DGOC.L Regulatory News (DGOC)

14 November 2019

DIVERSIFIED GAS & OIL PLC

("DGO" or the "Company")

Operations and Trading Update

Diversified Gas & Oil plc (AIM: DGOC), the U.S. based owner and operator of natural gas, natural gas liquids, and oil wells and midstream assets, is pleased to announce the following operations and trading update affirming that the Company is trading in line with current market forecasts.

Operating Highlights

·; 3Q 2019 net production ~91.1 thousand barrels of oil equivalent (Mboepd), up 10% vs. 2Q 2019

·; September 2019 net production >94.4 Mboepd, up 5% vs. June 2019

o Legacy asset(a) production of 70.6 Mboepd demonstrates the continued success of DGO's Smarter Well Management Programme which has effectively offset natural declines for ~16 months (since 2Q18)

·; Successful and ongoing integration of the recently acquired EdgeMarc Energy ("EdgeMarc") wells and two separate packages of midstream assets

·; Sold EdgeMarc PUD and undeveloped acreage for $10 million in early November 2019

Financial Highlights

·; 3Q 2019 hedged Adjusted EBITDA(c) of $64 million (51% margin(d)), up 28% vs. 3Q 2018

·; 31 Oct 2019, inclusive of EdgeMarc and midstream asset acquisitions, 2.4x Net Debt / Adjusted EBITDA(e)

·; $51 million in 3Q 2019 distributions to shareholders ($23 million in dividends + $28 million in share buybacks)

o Current dividend yield exceeding 10%

·; 3Q 2019 base Lease Operating Expense (Base "LOE") of $3.22/Boe or $0.54/Mcfe down 10% vs 2Q 2019

·; 3Q 2019 recurring administrative expenses(h) of $1.23/Boe or $0.20/Mcfe down 7% vs 2Q 2019

·; Low cost structure positions DGO against lower commodity prices with strong unhedged margins(d) including 39% in 3Q 2019 (realised price $2.03/Mcfe) and 48% for 9 mos. 30 Sept 2019 (realised price $2.56/Mcfe)

·; 2020 initiatives target higher revenue and lower costs totalling up to $13.9 million benefit annually

·; Successfully closed inaugural $200 million securitisation to enhance DGO's debt structure and increase liquidity

·; At the request of its Share Registrar, DGO has revised its 2Q 2019 dividend payment date to 20 December 2019 (from 18 December 2019) to accommodate the recently provided GBP sterling election

Corporate Highlights

·; Appointment of Sandy Stash to the Board as an Independent Non-Executive Director, further enhancing DGO's governance structure

·; Announced that, subject to UK Financial Conduct Authority approval, DGO is formally pursuing a move to the Premium Segment of the Main Market of the London Stock Exchange follow the publication of its full-year 2019 results

·; Announced that, subject to shareholder approval, PricewaterhouseCoopers will succeed Crowe as the DGO's external auditor beginning with the 2020 fiscal year

Rusty Hutson, Jr., CEO of the Company commented,

"The pace of activity at DGO has remained high during recent months as we've closed three additional margin-enhancing acquisitions and continue to fully integrate those upstream and midstream assets into our portfolio. Our Smarter Well Management efforts continue to deliver outstanding results with production from our legacy assets at approximately 70,000 barrels of oil equivalent per day, nearly identical to the equivalent production 16 months ago and nearly 7% better than the expected performance of these wells over that period of time. Recognising the challenging commodity price environment in which we now operate, we understand that now more-than-ever it is critical that we actively manage the business to align our costs with our revenues. Accordingly, we have proactively taken steps to improve both while also increasing our efforts to better align our robust hedging programme, with our long-lived and stable asset base through longer tenor and enhanced structures. Collectively, these efforts position us to deliver stabilised cash flows, as seen in our ongoing strong cash margins in excess of 50%, and to make consistent distributions to our shareholders."

Operations Update

DGO's total net production for the three months ended 30 September 2019 averaged 91.1 Mboepd, with its more recently acquired assets from HG Energy and EdgeMarc contributing approximately 21.8 net Mboepd. The Company's SWM Programme" continues to arrest the shallow natural production declines from DGO's legacy assets, which produced an average of 69.3 net Mboepd during the quarter, with the production of these assets largely flat since mid-2018(g). For the nine months ended 30 September 2019 and inclusive of the DGO's most recently acquired assets from EdgeMarc (closed 18 September 2019), the Company exited 3Q 2019 producing more than 94.4 net Mboepd, including more than 70.6 net Mboepd from the Company's legacy assets.

Consistent with its commitment to continuously optimise its assets performance and as part of its SWM Programme, during 2019, DGO has returned to production more than 560 wells that were previously non-productive, including certain wells that were previously and unnecessarily scheduled to be plugged.

Financial Performance

Revenues

While recent volatility in natural gas prices and wider gas basis differentials have compressed revenues, the Company's lean cost structure, proactive expense management and robust hedging programme meaningfully offset this volatility and stabilised cash flows. Importantly, winter weather and increased demand typical for the fourth and first quarters are driving prices higher and narrowing basis differentials, which translates into better price realisations.

The following tables summarise DGO's commodity revenue and realised pricing (net of differentials, transportation and related charges) during 3Q 2019 and 9 months to 30 September 2019 as compared to the same prior periods on an unhedged and hedged basis:

Expenses

Recognising the importance of fiscal discipline and maintaining a lean cost structure, particularly during periods of low commodity prices, the Company continues to focus on reducing its unit operating costs. DGO's strategy of acquiring assets within a geographically concentrated area allow it to maximise operational synergies and remove costs from the system. Additionally, its most recent acquisition of unconventional wells with very low base operating expenses have collectively delivered consistent and sequential cost reductions.

DGO's unit-level cash operating expenses of $7.42/Boe during 3Q 2019 were approximately 5% and 3% below 2Q 2019 and 3Q 2018, respectively. The increase in third-party gathering and transportation, a variable cost that correlates to the underlying production, reflects the Company's recent acquisitions of unconventional HG Energy and EdgeMarc assets that produce high volumes into third-party systems. The following table presents the Company's cash operating expenses for the periods presented.

Further, the following table reflects DGO's unit-level cash operating expenses of $7.95/Boe during the 9 months to 30 September 2019, approximately 7% below as at 9 months to 30 September 2018:

Adjusted EBITDA(c)(f)

The following table summarises DGO's Adjusted EBITDA for the periods presented:

Earnings Enhancing Initiatives

While periods of lower commodity prices and widening basis place pressure on realised prices and total revenue, DGO has identified several corporate initiatives aimed at reducing costs and improving margins, which include:

Reflective of its SWP Programme and active efforts to optimise its operations, DGO remains committed to continually seeking ways to reduce unit operating costs, create greater efficiencies and improve margins. As the Company looks ahead to 2020, and in addition to its hedging program (discussed below) and these revenue-enhancing and cost savings initiatives previously discussed, the Company remains focused on opportunities to drive efficiency in water management practices, reduce its electricity costs at compression facilities and utilise its newly enhanced technology platform to identify and realise other efficiency and productivity opportunities.

Successful Securitisation Financing Strengths the Balance Sheet and Protects Liquidity

Positioning DGO to thrive in lower commodity prices while remaining capable of successfully acquiring high-quality assets driven to market by a challenging market cycle means enhancing the Company's debt capital structure. While RBL provide low-cost financing relative to other forms like bonds, an RBL is subject to redetermination risk. Accordingly, during periods of lower commodity prices where the underlying future value of the loan collateral (primarily PDP reserves) falls, the RBL simultaneously contracts, potentially when it is most needed since lower prices also mean lower revenues and cash flows. Expanding DGO's debt capital structure to include a portion of fixed term financing reduces its exposure to downward revisions of its RBL upon redetermination (performed semi-annual on the RBL) while simultaneously creating additional liquidity by virtue of a higher advance rate of the underlying collateral value.

Consequently, on 13 November 2019, DGO closed its inaugural low-cost $200 million, BBB- investment grade-rated securitised financing arrangement with a coupon of 5%. The Notes, as rated by Fitch and Morningstar, have a 10-year scheduled maturity, although provide for a longer, 17-year final legal maturity, which aligns nicely with the Company's long-lived, low decline asset base and provides for scheduled debt reduction through principal amortisation. Please refer to the Company's separate announcement on 14 November 2019 for additional details regarding this financing.

Hedging Update

Prudent risk management also involves responsible hedging. Consistent with past performance, but with a renewed focus on tenors and structures that best align with DGO's producing assets, the Company remains opportunistic, executing hedges when NYMEX prices tick up or adding basis protection when NYMEX prices tick lower, which often leads to basis compression. Longer-tenor hedges add durability to the Company's cash flows, insulating them from commodity price volatility. To that end, longer-tenor hedges enhancing near-term cash flow by normalising a price curve in contango, effectively pulling value from the back-end of the price curve into the current periods.

Executing this strategy, DGO added meaningful hedge protection to 2020 and 2021 as follows:

Summary

Importantly, DGO remains focused on its efforts to prepare the Company to list on the Premium Segment of the Main Market on the London Stock Exchange following the publication of the financial information for the year ended 31 December 2019 and subject to the required regulatory approvals. Additionally, and subject to shareholder approval, PricewaterhouseCoopers will begin to serve as the Company's auditor in 2020.

Amendment to 2Q 2019 Dividend Payment Date

As announced on 8 August 2019 the Company will pay a 2Q 2019 dividend of 3.5 cents per share to those shareholders on the register as at 29 November 2019. However, following the subsequent announcement that future dividend payments will incorporate a GBP sterling election available for all shareholders, the 2Q dividend will now be paid on 20 December 2019 instead of 18 December 2019 as previously announced.

Shareholders who wish to elect to receive their dividends in GBP and who have not yet done so should complete a dividend election form which is available on the Company's website at https://ir.dgoc.com/dividend-information.

________________________Footnotes:

(a) Legacy assets defined as assets owned at 31 December 2018 and therefore prior to the Company's most recent 2019 acquisition of assets from HG Energy & EdgeMarc Energy.

(b) Assumes $38 million purchase price and approximately $16 million of year one net cash flows.

(c) Adjusted EBITDA 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.

(d) Represents Adjusted EBITDA as a percent of total revenue (including commodity revenue, midstream and other revenue), plus net hedge gain or loss as applicable.

(e) Represents net debt as of 31 October 2019 and 9 months to 30 Sept 2019 Adjusted EBITDA annualised and adjusted for price and seasonality.

(f) Adjusted EBITDA represents a non-IFRS estimate, which the Company reconciles in the table presented.

(g) Production for the months prior to the Core Appalachia acquisition pro forma ~70 net Mboepd including ~60 net Mboepd for July 2018 - October 2018 that increased production by ~10 net Mboepd from the Core Appalachia Acquisition.

(h) Recurring administrative expenses is a non-IRFS financial measure defined as total administrative expenses excluding non-recurring acquisition and integration costs:

 (i) Based on recent market prices, seasonally adjusted

 (j) Not meaningful due to a one-time adjustment in 2Q 2019

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