Diversified Gas & Oil: Clear strategy, consistent execution, strong financial results

11th Mar '21 by Yellowstone Advisory

3 comments 448 reads

This week we welcomed back the management team of Diversified Gas & Oil to present at a Yellowstone Advisory webinar. The company has a market cap of £850m and is now a member of the FTSE250 following a number of years of excellent performance. The company reported FY numbers on 8^th March and this was an opportunity to present these results and update on the opportunities for further growth. Investors will have been impressed with what they heard. A recording of the webinar can be found here.

Rusty Hutson Jr., Co-founder and CEO, started with a top level run though of performance and reiterated that a relentless focus on operational excellence across the portfolio continues to serve as the bedrock of their strong performance. Despite the challenging gas price environment and the operational complexities brought on by covid, DGOC had another successful year. During 2020 production averaged 100Mboedpd up 18% and the December exit rate production was 103 Mboepd up 8%. Overall reserves stood at 607 mmboe providing many years of production life. Cash flows were excellent with margin increasing slightly to 54% and adjusted EBITDA rose 10% to $301m. The balance sheet is in robust shape with net debt of and net debt/adj EBITDA of 2.2x. Of interest to many in the audience was the steadily rising dividend which is paid quarterly and rose 14% over the year to 15.25c.

One of the attractions of the company is the consistent delivery of the strategy which has not changed throughout its life. There are four clear components: hedge gas prices to limit downside risk, produce strong margins to generate high free cash flows (the FCF yield is currently 25%), distribute 40% of FCF to shareholders and maintain a safe, secure and robust balance sheet.

The business model to achieve the strategy has been equally consistent and throughout the presentation there were references to ESG and sustainability as being central to the model. DGOC doesn’t drill, instead their approach is to buy and then improve the stewardship of existing wells by increasing asset life and production. Ultimately, good ESG is good business and better for all stakeholders and all part of the DNA of the company. Wells are managed to optimise efficiency and reduce emissions, cash flows are protected through hedging of gas prices, competitive wages are paid to employees and strong governance is in place.…

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jsmye@btinternet.com

12th Mar '21

Watching the recent webinar, I was left with the impression that the Management know where they are and know how where they intend to go and that they are on top of the business, balancing risk with the rewards of future investment. I am therefore wondering why Stockopedia are rating this company with a stock rank of just 33 and a quality ratio of just 15? The earnings took a dip in the 6 Months to Dec 20 ( its Covid!), but the current ratio remains healthy and the debt to equity at around 1.6 :1 is not unduly concerning (considering the dividend payments). The balance sheet provides a solid platform to absorb the costs of future acquisitions, providing the management integrate the recent ones successfully before acquiring more. Stockopedia shows a 12 Month forecast rolling PE of 10.3 and EPS growth of 856.5%, although the EPS showed a loss of .02 for the 6 months to Dec 20. This indicates a solid 2021 with a dividend of 10.17%. So am I, or Stockopedia missing something here? Why are analysts rating this a strong buy, when Stockopedia are giving DGOC a health rating of just 3 and a distressed bankruptcy risk ? Maybe a re-rating is overdue?

JohnEustace

14th Mar '21

They are classed as an essential business and their operations were unaffected by COVID. If you look at the stock rank history in the bar below the chart on the StockRanks it was in the green until the 2020 results were posted. They reported a loss of $77.5m. This arose from their hedging programme. They protect their earnings by hedging natural gas prices out about two years. From their earnings announcement:

As I turn to a discussion of our reported earnings, it is important to link the positive price momentum I discussed to its associated earnings impact. As we adjust our 10+ year derivative portfolio to their fair values, we recognised a $239 million non-cash charge that we report in our earnings, which represents the change in the fair value of our entire unsettled hedge portfolio from 31 December 2019 to 31 December 2020. This non-cash valuation change primarily relates to higher prices on the forward price curve for natural gas, and drives our $87 million gross profit into a $137 million pre-tax loss. When excluding this non-cash loss, just as we have excluded our valuation-related non-cash gains in prior years, we report a $102 million pre-tax gain compared to $131 million in 2019. Ultimately, while we report a net loss in 2020 of $24 million compared to net income in 2019 of $99 million, we grew Hedged Adjusted EBITDA by 10% to $301 million compared to $273 million in 2019.

Grippie

28th May '21

Sold Diversified Energy Company today after dilutive share issue. (I voted against disapplication of statutory pre-emption rights). I did not sell earlier as I thought that "does not intend to issue shares for cash representing more than 7.5 per cent. of the Company’s issued ordinary share capital" meant that they wouldn't do that.

Diversified Gas & Oil: Clear strategy, consistent execution, strong financial results

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