DGOC.L Regulatory News (DGOC)

24 July 2019

DIVERSIFIED GAS & OIL PLC

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

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, is pleased to announce the following trading and operating update for the half-year period ended 30 June 2019.

Highlights

Operational highlights

·; 1H19 production averaged 76 MBoepd (net) including ~2 months of production from the HG Energy II ("HG") assets (transaction closed 18 April 2019), up ~295% compared to 1H18 (19 MBoepd) and up ~22% compared to 2H18 (62 MBoepd)

·; June exit rate production exceeded 90.2 MBoepd (net) including 69.7 MBoepd (net) excluding production from the wells acquired in the HG transaction

·; 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

·; Re-established wells and further SWM optimisations contributed to production (excluding from wells acquired in the HG acquisition) at month end June 2019 of 69.7 MBoepd, consistent with 2018 year-end exit rate production

·; The HG assets have been successfully integrated into the portfolio and are producing 20.5 MBoepd, in line with expectations

·; All seller-financed compression projects associated with the HG acquisition are complete and online

Financial highlights

·; 1H19 adjusted EBITDA*, hedged, of $131 million, including ~2 months of contribution from the HG acquisition; month-ended June 2019 adjusted EBITDA* of $24 million

·; 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

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

·; Distributions for the benefit of shareholders totaling $54 million to 30 June 2019 including $36 million of dividends and $19 million of share repurchases; year-to-date distributions increase to $68 million inclusive of an additional $11 million of share repurchases 

·; Maintained strong liquidity of ~$335 million including cash and availability under the Company's revolving credit facility

·; Through 30 June 2019 recurring capex, which excludes one-time investments associated with the Company's data modernization project and asset integration, approximated $12 million, in line with budget

·; Average 1H19 net realised price was $17.87 per BOE ($2.98 per Mcfe), including $0.54 per BOE ($0.09 per Mcfe) of net hedging gains through 30 June 2019; at 30 June 2019, DGO's net hedge portfolio was valued at $60.6 million of which $47.1 million is current

·; Lease operating expense of $5.39/BOE in June 2019 was ~6% lower compared to 4Q18 ($5.75/BOE); base LOE is ~14% lower compared to the same period

·; General and Administrative expense of $1.12/BOE in June 2019 was ~15% lower compared to 4Q18 ($1.32/BOE)

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

"As we entered 2019, we set the expectation that our SWM Programme would continue to offset natural declines within our portfolio and hold production flat excluding acquisitions. I'm pleased to report that production from the wells we owned prior to those purchased from HG averaged 70 Mboepd, marking a full year that we've successfully delivered on our objective and highlighting the effectiveness of our efficient field operations. Strong production and a robust hedge portfolio underpin our healthy cash flows that position us to weather periods of commodity price volatility. Our portfolio retains an ample opportunity set for continued organic production optimisation which we will continue to exploit.

"Wise stewardship of capital remains a top priority as do our efforts to reduce our unit-level operating and G&A expenses. Our emphasis on controlling costs and commitment to maintaining an effective hedge portfolio are reflected in strong cash margins near 55% despite a period of lower natural gas and natural gas liquids prices. We now enter the second half of 2019 with approximately $335 million of liquidity, well positioned to respond to market dynamics and opportunities to create long-term shareholder value."

Operations Update

DGO's production for June 2019 exceeded 90 MBoepd with approximately 70 MBoepd flowing from wells owned prior to adding the HG wells in late April 2019, demonstrating that the Company's SWM Programme continues to offset the natural declines associated with the Company's proved-developed-producing well portfolio. In line with our stated objective, DGO's well optimisation efforts have successfully held production flat for more than a year compared with expected natural declines of approximately 5%. In 1H19, the Company placed approximately 430 previously offline wells back into production while continuing ongoing efforts to optimise production from other wells.

For the six months ended 30 June 2019, net production averaged approximately 76 MBoepd as compared to 1Q19 production of approximately 69 MBoepd when HG was not yet a part of DGO's asset portfolio. June exit rate production for existing wells excluding HG improved to approximately 70 MBoepd while HG wells contributed an additional approximately 20 MBoepd, in line with expectations. Importantly, three of the four seller-financed compression projects at HG were completed by May 2019 and the fourth was recently brought on in July. As a result, production improvements from increased compression were not fully realized in the second quarter and continue to improve as DGO enters the third quarter.

In the six months to 30 June 2019, the Company successfully plugged 55 wells at an average cost of $25K per well, in line with Company estimates based on the states in which the wells were plugged. This progress represents ~52% of budgeted plugging events for the year and ~62% of the Company's 2019 required 89-well minimum plugging obligation per the long-term asset retirement agreements DGO negotiated with the four primary states in which approximately 98% of the Company's wells exist. Since the beginning of 2018 through 30 June 2019, DGO has plugged 90 wells at an average cost of $23K per well, approximately 5% below the Company's estimates.

Financial Update

The Company achieved a hedged adjusted EBITDA* in the six months to 30 June 2019 and during the month of June 2019 of $131 million and $24 million, respectively, representing a 54% cash margin for both periods despite lower natural gas and natural gas liquids over the past several months. Importantly, the month of June 2019 reflects a full contribution from the wells most recently added from HG. The Company's robust hedge portfolio, valued at more than $60 million at 30 June 2019 and of which more than $47 million is current, will complement cash flow and continue to offset volatility in commodity prices.

The Company continues to capitalize on its increasing scale in the Appalachian Basin to reduce both LOE and G&A expenses per BOE by ~6% and ~15%, respectively, in June 2019 compared to 4Q18. The addition of producing wells acquired from HG drove production higher while adding disproportionally less expense as the Company folded the assets into its existing footprint within the basin.

After ending 2018 with net debt of $495 million, DGO drew approximately $170 million on its revolver to fund a portion of the $400 million asset acquisition from HG resulting in an adjusted debt balance of $665 million. Using its free cash flow after funding operations and capital expenditures, paying $36 million in dividends, and repurchasing $19 million of its shares, DGO ended the first half of 2019 with net debt of $613 million, reflecting net principal reductions of $52 million during 1H19. At 30 June 19, DGO's net debt-to-adjusted EBITDA* was 2.0x. This metric sits well below the Company's stated, self-imposed limit of 2.5x and represents a slight increase from the previously reported 1Q19 of 1.8x due primarily to a lower adjusted EBITDA* denominator used in the calculation when annualizing June 2019 EBITDA* adjusted for price and volume seasonality vs. the previously used 2018 figure adjusted for the HG acquisition.

DGO's liquidity remains high at approximately $335 million and when combined with the Company's hedge portfolio protect the Company during periods of commodity price volatility and provide a healthy source of funding for additional growth on a non-dilutive basis.

Our disciplined approach to cash and capital allocation remains unchanged with an emphasis on value creating capex projects where we see attractive rates of return, value-creating acquisitions, and returning cash to shareholders. The Company continued its targeted dividend policy of returning 40% of free cash flow to shareholders by paying $36 million in dividends since 1 January 2019. As of 19 July 2019 the Company's $32 million in share repurchases under its Share Buyback Programme total approximately 22.7 million ordinary shares (47% of total permissible repurchases) at a weighted average repurchase price of 111 pence per ordinary share. Additionally, the Company has made $52 million in debt principal payments since year-end 2018.

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

* Adjusted EBITDA, presented hedged and unaudited, represents earnings before interest, taxes, depletion, depreciation and amortization 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.