Diversified Gas & Oil Plc – Final Results for the Year Ended 31 December 2016

7 June 2017

Diversified Gas & Oil, the US based gas and oil producer, is pleased to announce the publication of its annual results for the year ended 31st December 2016.



  • Year-end gross production of 26,500 mcfe/day, 120% increase from 2015
  • Revenue of $18.3 million, up $12.0 million from 2015
  • Operating profit of $22.4 million (2015: $4.6 million)
  • Income before taxation of $32.5 million (2015: $413,000 loss).
  • Acquisitions of the conventional assets of Eclipse Resources and Seneca Resources Corporation adding a total of 13,900 mcfpd and 270 bopd to the portfolio.


Post-Period Highlights:

  • Admission to London’s AIM Market in February raising $50 million
  • Acquisition of a package of 1,300 producing wells in February which added a further 3,800 mcfpd and 110 bopd to the DGO portfolio.
  • Signed a Sales and Purchase Agreement to acquire an additional 6,800 boepd for $84.2 million, due to increase group production by 161% once completed.


Commenting on the results, CEO Rusty Hutson said:


“We laid down solid foundations in 2016 with the addition of strategic acquisitions that resulted in increased cash flow and profitability.  We have since leveraged these foundations to execute our more ambitious strategic objectives in the form of our admission to AIM and further acquisitions, the latest of which will more than double the size of the Company’s operations once completed.  We are in a unique position whereby we have capitalised on the industry opportunities by acquiring complementary low-cost producing assets at compelling valuation metrics. This has enabled us to assemble a high-quality portfolio of assets in the Appalachian Basin, and in doing so establish ourselves as one of the largest conventional players in the region.”

Diversified Gas & Oil PLC

Rusty Hutson Jr., Chief Executive Officer

Brad Gray, Finance Director


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Smith & Williamson Corporate Finance Limited

(Nominated Adviser & Joint Broker)

Russell Cook

Katy Birkin


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Mirabaud Securities LLP (Lead Broker)

Peter Krens

Edward Haig-Thomas


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Ben Romney

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Henry Wilson

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I am delighted to be delivering my Chairman’s statement on the back of a truly transformational year in 2016. Diversified Gas & Oil’s (DGO) growth has accelerated rapidly in recent years, however the pace quickened through 2016, driven by several key events, and our evolution and realization of our vision has continued apace throughout 2017.


Our primary strategic objective in 2016 was obtaining a level of scale and materiality that would make us relevant and attractive to institutional investors as part of a flotation on the AIM Market of the London Stock Exchange.  To that end, we successfully completed two acquisitions in April and June 2016 that increased our cash flow and profitability, two elements that are the bedrock of our business model.  These acquisitions provided us with a stable platform from which we could consider, and subsequently deliver, the more ambitious growth plans that have occurred in 2017.


DGO has a simple and robust strategy; acquire low-risk, profitable producing assets within our geographical focus in the Appalachian Basin, North East US, and then maximize production, and profitability, from these wells through the implementation of operational efficiencies and recovery techniques.  The third element to our strategy focuses on the organic growth opportunity within our existing portfolio as we initiate infill drilling in areas with upside potential.  In the current industry environment, we are achieving considerably higher rates of return through M&A than we could deliver with the drill-bit, which is why our primary focus has been on consolidating M&A opportunities whilst the market window continues to offer attractive valuation metrics.  Should the oil and gas prices firm up, or the M&A opportunities cease to present themselves, then we will be ready to switch our focus to the organic growth within the diverse portfolio that we have assembled.


Since inception in 2001, DGO has always focused on the Appalachian Basin, the oldest and most established hydrocarbon basin in the US, because of the low risk geology and easy access to market provided by an abundance of infrastructure.  The industry dynamics in the region have shifted considerably in recent years driven by the increased focus on shale and this has presented a unique and compelling opportunity for DGO that we have leveraged to our advantage.  The focus of large independents is increasingly on the unconventional shale reservoirs of Marcellus and Utica, meaning the overlaying conventional producing reservoirs are non-core to their businesses.  Retention of the licenses to the shale reservoirs are however held by production (HBP) from the conventional reservoirs and therefore the large independents are keen to offload the conventional assets to a capable operator who can maintain production and in doing so, retain the rights to the unconventional assets on behalf of the vendors.  Such is the importance of the selected acquirer’s operating capabilities that the consideration price of the assets is not the deciding factor, thereby presenting favorable valuation metrics on acquiring proven developed producing reserves.


As a result of all these factors, DGO has uniquely positioned itself as a capable and proven acquirer in the region, leveraging our local network, our assets and access to capital, and the reputation that we have steadily built over 15 years as a credible operator. Our market position has enabled us to execute on the acquisitions throughout 2016 and 2017 year to date, and we continue to screen exciting and complementary opportunities within our steady pipeline.


Having successfully acquired the Eclipse and Seneca assets in 2016, using the capital raised through our bond offering in London, we set our sights on obtaining a listing on the AIM Market.  We chose the AIM market as it is an international growth market, it has an established and sophisticated understanding of our industry, and our unique and proven business model would enable us to differentiate our story from other E&Ps listed on AIM. Despite the challenging market conditions and generally negative sentiment towards investing in E&Ps, DGO was able to raise $50 million with high quality blue-chip institutional investors, making it the largest oil and gas IPO to have taken place in the London market since April 2014.  We believe that the success of this process can be assigned to the simplicity of our strategy, the low-cost nature of our operations that generate profitability in a low commodity price environment, and finally our commitment to a dividend policy that sets us apart from most of our peers.


The principal purpose of the AIM listing was to strengthen our balance sheet and give us better access to capital, both of which would enable us to capitalize on future M&A opportunities.  We are pleased to report that the listing has been a resounding success, and we began executing our plans in the weeks following our IPO, with the acquisition of additional wells in April 2017.  We also announced on 5 May 2017 an agreement for a transformational $84.2 million acquisition which once completed, will significantly increase our acreage position, proven reserves, daily production and cash flow.  This ambitious acquisition will instantly enhance our operational and financial profile, and takes us to another level.


In summary, 2016 was about growth, but more importantly, it was about laying the foundations to enable more aggressive growth, and we have successfully built on those foundations during an extremely exciting and busy start to 2017.  I would personally like to thank the executive team for their dedication and commitment to the entrepreneurial values that underpin DGO.  I would also like to thank the Board for their pragmatic guidance through what has been an exciting and intense period of growth for the Company.  Finally, I would like to thank our shareholders for the faith and support that they have shown in the Company.  Our primary objective is to create value on behalf of our shareholders and we are confident that we have the right strategy, assets and management in place to deliver on our ambitious objectives.



Robert M. Post

Chairman of the Board



2016 was undoubtedly a transformational year for DGO. Utilizing our successful capital raising efforts from our listed bond offering, DGO closed two acquisitions that significantly increased our production and cash flows and advanced the company to the size and scale to position ourselves for the AIM IPO completed in February 2017.  This important balance sheet recapitalization provides a platform to execute our business strategy of acquiring and developing conventional oil and gas assets in Appalachia.


Our strategy remains consistent:

1)    Acquire producing assets at compelling valuations.  The assets typically are mature production with predictable flow rates and low declines.

2)    Maximize production by enhancing operational techniques and deploying capital in an efficient manner.

3)    Execute low risk, low cost drilling when economics are favourable.

We are firmly committed to our growth strategy as evidenced by the two acquisitions we closed in 2016, and have accelerated the rollout of this strategy in 2017, as detailed in this report.


Acquisition – Eclipse Resources

On 13 April 2016, DGO completed the acquisition of all the conventional assets of Eclipse Resources in Ohio (US). The assets acquired included approximately 1,300 conventional oil and gas wells producing approximately 235 barrels of oil per day (“BOPD”) and 3,200 MCF per day of natural gas production.


Acquisition – Seneca Resources Corporation

In June 2016, DGO completed the acquisition of 2,200 conventional oil and gas wells in Pennsylvania (US) from Seneca Resources Corporation. These assets were producing approximately 10,700 MCF of natural gas per day and 35 BOPD. This was the largest acquisition for DGO to date.


Financial Highlights

Both the Eclipse and Seneca acquisitions added significant production and were accretive to DGO’s EBITDA.   We ended 2016 with gross production of 26,500 mcfe/day, an 120% increase from the 2015 year end.  This growth was driven primarily by our acquisition-focus throughout 2016.  We also enhanced our operating metrics by becoming more efficient in our operations.  Total lease operating expense per MCFE dropped from $1.72 in 2015 to an average of $1.39 in the fourth quarter of 2016, which included all of our acquisitions for the period.  On a per flowing barrels of oil equivalent (BOE), 2016 ended at $8.26, positioning us firmly at the low end of the industry operating cost curve.  Our strict commitment to capital discipline ensures we are prudent in how we spend our capital to ensure the highest returns for the money spent.


Revenues for the year ended 31 December 2016 were $18.3 million, up $12.0 million from the prior year 2015. The increase was attributable to a full year of revenues from the three acquisitions closed in 2015, the impact of the two 2016 acquisitions, and the increase in production associated with the assets. Operating profit was $22.4 million (2015: $4.6 million) credited to obtaining natural gas and crude oil production at compelling valuations over its fair market value of $24.2 million. Net Income was $32.5 million (2015: $413 thousand loss) which was favourably impacted by the settlement of mezzanine debt which resulted in a gain on debt cancellation of $14.1 million. Excluding the impact of one-time costs and gains along with other non-cash transactions, the adjusted EBITDA of DGO was $4.3 million (2015: $2.6 million).


Total assets of DGO increased to $85.9 million representing an increase of 85.0%.  This increase in assets resulted from the recognition of the fair market value of the two successful acquisitions of the conventional assets of Eclipse Resources and Seneca Resources.  These acquisitions added significant scale to our operations and increased our oil and gas reserves.  As a result of recording the increase in the fair market value of the acquired assets, we recorded a gain on bargain purchase of $24.3 million which favourably impacted our shareholders’ equity.  Our total equity balance at 31 December 2016 is $9.2 million compared to a deficit balance of $8.8 million at 31 December 2015.


Prior to 1 January 2016, DGO’s results of operations and financial position consisted of the consolidation of individually owned “pass through” corporate entities incorporated in the United States. As a result of the successful contribution of the capital stock of the historical pass through entities to our US parent entity, Diversified Gas & Oil Corporation, DGO established an initial recognition of deferred income taxes in 2016.  DGO’s Statement of Financial Position at 31 December 2016 includes a deferred tax liability of $15.1 million.  Further discussion of our deferred income taxes is provided for in the notes to our Consolidated Financial Statements.


DGO’s total borrowings at 31 December 2016 were $41.3 million ($44.4 million in 2015).  DGO has historically funded its acquisition strategy through debt, including the acquisitions of Eclipse Resources and Seneca Resources.  The majority of the total borrowings were fully satisfied in the first quarter of 2017 as a result of DGO’s IPO on the AIM Market of the London Stock Exchange.


Future Developments

2017 promises to be another extremely active year for the company and we have already delivered a number of transformational milestones in the year.  In February we completed our public offering raising $50 million in the largest oil and gas IPO in the London market since 2014.  Later that month, we announced the acquisition of 1,300 oil and gas wells in Ohio and Pennsylvania (US), increasing our total production to approximately 33,300 mcfe per day.  These assets complemented our existing portfolio in both states and increased our daily natural gas production by 14% and daily oil production by 23%.


At the time of this writing, DGO has signed a conditional Purchase and Sale Agreement for a transformational acquisition that will have a significant impact on our production and operations.  This acquisition will give us a platform to significantly increase our operations within the Appalachian Basin and establish the Company as one of the largest conventional oil and gas operators in the region.  The purchase price is $84.2 million and this transaction will add approximately 6,800 BOE to our daily production, an increase of 161%.  Combined, the Company will produce approximately 11,000 BOE of net daily production, making us a material producer amongst our small-mid cap peer group.  This acquisition is scheduled to close in late June 2017.



DGO stated in the Company’s Admission Document, published on 30 January 2017, that the Directors intend to adopt a progressive dividend policy to reflect the expectation of future cash flow generation and long-term earnings potential for the Group.  The Board intends that not less than 40 per cent of operating free cash flow will be paid to Shareholders by way of a dividend.


The Board intends to recommend a final dividend in line with the stated dividend policy, for approval by shareholders at the Company’s Annual General Meeting to be held on 28 July 2017 and expects to pay such dividend not later than 31 July 2017.  The terms of this recommended final dividend will be announced and also included in the Company’s admission document to be published in relation to the proposed acquisition detailed above.


Responsibility for risk management

Risk management is integral to all of DGO’s activities. Each member of executive management is responsible for continuously monitoring and managing risk within the relevant business areas. Every material decision is preceded by an evaluation of applicable business risks. Reports on DGO’s risk exposure and reviews of its risk management are regularly undertaken and presented to the Board of Directors.


Principal risks and uncertainties


DGO may not successfully manage its growth

Expansion of the business of DGO may place additional demands on the management, administrative and technological resources, and may require additional capital expenditure. If DGO is unable to manage any such expansion effectively, then this may adversely impact the business, development, financial condition, results of operations, prospects, profits, cash flow and reputation of DGO. DGO’s growth and future success will be dependent to some extent on the successful completion of such expansion strategies proposed to be undertaken. The execution of DGO’s expansion strategies may also place a strain on its managerial, operational and financial reserves. Should DGO fail to implement such expansion strategies, DGO’s business operations, financial performance and prospects may be adversely affected.


Changes in natural gas and crude oil commodity pricing environment

Changes in commodity pricing may affect the value of DGO’s natural gas and oil fair market valuation, operating cash flow and adjusted EBITDA regardless of operating performance. DGO could be affected by unforeseen events outside of its control including economic and political events and trends, inflation and deflation, terrorist attacks or currency exchange fluctuation. The combined effect of these factors is difficult to predict and DGO could be affected adversely by changes in economic, political, administrative, taxation or other regulatory factors in any jurisdiction in which DGO may operate. Deterioration in the economic climate could result in a delay or cancellation of DGO’s plans and strategies. DGO’s management can mitigate several of these risks and streamline cash flows with adequate derivatives in place.


Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk is comprised of foreign currency risk, interest rate risk and other price risk, for example, commodity price risk. The objective of market risk management is to manage and control market price exposures within acceptable limits, while maximizing returns.


Liquidity risk

Liquidity risk arises from DGO’s ability to generate cash flows from operations to fund its business requirements or to create access to non-operational sources of funding. This risk can result in DGO’s difficulty in meetings its financial obligations as they become due.  The Directors continually review the cash available to the Company and seek to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs.


Environmental risk

DGO’s operations are subject to environmental regulation in all the jurisdictions in which it operates. DGO is unable to predict the effect of additional environmental laws and regulations which may be adopted in the future, including whether any such laws or regulations would adversely affect DGO’s operations. There can be no assurance that such new environmental legislation once implemented will not oblige DGO to incur significant expenses and undertake significant investments.


Closing Remarks

As reported, it has been an exciting time for DGO and we have accelerated the growth of the Company in a relatively short time frame.  We are particularly proud that we have been able to make such strides in the face of challenging industry headwinds.  We are continuing to see strong acquisition deal flow and we assess each opportunity with value creation as our primary goal.  We will continue to be aggressive in our approach, but disciplined in our valuations, placing emphasis on efficiencies and cash flow.  We truly believe that we have now created a solid platform from which we can grow and that our best days are ahead.


Finally, I would like to thank our Board of Directors for their ongoing support, and all of our staff for their dedication and commitment in this truly ever-changing landscape.  I would also reiterate our Chairman’s gratitude to our shareholders for their trust in our strategy and management team.  We will continue to work hard to maintain and repay that faith by developing a strong track record for delivery.



Robert “Rusty” Hutson, Jr.

Chief Executive Officer

Note Year ended
31 December
Year ended
31 December
$’000 $’000
Revenue 1 18,279 6,304
Cost of sales (12,767) (4,251)
Depreciation and depletion (4,039) (3,388)
Gross profit/(loss) 1,473 (1,335)
Administrative expenses (2,540) (1,016)
Gain/(Loss) on disposal of property and equipment 34 (2)
(Loss)/Gain on derivative financial instruments (810) 402
Gain on bargain purchase 24,293 6,582
Operating profit 2 22,450 4,631
Finance costs (3,291) (3,177)
Finance costs, accrued (925)
Accretion of decommissioning provision (797) (366)
Potential initial public offering charges (576)
Gain on debt cancellation 14,149
Income/(Loss) before taxation 32,511 (413)
Taxation on income/(loss) (14,829)
Income/(Loss) after taxation 17,682 (413)
Other comprehensive income – Gain on foreign currency conversion 901 17
Total comprehensive income/(loss) for the year 18,583 (396)
Earnings per share – basic and diluted (US$) 3 $0.42 $(0.01)



2016 2015  
$’000 $’000  
Non-current assets  
Oil and gas properties 76,793 42,353  
Property and equipment 3,348 2,110  
Other assets 998 414  
Restricted cash 117 115  
81,256 44,992  
Current assets  
Trade receivables 3,084 1,345  
Derivative financial instruments 17  
Other current assets 1,311 43  
Cash and cash equivalents 224 90  
4,619 1,495  
Total Assets 85,875 46,487  
Shareholders’ equity  
Share capital 669 630  
Share based payment reserve 313  
Merger reserve (478) (478)  
Retained earnings/(deficit) 8,658 (8,969)  
Total Equity 9,162 (8,817)  
Non-current liabilities  
Decommissioning liability 12,265 8,869  
Capital lease 274 58  
Borrowings 10,113 20,115  
Deferred tax liability 15,148  
Other liabilities 414 277  
38,214 29,319  
Current liabilities  
Trade and other payables 4,627 1,749  
Borrowings 27,181 22,821  
Capital lease 169 115  
Derivative financial instruments 939  
Other liabilities 5,583 1,300  
38,499 25,985  
Total Liabilities 76,713 55,304  
Total Liabilities and Equity 85,875 46,487  





Share based payment reserve Merger
$’000 $’000 $’000 $’000 $’000
Balance as of 1 January 2015 611  (478) (7,470)  (7,337)
Loss after taxation (413) (413)
Gain on foreign currency conversion 17 17
Total comprehensive loss for the year (396) (396)
Stockholder contributions pre-group reconstruction 1,296 1,296
Stockholder distributions pre-group reconstruction (2,399) (2,399)
Issuance of share capital 19 19
Transactions with owners 19 (1,103) (1,084)
Balance as of 31 December 2015 630 (478)     (8,969) (8,817)
Income after taxation 17,682 17,682
Gain on foreign currency conversion 901 901
Total comprehensive income for the year 18,583 18,583
Stockholder distributions pre-group reconstruction (956) (956)
Issuance of share capital 39 313 352
Transactions with owners 39 313 (956) (604)
Balance as of 31 December 2016 669 313 (478) 8,658 9,162




2016 2015
$’000 $’000
Cash flows from operating activities
Income/(Loss) after taxation 17,682 (413)
Cash flow from operations reconciliation
Depreciation and depletion 4,039 3,388
Finance costs 3,291 3,177
Accretion of decommissioning provision 797 366
Loss on derivative financial instruments 957 859
Gain on oil and gas program (84) (344)
Deferred income taxes 14,829
Gain on bargain purchase (24,293) (6,582)
Gain on debt cancellation (14,149)
(Gain)/Loss on disposal of property and equipment (34) 2
Noncash equity grant 340
Working capital adjustments:
Change in trade receivables (907) (158)
Change in other current assets (269) (26)
Change in other assets (652) (414)
Change in trade and other payables 2,662 (1,547)
Change in other liabilities 920 938
Net cash provided by/(used in) operating activities 5,129 (754)
Cash flows from investing activities
Expenditures on oil and gas properties (7,838) (2,513)
Expenditures on property and equipment (1,462) (1,216)
Increase in restricted cash (2) (25)
Proceeds on disposal of oil and gas properties 93 105
Net cash used in investing activities (9,209) (3,649)
Cash flows from financing activities
Proceeds from borrowings 14,915 9,311
Repayment of borrowings (6,794) (844)
Financing expense (3,222) (3,078)
Proceeds from capital lease 435 192
Repayment of capital lease (164) (19)
Contributions from stockholders pre-group reconstruction 1,296
Dividends to stockholders pre-group reconstruction (956) (2,399)
Net cash provided by financing activities 4,214 4,459
Net increase in cash and cash equivalents 134 56
Cash and cash equivalents – beginning of year 90 34
Cash and cash equivalents – end of year 224 90








2016 2015
$’000 $’000
Natural gas and crude oil revenue 14,878 4,738
Operator revenue 1,209 825
Oil and gas program revenue 1,573 344
Water disposal revenue 619 397
Total revenue 18,279 6,304





Adjusted EBITDA is a non-IFRS financial measure, which is of particular interest to the industry and Directors, as it is essentially the cash generated from operations that DGO has free for interest payments and capital investment. Adjusted EBITDA should not be considered as an alternative to operating profit (loss), comprehensive income, cash flow from operating activities or any other financial performance or liquidity measure presented in accordance with IFRS. Adjusted EBITDA is a non-IFRS financial measure that is defined as comprehensive income (loss) plus or minus:


  • finance costs, including accrued finance costs and deferred financing costs;
  • depreciation and depletion
  • gain on bargain purchase;
  • net gains or losses on the valuation of commodity derivative contracts;
  • net gains or losses on foreign currency translation;
  • net gains or losses on disposal of property and equipment;
  • acquisition related costs
  • other material non-cash costs


2016 2015
$’000 $’000
Operating profit 22,450 4,631
Gain on bargain purchase (24,293) (6,582)
(Gain)/Loss on disposal of property and equipment (34) 2
Fair value movement on open derivatives 957 859
Depreciation and depletion 4,039 3,388
Non-cash equity grant included in administrative expenses 340
Acquisition costs 838 293
Adjusted EBITDA 4,297 2,591





The calculation for earnings per share (basic and diluted) for the relevant year is based on the comprehensive income/(loss) after income tax attributable to equity holders for the years ended on 31 December 2016 and 2015 as follows:


2016 2015
Income/(Loss) after taxation ($) 17,682,000 (413,000)
Weighted average number of Ordinary Shares 42,010,690 40,100,000
Earnings per ordinary share $0.42 $(0.01)


Diluted loss per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of other equity instruments. There were no potentially dilutive ordinary shares in issue as of 31 December 2016 and 2015.





Copies of the Annual Report will be available on the Group’s website, and from the Group’s registered office at 27/28 Eastcastle Street, London  W1W 8DH.


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