Following on from strong HY results, Diversified Gas and Oil produced an even better Q3 update at the end of October. When management presented at the latest Yellowstone Advisory webinar on 3rd November, they were justifiably pleased with recent performance and confident in future opportunities. A recording of the webinar is available here.

CEO Rusty Hutson Jr. started the webinar by running through some of the operating highlights of the quarter. Daily production increased 7% to 107MBOEPD on the back of another strong performance from the legacy gas assets. This is the ninth straight quarter where the company has delivered very low declines from legacy assets. In the Q&A section, Rusty talked about the work they are doing to put wells back into production, improving the maintenance of wells and fixing pipelines to improve production and that they still have a long way to go on this front. So low declines are expected to continue for a while. This helped generate adjusted EBITDA of $75m, an increase of 10% and an EBITDA margin of 52% - described by Rusty as being outstanding. They maintain their position as a low-cost producer with production costs at $1.18/Mcfe in line with the previous quarter ($1.17). The company also said they would try and maintain these costs going forward.

Some time was spent on the company hedging policy and the outlook for gas prices. One of the points reiterated a couple of times in response to questions from the audience was that the company would always forgo potential upside from higher prices by protecting against any downside shocks and ensuring more predictable cash flows by a conservative approach to hedging production. Henry Hub prices were as low as $1.83 this year but prices have recovered, and the forward curve is now above $3.00. At $2.75 gas price for DGOC, which is where they are currently hedged, would generate 57% EBITDA margins on a full year basis. Natural gas prices for 2021 continue to improve and the company has increased its hedging position for 2021 to 80% of production at a floor price of $2.66 MMBTU giving improved confidence in future cash flows. There is a feeling that natural gas macro conditions have improved this year and continue to look attractive.

The recent acquisitions of Carbon and EQT have been successfully integrated into the operating structure of DGOC and these wells are performing…

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