The management team of Diversified Gas and Oil plc (Diversified Gas & Oil (LON:DGOC)) presented their HY results at one of our Yellowstone Advisory webinars on Wednesday and the more I hear them talk the more impressed I am.

The company listed in 2017 and moved to a premium listing on the main market of the LSE earlier this year with every chance they could enter the all-share and FTSE250 indices at the next review in September. Whilst the name, Diversified Gas & Oil plc suggests a mixture of assets, in fact 99% of revenues are generated from natural gas all concentrated in the Appalachian Basin in the United States.

DGOC is different from its peers because it doesn’t drill new wells, instead it acquires existing wells and produces more efficiently under careful stewardship. The company has a greater focus on improving the decline rates so that the wells can produce for longer; the average asset life is over 50 years. The difference in the operating model comes through in significantly better financial metrics.

In these latest HY results the company reported 55% EBITDA margins, despite the fall in gas prices due to a conservative hedging policy and a reduction in operating expenses per barrels of oil equivalent (boe) of 8%. The company operates a policy of distributing 40% of FCF to shareholders through a dividend and this resulted in a 7% increase to the quarterly dividend, something that not many companies in the sector, or indeed the market, can report. Since listing, DGOC has paid regular and increasing dividends to shareholders and the shares yield over 10%.

The focus on operational excellence really came through during the presentation. The business model is one which has been used successfully since the start of the company and is actually quite simple but management execute it well. Once an asset is acquired, the focus is on integration, making improvements to the production profile of the acquired wells and improving the operational costs associated with each well. DGOC call this the ‘Smarter Well Management Program’ and it seems to work. Overall, this means they are one of the lowest cost producers enabling them to operate profitably in any price environment.

On that front, management talked about their hedging program which they use to reduce risk and provide predictability. This hedging program may reduce the potential for higher revenues at times…

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