Oil & Gas Watch - DGOC And Enwell

18th Feb '21 by Jack Brumby

11 comments 5953 reads

Part two of two in this initial look at potential oil & gas plays. There’s more of a scene-setting introduction over in part one, but to summarise:

Oil and gas is a risky section of the market, with volatile earnings and commodity price risk. In aggregate, equally weighted, it is a lower quality industry group.
But oil and gas prices have at least partially recovered from last year’s double whammy, and are beginning to price in a 2021-2022 recovery. In fact, there’s even (speculative) talk of an oil ‘supercycle’.
You might argue that certain share prices in this industry group are not yet pricing in improving prospects.

Stocks could rerate if the oil and gas prices continue to climb. But maybe you disagree with that basic assumption, in which case contrasting macro views are always welcome.

Edmund Shing’s most recent Market Musings coincidentally touches on the same theme of contrarian oil. And it is contrarian - some might even consider it unethical from an environmental perspective.

ESG funds (portfolios of equities and/or bonds that consider environmental, social and governance factors) are driving capital away from this part of the market. Sentiment is poor and that probably caps valuations.

But even accounting for ESG investing and the shift to clean energy, oil and gas will be a part of the mix for many years to come. That’s because global population growth and improving living standards continue to drive demand in the global energy markets.

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Operators with high quality, producing assets and resilient economics have been able to create shareholder value over the past year. If conditions improve in the year ahead, some of them might rerate as those cash flows are operationally geared.

There are plenty of caveats to add, such as factoring decommissioning liabilities and abandonment costs into valuation, but these issues will have to be more fully explored on a stock by stock basis. For now, I just hope to flag some worthy research candidates.

In part one we took a quick look at Serica Energy (LON:SQZ) and Jkx Oil And Gas (LON:JKX) . Both have their attractions. Today I’ll touch on Diversified Gas & Oil (LON:DGOC) and Enwell Energy (LON:ENW) , which also might be of interest.

Diversified Oil & Gas (LON:DGOC)

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fred9566

18th Feb '21

I have been a shareholder for a few months now . I was looking for yield and of course on the face of it a yield between 7 and 10% looked very risky in terms of capital protection but the more I looked at it the more I believed that this was one of the "least risky" investments in the oil and gas sector . The TS in September in my view summed it up and crystallized my thoughts

Average 107MBoepd (+8% versus 2qtr 2020 +17% versus 3 qtr 2019 )Includes acquisition in May

Adjusted ebitda £75million , hedged . (2q20 $68mill , 3q19: $64mill)

Recurring capital expenditure just $5miil reflecting DGOC,s low capital requirements

Announced agreement with Oakley capital

Positive Commodity Outlook Complements Hedging program and cashflow

Outlook for natural gas is positive

Dividend increased by 15% this year

On track to meet full year expectations

DGOC does not do exploration so capex is relatively low ,it hedges its cash flow and if you read their RNS's they are committed to dividends - net result is that since I invested I am just under 20% up on the share price and have received some pretty hunky quarterly divs as well - what's not to like about that

JohnEustace

@fred9566

Probably a typo, but the Diversified Gas & Oil (LON:DGOC) deal is with Oaktree Capital, not Oakley. A different beast altogether.

I'm also content to hold but for now I think I'll await news of their next deal and see if the market gives me a better price to add to my holding.

Lord Gnome

DGOC is one of my LTBH shares and I rarely have to be concerned about them. I started buying just after IPO when the share price was in the 60s, so they have done very nicely for me and that yield has developed strongly along the way. I am always tempted by a high yielding share offering quarterly dividends!

By a stroke of good fortune I have traded these very successfully a couple of times when they have had a dose of the jitters. Each time I bought back a few more than I had before and I added more last year. I now have a full allocation of 5% of my portfolio.

The debt situation doesn't worry me in the least. Every deal is backed by an amortising loan that is paid back out of the proceeds of that deal. The debts are non-recourse and are not interlinked. DGOC has a very supportive pool of bankers happy to take their business. It's a very neat situation.

I have also been happy with Rusty and his team. They are plain talking, which I like. The business plan seems very simple. Their track record means that they have also now entered a very lucrative joint venture with Oaktree. Potentially lucrative, that is, as it has not yet done its first deal. I dare say forecasts of higher energy prices mean that distressed assets are going to be harder to come by.

The only down points that I can see are the value of the $ against the £ which is eating into the value of the dividends and that fact that the US Treasury takes 15% of all dividends by way of the withholding tax.

Other than that, a very happy holder.

Gnome

Quilleron

Diversified Gas & Oil (LON:DGOC) is a core holding for me too - got in on the back of a Midas tip in 2019 https://www.dailymail.co.uk/mo... and so am only recently back in the black (though added at lower levels more recently) but have never doubted their business model which seems to be poorly understood. The buy legacy gas wells at low cost and are expert at extending their remaining lifespan and then capping them inexpensively when exhausted. They now have also invested in a distribution capability.

The company name is also misleading in that oil is only 1% of their production - and hence a regular question is why they don't change the name (expensive just for the sake of it but they might if a sufficiently large acquisition came along that gave the impetus/rationale). Gas being so much more acceptable and necessary as part of the transition to a low/no-carbon future.

Worth reading their Investor Presentation https://d1io3yog0oux5.cloudfro... and if you're really interested, register for the webinar on 10th March two days after the next set of results https://www.dgoc.com/news-even...

marben100

19th Feb '21

If BP's projections re growth in oil & gas consumption over the next 20 years turn out to be correct, we're all in deep trouble.

I have always been deeply suspicious of Diversified Gas & Oil (LON:DGOC) : its assets are in a region that is already oversupplied with gas, resulting in persistently low sales prices (except very recently as a result of the US cold snap). Constant acquisitions and share issuance can hide a multitude of sins. Another source of suspicion is the company quoting figures in boe rather than mmcf. This is a trick that can lead naïve investors to think of values in oil barrel terms, whereas with almost all DGOC's assets being gas, the value of gas (especially Appalachian gas) is much lower - oil around $50-60/bbl recently vs Appalachian gas @ around $12/boe [$2/mmcf]. However, were I a shareholder I would gain some comfort from Oaktree's involvement - they don't generally buy duff assets!

jsmye@btinternet.com

I got into GDOC some 14 Months ago for all the reasons posted by the other investors and by Stockopedia, low PE, high returns from quarterly Divs and since then a 42% capital increase. I have been tempted to realise the gain but have been coerced to hold by the regular dividend payments which are a timely reminders of the value of holding regular income streams generated by, what appears to be a good management team. I am imagining someone called Rusty would be scouring the Appellations for bargain wells in his Stetson and bolting them on the a well "oiled" lowering fixed cost base and I am looking forward to the next set of accounts to confirm this.

The withholding tax taken from the divs is a disappointment, but this may be able to be mitigated by holding the shares in an ISA, or SIPP and getting your accountant to claim these back.

Verdict: I am holding

Withholding Tax can be reclaimed in a SIPP but not in an ISA. The standard rate of tax is 30%, but by filling in the correct tax form (W80BEN?) available from your stockbroker, this is reduced to 15%.

cjg

Gnome - similar to you i started buying £DGOC immediately post the IPO for the yield and have added since . One key thing that attracted me was the protection for the yield put in place through the hedging, which forms a fundamental part of their strategy.

For example the last trading statement as of 27th Jan indicated they have hedged 90% of 2021 gas sales and 60% of 2022. This restricts the downside (and upside) but importantly allows them to plan ahead and deliver on the forecast dividends/high yield.

Management to date appear to have made sensible acquisitions and also moved from AIM to the main market. They seem to be content to stick to their focussed strategy and avoid distractions.

Biggest risk may be the financial commitment to plug wells that are out of gas - but they have done a number of deals with different States as a further hedge against these costs.

Yellowstone Advisory

For all those with questions about Diversified Gas & Oil (LON:DGOC) why not put them directly to management? FY results are on 8th March and there is a webinar for private investors on 10th March at 6pm. You can register for the webinar here.

https://us02web.zoom.us/webina...

Wafeeq K

12th Mar '21

Enwell actually had a cash in Jan 21 of $61m around £44m. Could be closer to $70m by now due to increased gas and oil prices. They also finally resolved Arkona dispute in their favour so thats one risk less that you mentioned.

IncredibleMosesLeroy

23rd Jul '21

An interesting series Jack, thanks.

I have a technical question: If a company reports in $ but collects in Hyrvnia/Roubles what happens if the USD$ falls? Is that net positive or negative?

What if the company reports in Roubles but the share trades in USD$? Is that good for say Gazprom Pao (LON:OGZD) share price or bad? My thinking is USD = Commodities so good, but realise that is likely overly simplistic.

Trying to wrap my head around what I am actually exposed to in USD terms.

Oil & Gas watch - DGOC and Enwell

Diversified Oil & Gas (LON:DGOC)

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Jack Brumby

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