million charge for the accelerated amortisation of the remaining deferred financing costs and $5.8 million relating to an early payment fee.

In July 2018 and in conjunction with the acquisition of certain assets of EQT, the Company closed on an enlarged $1 billion, five-year secured revolving credit facility with an initial borrowing base of $600 million, which replaced the existing $500 million facility.

In December 2018 and following the October 2018 acquisition of Core, the Company closed on a further-enlarged $1.5 billion, five-year senior secured credit facility with an initial borrowing base of $725 million, and which replaced the $1 billion facility and fully extinguished Core's facility assumed as part of that acquisition. The facility maintains the July 2023 maturity date of the prior facility, and had an interest rate of 2.75% plus one-month LIBOR and is subject to a grid that fluctuates from 2.25% to 3.25% plus LIBOR based on utilisation.

In April 2019, the Company increased its borrowing base on the $1.5 billion, five-year senior secured credit facility from $725 million to $950 million. The April 2019 acquisition of certain producing assets of HG Energy, discussed in Note 3, was funded partially by a $152 million draw on the upsized credit facility. The facility has an initial interest rate of 2.50% plus the one-month LIBOR and is subject to a pricing grid that fluctuates from 2.00% to 3.00% plus LIBOR based on utilisation.

For more information on DGO's acquisitions and borrowings refer to Notes 3 and 13, respectively.

Income before taxation, EPS and Adjusted EBITDA

DGO reported income before taxation of $84.0 million in 1H19 compared to $21.4 million in 1H18, an increase of 293%, and reported statutory earnings for 1H19 per diluted ordinary share of $0.10 compared to $0.09 per diluted ordinary share in 1H18. 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 $0.22, a 152% increase over the prior year's $0.09. DGO's adjusted EBITDA for 1H19 was $131.3 million, a 474% increase over $22.87 million in 1H18. Refer to Note 6 for additional information regarding DGO's adjusted EBITDA.

Conclusion

We have already enjoyed an eventful and successful 2019, and we look forward to continued progress as we focus our attention towards the second half of 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 look forward to reporting back to you with our full-year results.

David Johnson

Chairman

Independent Auditor's Report

INDEPENDENT REVIEW REPORT

Introduction

We have been engaged by the company to review the condensed financial statements in the interim financial report for the 6 months ended 30 June 2019 which comprise the Consolidated Condensed Statement of Profit or Loss and Other Comprehensive Income, the Consolidated Condensed Statement of Financial Position, the Consolidated Condensed Statement of Changes in Equity, the Consolidated Condensed 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 2, 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 financial statements in the interim financial report for the 6 months ended 30 June 2019 are 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.

/s/Crowe U.K. LLP

Crowe U.K. LLP

Statutory Auditor

Consolidated Condensed 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.

Consolidated Condensed Statements of Financial Position

(Amounts in thousands)

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

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

The consolidated financial statements were approved by the Board of Directors on 8 August, 2019 and were signed on its behalf by:

David Johnson

Chairman

Consolidated Condensed Statements of Changes in Equity

(Amounts in thousands)