NEWS & MEDIA

Diversified Gas & Oil Plc – Interim Results for the Six-Month Period Ended 30 June 2017

11 September 2017

Diversified Gas & Oil PLC, the US based gas and oil producer, is pleased to announce the publication of its interim results for the six-month period ended 30 June 2017.

Highlights:

  •       Successful float on AIM in February 2017 raising $50m
  •       First post-IPO acquisition in April of a package of 1,300 producing wells which added approximately 743 barrels of oil equivalent per day (“boepd”) to the DGO portfolio.
  •       $84.2m reverse takeover and readmission to AIM through the acquisition of additional assets from Titan Energy LLC (“Titan Energy”) in June 2017, increasing production by 6,800 boepd, an increase of 161% over legacy production. The acquisition was financed through an oversubscribed $35m secondary share placing and with a $64m draw on our $110m debt facility
  •       Increased Proved Developed Producing reserves to approximately 59.4mmboe
  •       Operating costs reduced 6.4% to $7.73 per barrel of oil equivalent (“boe”) in 1H17 vs $8.26 per boe in our readmission document for the last three months of 2016
  •       Adjusted EBITDA (a) increase of 209% to $4.1m (2016: $1.3m); Pro forma for the Titan acquisition, Adjusted EBITDA increased nearly 900% to $12.9m
  •       Adjusted EBITDA (a) per share increase of 33% to $0.04 (2016: $0.03)
  •       Proforma Adjusted EBITDA (c) increase of 878% to $12.9m (2016: $1.3m)
  •       Reduced net debt by 17.3% with a leverage ratio of Net debt / Pro forma adjusted EBITDA of just 1.4x, a significant improvement over the 16.2x as at 30 June 2016
  •       Paid a dividend to shareholders of $0.0199 per ordinary share or $2.9m on 31 July 2017
  •       Declared a dividend of $0.0199 per ordinary share to be paid on 20 December 2017
  •       Strong balance sheet with $4.6m cash, $24.9m in our AIM offering equity placing receivable and $64m debt with $46m undrawn on the $110m credit facility (d)
  •       Enhanced liquidity position totaling $75.4m including $29.5m cash and near cash equivalent ($4.6m cash plus the $24.9m in our AIM offering equity placing receivable) and $46m undrawn on our $110m credit facility

These objectives have been delivered with the assistance of a strengthened management team as the Company continues to progress its acquisitive growth strategy.

Financial Summary:

                Change
    Explanation   H1 2017   H1 2016   $’000   %
        $’000   $’000        
Financial highlights continuing operations results:                    
Revenue       11,541     7,653     3,888     50.8 %
Adjusted EBITDA   a   4,065     1,314     2,751     209.4 %
Adjusted EBITDA margin   b   35.2 %   17.2 %   18.0 points   104.7 %
Adjusted EBITDA per share – Diluted ($)       0.04     0.03     0.01     33.3 %
                     
Refer to the Outlook Section of this document for pro forma results                    
                     
Statutory results for continuing operations:                    
Operating profit       9,738     23,936     (14,198 )   (59.3 )%
Profit before tax       3,940     36,491     (32,551 )   (89.2 )%
Diluted earnings per share ($)       0.04     0.91     (0.87 )   (95.6 )%

 

 

a)   Adjusted EBITDA is derived from the reported Operating Profit adjusted for depreciation and depletion, non-cash gains on bargain purchase and on disposal of property and equipment, losses on derivative financial instruments and non-recurring costs associated with acquisitions and certain other administrative expenses

 
     
b)   Adjusted EBITDA margin is calculated as Adjusted EBITDA divided by total revenue.
     
c)   The calculation of proforma Adjusted EBITDA is based on the Adjusted EBITDA for DGO together with the actual operating results for the assets acquired from Titan Energy for the period from 1 January 2017 to 30 June 2017 as reported to DGO by Titan Energy and as were included in the transaction’s closing statement.  These figures are for illustrative purposes only and have not been reported upon by the Company’s auditors.
     
d)   DGO drew $64m on the $110m credit facility to close the Titan asset acquisition on 30 June 2017. Of the $46m undrawn, $11m is reserved to close on the Titan assets held in public partnership structures. The remaining $35m availability can be used within the first twelve months of the facility’s life to finance additional acquisitions, of which $25m, would require an additional underwriting process by the lender.

 

 

Commenting on the results, CEO Rusty Hutson said:

 

“The DGO team has been incredibly active and highly focused in 1H17, delivering on a number of important corporate and strategic objectives for the benefit of our shareholders. Following our successful listing on AIM at the beginning of the year, we continue to concentrate on delivering the stated objectives included within our IPO admission document. Importantly, we returned nearly $3m through our inaugural dividend paid in July, which is strong evidence of our successful business model and a major differentiating factor of our investment proposition. DGO is now one of only two AIM companies amongst the 90 constituent companies in the Oil & Gas Production sector that pays a dividend to its shareholders.

 

In April, we closed on the acquisition of nearly 1,300 additional oil and natural gas wells, and after quickly and successfully integrating these assets into our continuing operations, we maintained the momentum by closing on a much larger, transformational acquisition of nearly 8,240 producing natural gas and oil wells. Collectively, these 1H17 acquisitions more than doubled our high-quality, long-life and low-decline asset base, while significantly enhancing DGO’s production base and operating cash flows. DGO enters 2H17 owning a portfolio capable of producing a net 11,000 boepd of highly predictable and profitable volumes of gas and oil, which places DGO amongst the largest producers on AIM, and underpins our stable business model.  The integration of the Titan assets is progressing well and 2H17 will see a material step-change in revenue and Adjusted EBITDA as we reap the full benefit of that acquisition, the cost of which has largely been taken in the first half of the year.”

 

Strategic Report

 

Delivering on our strategic objectives

 

These 1H17 results reflect DGO’s solid performance, delivering on our stated objectives and builds upon our already strong platform for additional growth. When we came to market in February 2017, we communicated a clear strategic vision for DGO: leverage our established position in the Appalachian Basin to capitalise on unique market conditions and acquire complementary producing assets on attractive valuation metrics to in turn grow production and cash flow, which DOG will use to fund a bi-annual dividend to shareholders.  We are proud to say that we have already delivered on these objectives and have rapidly transformed the business to become what we believe to be a unique investment proposition on AIM: a low-risk, cash flow positive, dividend paying Exploration and Production Company (“E&P”).

 

Results summary

 

DGO’s first financial results since becoming a listed company reflect solid growth in numerous key financial metrics.  Revenues are up more than 50% to $11.5m (2016: $7.7m) while adjusted EBITDA was up more than 200% to $4.1m (2016: $1.3m). Similarly, Adjusted EBITDA margin is significantly improved at 35.2% (2016: 17.2%), up 18 points over the corresponding period in 2016.

 

Whilst these half-year results demonstrate the Company’s steady progress through to 30 June, they do not reflect the significantly enhanced financial and operational capabilities that we expect to report in 2H17, following the completion of our transformational acquisition of certain Titan Energy Appalachian Basin assets.  The acquisition closed on the final day of the period and as such no contribution is reflected in our reported results although the costs associated with that transaction are included.  To illustrate the significance of this acquisition, we have included below within the Outlook discussion a pro-forma table which that illustrates what DGO’s financial results would have been had the Titan Energy acquisition occurred at the start of the period.

 

The Company’s balance sheet and liquidity position have been transformed following the recent acquisitions together with the new $110m debt facility ($64m drawn at 30 June) and two share placings which raised gross proceeds of $85m.  As at 30 June DGO had cash, and near cash equivalents, of $29.4m (2016: $0.02m) while total net assets stood at $87.1m (2016: $9.2m).

 

Consistent with the Board’s stated policy, DGO paid a maiden dividend of 1.55 pence per ordinary share (1.99 cents) on 31 July, and the Board is pleased to announce that the Company will pay an interim dividend of 1.99 cents per ordinary share on 20 December 2017.

 

The Appalachian Basin opportunity

 

The prevailing market conditions in our regional focus on the Appalachian Basin, both before and increasingly more so following our IPO, have created a compelling buyer’s market for well-capitalised, credible, local operators wishing to expand their portfolio of mature, producing assets.  The Appalachian Basin, the oldest producing basin in the US with an abundance of existing infrastructure, has seen a rapid expansion of unconventional activity as large players focus their operations on the prolific Utica and Marcellus shale reservoirs located throughout the basin.  This industry shift towards unconventional assets, the rights to which are held by production (“HBP”), means the mature, often conventional producing assets which routinely retain the rights to the unconventional assets, have become non-core to the larger industry players.  As such, these parties are keen to offload these assets to buyers who can maintain the production while allowing them to retaining the rights to the unconventional reservoirs.  With the maintenance of production and rights to the undeveloped, unconventional reservoirs being the main priority for the seller, this market dynamic creates particularly attractive valuation metrics for the appropriate buyers as price consideration is not always the seller’s principal factor in completing transactions.

 

Having operated in the Appalachian Basin since 2001, DGO has developed a strong network and regional reputation as a proven and credible operator, providing it with a first-mover advantage in a small band of appropriate companies competing to capitalise on these unique buying opportunities.  Furthermore, our proven ability to raise capital through the equity and debt markets puts us in an even smaller peer group capable of executing the material transactions of larger packages being offloaded.

 

Reducing operating costs

 

The conventional producing assets that represent the focus of DGO’s operations are characterised as low-cost and long-life, capable of producing steady volumes of natural gas and oil for decades with minimal pressure decline and requiring limited operational management.  The assets DGO seeks to acquire have often been managed inefficiently by larger operators, and present a unique opportunity for DGO to utilise its operational skillset and complementary regional footprint to reduce operating costs and improve the asset’s profitability.  DGO has a proven track record for driving down its unit operating costs as the Company expands its scale in the region, which enhances its resilience and profitability in a low-cost commodity environment.  Accordingly, DGO’s operating expenses in 1H17 were 6.4% lower at $7.73 per boe compared with $8.26 per boe reported in our readmission document for the last three months of 2016. We estimate that these costs will fall further as we begin to realize the benefit from various operational synergies and increased production from the Titan assets acquired on the last day of the 1H17 reporting period.

 

Growing through acquisition

 

Our successful share placing to raise gross proceeds of $50m and admission to AIM in February 2017 enabled us to significantly strengthen our balance sheet and liquidity and positioned us to transact on the opportunities stated above. We were pleased to complete our first post-IPO transaction only weeks after coming to market, as we acquired a package of 1,300 producing wells for $1.75m.  The acquisition added production of 3,800 mcfd and 110bopd. We completed field operation integration for these wells in May, and more fully completed the integration of accounting operations in June.

 

In March 2017, DGO identified the opportunity to acquire certain Appalachian Basin gas and oil assets from Titan Energy that were consistent with our acquisition criteria and that had the potential to significantly enhance the Company’s scale and profile in the region. DGO successfully raised an additional $35m through a further share placing and negotiated a new $110m senior secured credit facility to fund the $84.2mTitan Energy asset acquisition. The Company closed on $72.8m of the related assets on 30 June 2017 and continues to anticipate closing on the remaining $11.4m of assets by 30 September 2017 that are held within public partnership structures and that require regulatory approval within the US to close.

 

Inclusive of all Titan Energy assets, the Company’s gross oil and gas production increases to approximately 18,300 boepd (11,000 BEOPD net) with total gross gas production increasing more than 260% to approximately 104,200 mcfpd and gross oil production increasing by 69% to approximately 931 bopd. These production levels position DGO as one of the largest producers on AIM. At these production levels, and even with the existing cost structure that Management is actively working to lower, the acquired wells are immediately accretive to Adjusted EBITDA. Importantly, the acquisition also increased PDP reserves to approximately 59.4mmboe.

 

Management continues to screen a pipeline of complementary and value accretive opportunities in the Appalachian Basin and DGO is well funded to execute on additional transactions should they be compelling and in the best interest of the Company and its shareholders.

 

Integration process

 

On the day of closing the Titan acquisition, we added 104 field operation employees from Titan Energy to our team.  Led by newly appointed Senior Vice President of Operations, Bob Cayton, we restructured our field operations management team to reflect our scale and geographical size. Our legacy employees combined with these new additions to our team are unified in their focus to ensure a smooth and effective integration of the new assets into our operations processes.  As part of this process, the now larger team is working to enhance production and strive to generate cost savings.  The addition of many talented, experienced employees from Titan Energy was an important rationale in our strategy to acquire these assets, and we are very pleased to report that we are already seeing tangible benefits from their expertise.

 

As a part of the acquisition, we entered into a six-month transitional services agreement (“TSA”) for accounting and other administrative services from Titan Energy. The TSA is operating as we anticipated and has proven to be an effective strategy to integrate the operations.  In addition to the TSA, we engaged an energy consulting firm based in Houston, Texas to work with our teams on further integration strategies including accounting and technology needs.   Our engagement with the consulting firm is producing favourable results and is helping prepare us for a post-TSA operating model.

 

Organic opportunity

 

Whilst DGO’s growth strategy this year has focused on successfully achieving scale through acquisition, the Company’s portfolio provides significant organic growth opportunities.  As we complete the full integration of the newly acquired assets, our field management team will focus on maximising production by enhancing operational techniques.  Our extensive leasehold, which now covers approximately 1.6m surface acres, has been sparsely drilled to date and therefore provides material running room for infill drilling to increase the production throughout the portfolio.  Development wells are both low-risk and low-cost, ranging from $250k – $350k per well drill and placed on production.  Management intends to initiate a development programme when drilling economics become more favourable and offer the Company higher rates of return than are currently provided through the compelling acquisition opportunities available at present valuations from which we have recently benefitted.

 

Enhancing the DGO team

 

An important aspect of successfully executing our strategy is ensuring we have leadership and management teams with the kills and experience necessary to oversee our rapid expansion. As such, we have placed a significant focus on adding depth to our team in the past six months through the hire of several highly quality professionals.  With the acquisition of the Titan Energy assets, we added Bob Cayton as our Senior Vice President of Operations and John “Jack” Crook as our Senior Vice President of Environmental, Health & Safety.  Both Bob and Jack each have over 30 years of experience operating in the Appalachian Basin and we have entrusted them with the responsibility of managing our entire Appalachian operations.  We also extended our capital markets, accounting and financial reporting capabilities with the addition of Eric Williams as our new Chief Financial Officer.  Eric’s experience includes working with numerous SEC companies in the US, and was most recently the head of the investor relations function for a Permian based SEC oil and gas company.  Eric will lead our investor relations, financial reporting and accounting operations. We were also pleased to enhance our middle management teams in both field operations and administrative functions.

 

Outlook

 

The second half of 2017 promises to represent a step-change in DGO’s financial and operational profile as we reap the benefits from the transactions that we closed out in the first half of the year.  Our growth trajectory has been rapid as we have grown the Company’s gross production by nearly 240% over the past year. Near term, Management will remain highly focused on the successful integration of the acquired Titan Energy assets with a particular emphasis on the work required to ensure we maximise production whilst lowering our operating expenses.

 

After assuming control on 30 June 2017 of the Titan Energy assets, we have been working diligently to deliver improved operating results through initiatives to enhance asset performance while simultaneously reducing costs. The Company is pleased to report that in just the first month following the integration of Titan Energy’s assets, operating margins have meaningfully improved and we believe we will continue to drive additional improvement.

 

For example, immediately upon closing, we lowered operating costs with a more than 22% reduction in the number of Titan Energy employees servicing the assets. To accomplish this reduction without a detrimental effect on operations, we leveraged our existing employees in the region resulting in more efficient allocation of responsibilities in the region to lower non-productive time. Additionally, we took steps to reduce chart expenses by implementing a better process for taking readings, and we reduced workover expense by utilizing a recently acquired service rig. Recognizing that costs are only half of the equation to improve margins, we also took steps to improve asset performance. For example, with de minimis investments, we returned wells to production that were previously left shut-in and non-producing. Additionally, we’ve enhanced production by properly sizing compressors to the wells they support.

 

The following table illustrates DGO’s pro forma results assuming that the Titan Energy acquisition occurred at the beginning of the period on 1 January 2017. The pro forma results reflect Titan Energy’s actual operating results for the acquired assets, and therefore reflect none of the synergies DGO expected upon the integration of the assets. Further, the pro forma results include substantially no contribution from our EnerVest Energy Acquisition.

 

    As Reported   Unadjusted                    
    Unaudited   Unaudited   Unaudited       Pro forma vs H1 2016   Unaudited
    DGO   Titan Energy   Pro Forma       Change   Consolidated
    H1 2017   H1 2017   H1 2017   H1 2016   $’000   %   July 2017
    $’000   $’000   $’000   $’000           $’000
See Note 9 for details regarding the Titan Energy acquisition                            
Revenue   11,541     24,548     36,089     7,653     28,436     371.6 %   5,186  
Gross Profit   3,090     7,681     10,771     919     9,852     1,072.0 %   1,567  
Adjusted EBITDA   4,065     8,787     12,852     1,314     11,538     878.1 %   2,087  
Adjusted EBITDA margin   35.2 %   35.8 %   35.6 %   17.2 %   18.4 points   107.0 %   40.2 %
Adjusted EBITDA per share – Diluted   0.04     0.10     0.14     0.03     0.11     366.7 %   n/a
                             
Interim dividend per share           0.0199     –     0.0199     100 %    
Adjusted net debt           35,177     42,539     (7,362 )   (17.3 )%    
Net Debt (Cash + Equity Receivable – Debt) / Pro forma Annualized Adjusted EBITDA           1.4 x   16.2 x   (14.8 )x   (91.4 )%    

 

The sector backdrop continues to be challenging and we are in a highly fortunate position to be operating in a safe jurisdiction, benefit from a strong balance sheet and have an effective business model that provides significant downside protection against the variables of commodity prices.  Our low-cost operations ensure we are profitable in the current environment, and able to withstand a further decrease in commodity prices.  We also take a prudent approach to the way the business is run in terms of cash management and hedging out our production to ensure visibility on predictable earnings.  Ironically, we are uniquely positioned to benefit from the challenging sector backdrop as it creates very compelling acquisition opportunities as distressed companies seek to rationalise their portfolio.

 

Over the longer-term, we continue to work on our existing portfolio to seek in-fill opportunities and maximise the efficiency, production and longevity of our assets, activities that are a key aspect of company reputation and expertise.  Further, we continue to seek attractive acquisition opportunities arising out of current market conditions that have already resulted in a number of strategic purchases for DGO in the past 18 months. As our acquisitive momentum has increased over the years, we seek to continue to deliver valuable additions to our portfolio in the Appalachian Basin and other suitable mature, hydrocarbon basins in the US.

 

Conclusion

 

In summary, the first six months of 2017 has been truly transformational for the Company.  We have delivered on the strategic, corporate and operational objectives that we defined at the time of obtaining our admission to AIM in February 2017.  We enter the second half of the year in a strong position.  I wish to extend my gratitude to our shareholders who have demonstrated confidence in our defined strategy, management team and our focus on additional growth.  I would also like to thank my colleagues for their hard work and commitment, without which we would not have been able to deliver such impressive growth.  We are wholly focused on delivering value for all our stakeholders as we leverage the strong platform that we have created.

 

 

Rusty Hutson Jr

Chief Executive Officer

 

 

 

Financial Review

 

Revenue

 

Total revenues from natural gas and oil sales in 1H17 were $10.2m, a 48.9% increase over $6.8m for 1H16.The increase in this revenue was primarily attributable to a 45.6% increase in barrel of oil equivalent sales. DGO ended the first six months of 2017 with net boe sales of approximately 581,000 vs. the prior year sales of approximately 399,000.  The increase in boe sales was driven by the successful acquisitions of the assets from Seneca Resources and Eclipse Resources.

 

Operating profit

 

DGO’s operating profit in 1H17 was $9.7m compared to $23.9m in 1H16.  The decrease of $14.2m reflects the decrease in non-recurring bargain purchase gains of $13.8m between the two periods.  The Company recorded gains on bargain purchases of $24.2m in 1H16 as a result of the acquisitions of Seneca Resources and Eclipse Resources while recording gains on bargain purchases of $10.4m in 1H17 resulting from the Titan Energy and EnerVest Energy acquisitions.

 

The operating expenses incurred of $3.17m were significantly higher than the $0.89m for same period last year, due to the various costs of acquisition and corporate transactions in the period, but also reflecting the investment made in staff and systems to support the Company’s growth.

 

Finance costs

 

DGO’s finance costs include interest expense on borrowings, non-cash amortization of deferred financing costs and gains/losses on the early retirement of debt.  In 1H17 and using the proceeds from our successful AIM IPO, DGO repaid its publicly traded bonds and the then other outstanding debt. Accordingly, DGO incurred a non-recurring loss on the early extinguishment of debt, which primarily included a $3.8m charge for the accelerated amortization of the remaining deferred financing costs and $0.6m in premiums paid to redeem convertible bonds prior to DGO’s admission to AIM.

 

Hedging

 

To manage its cash flows in a volatile commodity price environment, DGO uses a combination of physical and financial derivative instruments. As required by its Senior Secured Credit Facility, DGO executed a combination of fixed price physical contracts, price swap financial contracts and two-way collar financial contracts equal to approximately 75% of the Company’s forecasted production volumes for a 36-month rolling period. Please refer to note 13 to our interim financial statements for additional information regarding DGO’s hedge portfolio.

 

EPS and Adjusted EBITDA

 

DGO reported 1H17 statutory earnings per diluted ordinary share of $0.04 compared to $0.91 per diluted ordinary share in 1H16. However, when adjusted for certain non-cash items such as gains on bargain purchases and similar items, DGO reported Adjusted EBITDA per diluted ordinary share of $0.04 per diluted ordinary share, a 33% increase over the prior year’s $0.03 Adjusted EBITDA per diluted ordinary share.

 

Dividend

 

The Board has announced an interim dividend of 1.99 cents per ordinary share to be paid on 20 December 2017 to those shareholders in the register on 17 November 2017, and follows the dividend of 1.99 cents per ordinary share paid to shareholders on 31 July 2017.

 

Enquiries:

Diversified Gas & Oil PLC

Rusty Hutson Jr., Chief Executive Officer

Brad Gray, Finance Director / Chief Operating Officer

Eric Williams, Chief Financial Officer / Investor Relations

www.diversifiedgasandoil.com

 +001 205 408 0909
   
Smith & Williamson Corporate Finance Limited

(Nominated Adviser & Joint Broker)

Russell Cook, Katy Birkin

 +44 (0)20 7131 4000
   
Mirabaud Securities Limited (Lead Broker)

Peter Krens, Edward Haig-Thomas

 +44 (0)20 3167 7221
   
Buchanan (Financial Public Relations)

Ben Romney, Chris Judd, Henry Wilson

dgo@buchanan.uk.com

 +44 (0)20 7466 5000

 

 

IMPORTANT NOTE REGARDING THE BASIS OF PRESENTATION —

 

The Company is pleased to present its interim consolidated financial statements. As discussed below in note 3, “Basis of Presentation,” please be aware that unless otherwise stated, the all information included within the financial statements, including the notes to the financial statements, is presented in US Dollars, which is the currency of the primary economic environment in which the Company operates, and all values, including those in sentences, are rounded to the nearest thousand dollars except per unit amounts and where otherwise indicated.

 

 

 

Interim Consolidated Statements of Comprehensive Income

(Amounts in thousands, except per-share amounts)

        Unaudited   Unaudited   Audited
        Six months to   Six months to   Year ended
    Note   30 June 2017   30 June 2016   31 December 2016
                 
Revenue   4   $ 11,541     $ 7,653     $ 18,279  
                 
Cost of sales   5   (6,225 )   (6,227 )   (12,767 )
Depreciation and depletion   5   (2,226 )   (507 )   (4,039 )
                 
Gross profit       $ 3,090     $ 919     $ 1,473  
                 
Administrative expenses   5   (3,167 )   (887 )   (2,540 )
Gain on disposal of property and equipment       4     –     34  
Loss on derivative financial instruments       (540 )   (308 )   (810 )
Gain on bargain purchase   9   10,351     24,212     24,293  
                 
Operating profit       $ 9,738     $ 23,936     $ 22,450  
                 
Finance costs       (745 )   (1,371 )   (3,291 )
Accretion of decommissioning provision       (585 )   (223 )   (797 )
(Loss)/Gain on early retirement of debt       (4,468 )   14,149     14,149  
                 
Income before taxation       $ 3,940     $ 36,491     $ 32,511  
                 
Taxation on income       (262 )   –   (14,829 )
                 
Income after taxation available to ordinary shareholders       $ 3,678     $ 36,491     $ 17,682  
                 
Other comprehensive income – gain on foreign currency conversion       202     603     901  
                 
Total comprehensive income for the year       $ 3,880     $ 37,094     $ 18,583  
                 
Earnings per ordinary share – basic & diluted   7   $ 0.04     $ 0.91     $ 0.42  
                 
Weighted average ordinary shares outstanding – Basic & Diluted   7   94,971     40,100     42,011  

 

 

Interim Consolidated Statements of Financial Position

(Amounts in thousands)

        Unaudited   Unaudited   Audited
    Note   30 June 2017   30 June 2016   31 December 2016
ASSETS                
Non-current assets                
Oil and gas properties, net   11   $ 176,536     $ 79,864     $ 76,793  
Property and equipment, net   12   5,668     2,798     3,348  
Other non-current assets       1,011     817     998  
Restricted cash       117     117     117  
     Total non-current assets       $ 183,332     $ 83,596     $ 81,256  
                 
Current assets                
Trade receivables       5,085     2,519     3,084  
Other current assets       417     118     1,311  
Equity placing receivable       24,864     –     –  
Cash and cash equivalents       4,574     20     224  
     Total current assets       $ 34,940     $ 2,657     $ 4,619  
                 
Total Assets       $ 218,272     $ 86,253     $ 85,875  
                 
EQUITY AND LIABILITIES                
Shareholders’ equity                
Share capital   14   $ 1,940     $ 630     $ 669  
Share premium       76,015     –     313  
Merger reserve       (478 )   (478 )   (478 )
Dividends declared       (2,887 )   –     –  
Retained earnings       12,538     27,587     8,658  
     Total Equity       $ 87,128     $ 27,739     $ 9,162  
                 
Non-current liabilities                
Decommissioning liability   15   $ 31,630     $ 14,798     $ 12,265  
Capital lease       440     115     274  
Borrowings   16   61,316     9,592     10,113  
Deferred tax liability       15,408     –     15,148  
Other non-current liabilities   10   5,038     457     414  
     Total non-current liabilities       $ 113,832     $ 24,962     $ 38,214  
                 
Current liabilities                
Trade and other payables       $ 3,032     $ 3,537     $ 4,627  
Borrowings   16   305     29,194     27,181  
Capital lease       250     113     169  
Dividends payable       2,887     –     –  
Other current liabilities   10   10,838     708     6,522  
     Total current-liabilities       $ 17,312     $ 33,552     $ 38,499  
                 
Total Liabilities       $ 131,144     $ 58,514     $ 76,713  
                 
Total Liabilities and Equity       $ 218,272     $ 86,253     $ 85,875  

 

 

Interim Consolidated Statements of Changes in Equity

(Amounts in thousands)

      Share   Share   Merger       Retained   Total
  Note   Capital   Premium   Reserve   Dividends   Earnings   Equity
Balance as of 1 January 2017     $ 669     $ 313     $ (478 )   $ –     $ 8,658     $ 9,162  
                           
Income after taxation     –     –     –     –     3,678     3,678  
Gain on foreign currency conversion     –     –     –     –     202     202  
     Total comprehensive income     –     –     –     –     3,880     3,880  
                           
Issuance of share capital, initial offering 14   768     43,550     –     –     –     44,318  
Issuance of share capital, secondary offering 9   503     32,152     –     –     –     32,655  
Dividends authorized and declared 8   –     –     –     (2,887 )   –     (2,887 )
     Transactions with shareholders     1,271     75,702     –     (2,887 )   –     74,086  
                           
Balance as of 30 June 2017     $ 1,940     $ 76,015     $ (478 )   $ (2,887 )   $ 12,538     $ 87,128  
                           
                           
      Share   Share   Merger       Retained   Total
      Capital   Premium   Reserve   Dividends   Earnings   Equity
Balance as of 1 January 2016     $ 630     $ –     $ (478 )   $ –     $ (8,969 )   $ (8,817 )
                           
Income after taxation     –     –     –     –     36,491     36,491  
Gain on foreign currency conversion     –     –     –     –     603     603  
     Total comprehensive income     –     –     –     –     37,094     37,094  
                           
Stockholder distributions pre-group reconstruction     –     –     –     –     (538 )   (538 )
     Transactions with shareholders     –     –     –     –     (538 )   (538 )
                           
Balance as of 30 June 2016     $ 630     $ –     $ (478 )   $ –     $ 27,587     $ 27,739  
                           
                           
      Share   Share   Merger       Retained   Total
      Capital   Premium   Reserve   Dividends   Earnings   Equity
Balance as of 1 January 2016     $ 630     $ –     $ (478 )   $ –     $ (8,969 )   $ (8,817 )
                           
Income after taxation     –     –     –     –     17,682     17,682  
Gain on foreign currency conversion     –     –     –     –     901     901  
     Total comprehensive income     –     –     –     –     18,583     18,583  
                           
Stockholder distributions pre-group reconstruction     –     –     –     –     (956 )   (956 )
Issuance of share capital     39     313     –     –     –     352  
     Transactions with shareholders     39     313     –     –     (956 )   (604 )
                           
Balance as of 31 December 2016     $ 669     $ 313     $ (478 )   $ –     $ 8,658     $ 9,162  

 

 

Interim Consolidated Statements of Cash Flow

(Amounts in thousands)

        Unaudited   Unaudited   Audited
        Six months to   Six months to   Year ended
    Note   30 June 2017   30 June 2016   31 December 2016
Cash flows from operating activities                
Income after taxation       $ 3,678     $ 36,491     $ 17,682  
Cash flow from operations reconciliation:                
     Depreciation and depletion       2,226     507     4,039  
     Finance costs       4,045     1,371     3,291  
     Accretion of decommissioning provision   15   585     223     797  
     Loss on derivative financial instruments   13   687     699     957  
     Gain on oil and gas program       (396 )   (84 )   (84 )
     Deferred income taxes       260     –     14,829  
     Gain on bargain purchase   9   (10,351 )   (24,212 )   (24,293 )
     Gain on disposal of property and equipment       (4 )   –     (34 )
     Gain on debt cancellation       –     (14,149 )   (14,149 )
     Non-cash equity grant       –     –     340  
Working capital adjustments:                
     Change in trade receivables       (2,002 )   (1,145 )   (907 )
     Change in other current assets       138     (71 )   (269 )
     Change in other assets       (13 )   –     (652 )
     Change in trade and other payables       (1,595 )   543     2,662  
     Change in other liabilities       9,733     129     920  
Net cash provided by operating activities       $ 6,991     $ 302     $ 5,129  
                 
Cash flows from investing activities                
Expenditures on oil and gas properties       $ (73,585 )   $ (8,642 )   $ (7,838 )
Expenditures on property and equipment       (2,652 )   (155 )   (1,462 )
Increase in restricted cash       –     (2 )   (2 )
Proceeds on disposal of oil and gas properties       –     93     93  
Net cash used in investing activities       $ (76,237 )   $ (8,706 )   $ (9,209 )
                 
Cash flows from financing activities                
Proceeds from borrowings   16   $ 64,000     $ 13,200     $ 14,915  
Repayment of borrowings       (40,521 )   (3,138 )   (6,794 )
Financing expense       (2,994 )   (1,244 )   (3,222 )
Proceeds from equity issuance, net       52,864     –     –  
Proceeds from capital lease       319     133     435  
Repayment of capital lease       (72 )   (79 )   (164 )
Dividends to shareholders pre-group reconstruction       –     (538 )   (956 )
Net cash provided by financing activities       $ 73,596     $ 8,334     $ 4,214  
                 
Net increase(decrease) in cash and cash equivalents       4,350     (70 )   134  
Cash and cash equivalents – beginning of the period       224     90     90  
                 
Cash and cash equivalents – end of the period       $ 4,574     $ 20     $ 224  

 

Note 1 – General Information

 

Diversified Gas & Oil PLC (“DGO” or the “Company”) is a natural gas and crude oil producer that is focused on acquiring and operating mature producing wells with long lives and slow decline profiles. Presently, our assets are exclusively located within the Appalachian Basin. The Company is headquartered in Birmingham, Alabama, USA with field offices located in Pennsylvania, Ohio, West Virginia and Tennessee.  DGO was incorporated on 31 July 2014 in England and Wales as a private limited company under company number 09156132. DGO’s registered office is located at 27/28 Eastcastle Street, London W1W 8DH, United Kingdom.

 

Note 2 – Business Consolidation

 

The interim consolidated financial statements reflect the following corporate structure of DGO:

 

  •       Diversified Gas & Oil PLC (“PLC”), and its wholly owned subsidiary,

◦      Diversified Gas & Oil Corporation (“DGOC’), as well as its wholly owned subsidiaries,

▪      Diversified Resources, Inc.

▪      M & R Investments, LLC;

▪      M & R Investments Ohio, LLC;

▪      Marshall Gas and Oil Corporation;

▪      R&K Oil and Gas, Inc.;

▪      Fund 1 DR, LLC

▪      Diversified Oil & Gas, LLC;

▪      Diversified Appalachian Group, LLC

▪      Diversified Energy, LLC (see note 9)

 

Note 3 – Basis of Preparation

 

The interim consolidated financial statements do not represent statutory accounts within the meaning of section 435 of the Companies Act 2016. The financial information for the period ended 30 June 2017 is based on the statutory accounts for the year ended 31 December 2016. Those accounts, upon which the auditors issued an unqualified opinion, have been delivered to the Registrar of Companies and did not contain statements under section 498(2) or (3) of the Companies Act 2006.

 

The interim consolidated financial information is unaudited and has been prepared on the basis of the accounting policies set out in the Group’s 2016 statutory accounts in accordance with IAS 34 Interim Financial Reporting.

 

Unless otherwise stated, the financial statements are presented in US Dollars, which is the currency of the primary economic environment in which DGO operates, and all values are rounded to the nearest thousand dollars except per unit amounts and where otherwise indicated. Certain prior period amounts have been reclassified to conform with current presentation. Transactions in foreign currencies are translated into US Dollars at the rate of exchange on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange ruling at the balance sheet date. The resulting gain or loss is reflected in the income statement within Other comprehensive income – gain on foreign currency conversion.

 

The financial statements have been prepared under the historical cost convention, except for acquisitions and derivative financial instruments that have been measured at fair value through profit and loss.

 

The financial statements have been prepared on the going concern basis, which contemplates the continuity of normal business activity and the realization of assets and the settlement of liabilities in the normal course of business. The Directors have reviewed DGO’s overall position and outlook and are of the opinion that DGO is sufficiently well funded to be able to operate as a going concern for at least the next twelve months from the date of approval of these financial statements. The Directors believe that the use of the going concern basis is appropriate. Accordingly, the Directors have prepared the financial statements on a going concern basis.

 

Note 4 – Revenue

 

DGO extracts and sells natural gas and crude oil to various customers. DGO also operates oil and natural gas wells for customers and other working interest owners. The following table reconciles the Company’s revenues for the periods presented:

    Unaudited   Unaudited   Audited
    Six months to   Six months to   Year ended
    30 June 2017   30 June 2016    31 December 2016
             
Natural gas revenue   $ 7,795     $ 4,996     $ 10,671  
Oil revenue   2,399     1,849     4,207  
     Total natural gas and oil revenues   10,194     6,845     14,878  
Operator revenue   662     468     1,209  
Oil and gas program revenue   403     84     1,573  
Water disposal revenue   282     256     619  
     Total revenue   $ 11,541     $ 7,653     $ 18,279  

 

Note 5 – Expenses by Nature

 

The following table provides a detail of the Company’s expenses:

        Unaudited   Unaudited   Audited
        Six months to   Six months to   Year ended
    Explanation   30 June 2017   30 June 2016    31 December 2016
                 
Automobile       $ 526     $ 306     $ 797  
Employees and benefits       2,354     2,135     4,117  
Insurance       117     53     162  
Well operating expenses & taxes       3,228     3,733     7,691  
     Total cost of sales       $ 6,225     $ 6,227     $ 12,767  
                 
Depreciation       516     (567 )   756  
Depletion       1,710     1,074     3,283  
      Total depreciation and depletion       $ 2,226     $ 507     $ 4,039  
                 
Employees and benefits   a   965     95     373  
Other administrative       136     150     301  
Professional fees       165     63     272  
Auditors’ remuneration                
     Audit of parent       11     15     34  
     Audit of group       75     112     247  
          Total Auditors’ remuneration       $ 86     $ 127     $ 281  
Other fees payable to auditors       4     24     42  
Rent       42     44     93  
     Recurring administrative expenses       $ 1,398     $ 503     $ 1,362  
                 
Non-recurring costs associated with acquisitions & contribution of assets       1,769     384     838  
Non-cash equity issuance   b   –     –     340  
     Non-recurring administrative expenses       $ 1,769     $ 384     $ 1,178  
                 
Total administrative expenses       $ 3,167     $ 887     $ 2,540  
                 
Total expenses       $ 11,618     $ 7,621     $ 19,346  

 

a)   Prior to admission to AIM, compensation expense for the owners was recorded as an owner distribution. Thus, the expense reported in the prior year is lower by the amount of such distributions. Further, the Company hired additional personnel, including a Finance Director and Chief Operating Officer in October 2016, which increased this expense to support a larger, more dynamic organization.

 
     
b)   Non-cash equity issuance is a non-recurring expense related to the initial issuance of stock to a Company senior manager in 2016.

 

Note 6 – Adjusted EBITDA

 

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 operating profit plus or minus items detailed below in the table below.

 

The Company believes Adjusted EBITDA is a useful measure because it enables a more effective way to evaluate operating performance and compare the results of operations from period-to-period and against our peers without regard to our financing methods or capital structure. The Company excludes the items listed in the table below from operating profit in arriving at Adjusted EBITDA because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired.

 

The following table reconciles the Company’s operating profit to Adjusted EBITDA:

    Unaudited   Unaudited   Audited
    Six months to   Six months to   Year ended
    30 June 2017   30 June 2016   31 December 2016
             
Operating profit   $ 9,738     $ 23,936     $ 22,450  
             
Depreciation and depletion   2,226     507     4,039  
Gain on bargain purchase   (10,351 )   (24,212 )   (24,293 )
Gain on disposal of property and equipment   (4 )   –     (34 )
Loss on derivative financial instruments   687     699     957  
Non-recurring costs associated with acquisitions & contribution of assets   1,769     384     838  
Non-cash equity issuance included in Administrative expense   –     –     340  
   Total Adjustments   (5,673 )   (22,622 )   (18,153 )
             
Adjusted EBITDA   $ 4,065     $ 1,314     $ 4,297  
             
Weighted average ordinary shares outstanding – Basic and Diluted   94,971     40,100     42,011  
             
Adjusted EBITDA per share – Basic and Diluted   $ 0.04     $ 0.03     $ 0.10  

 

Note 7 – Earnings per Share

 

The calculation of basic income/(loss) per ordinary share is based on the income/(loss) after taxation available to ordinary shareholders and on the weighted average number of ordinary shares outstanding during the period. The calculation of diluted income/(loss) per ordinary share is based on the income/(loss) after taxation available to ordinary shareholders and the weighted average number of ordinary shares outstanding plus the weighted average number of shares that would be issued if dilutive options and warrants were converted into shares on the last day of the reporting period. Basic and diluted income/(loss) per ordinary share is calculated as follows:

        Unaudited   Unaudited   Audited
        Six months to   Six months to   Year ended
    Calculation   30 June 2017   30 June 2016   31 December 2016
                 
Income after taxation available to ordinary shareholders   A   $ 3,678     $ 36,491     $ 17,682  
                 
Weighted average ordinary shares outstanding – Basic & Diluted   B   94,971     40,100     42,011  
                 
Earnings per ordinary share – basic & diluted   = A / B   $ 0.04     $ 0.91     $ 0.42  
                 
Adjusted EBITDA per ordinary share – basic & diluted   See Note 6   $ 0.04     $ 0.03     $ 0.10  

 

Note 8 – Dividends

 

On 15 June 2017, the Company declared its first dividend subsequent to completing its initial public offering on the AIM in February 2017. Subsequent to 30 June 2017, the Company declared an additional dividend to be paid on 20 December 2017.

 

The following table summarizes the Company’s dividends paid and declared:

    Dividend per Ordinary Share                
Date Declared   USD   GBP   Record Date   Pay Date   Shares Outstanding   Gross Dividends Paid
15 June 2017   $ 0.0199     £ 0.0155     07 July 2017   31 July 2017   145,076     $ 2,887  
11 September 2017   0.0199     Pending   17 November 2017   20 December 2017   Pending   Pending

 

Note 9 – Acquisitions

 

The assets acquired in all acquisitions include the necessary permits, rights to production, royalties, contracts and agreements that support the production from the wells. The acquisitions have been accounted for as a business acquisition under IFRS 3. The acquisitions gave rise to bargain purchases due to the prevailing market conditions in the Appalachian Basin, the context of global oil and gas prices, the financial condition of the sellers, and a change in the operational focus of the sellers compelling these sellers to divest of their conventional oil and gas assets.

 

EnerVest Acquisition

 

In April 2017, DGO acquired approximately 1,300 conventional natural gas and oil wells in Ohio and equipment from EnerVest. The purchase consideration totalling $1,750 was paid in cash. Management considered the fair value of the reserves held in the assets acquired to be $5,629, which was the 30% cumulative cash flow discount reserve valuation derived from a third-party engineer at the time of purchase. The provisional estimated fair values of the assets and liabilities assumed were as follows:

Oil and gas properties   $ 5,629  
Oil and gas properties (Decommissioning provision, asset portion)   2,406  
Decommissioning liability   (2,406 )
Gain on bargain purchase   (3,879 )
     Purchase price   $ 1,750  

 

 

Titan Energy Acquisition

 

On 30 June 2017, DGO acquired approximately 8,380 producing conventional natural gas and oil wells in the states of Pennsylvania, Ohio, and Tennessee (including approximately 1,140 non-operated wells) and equipment from Titan Energy. The total purchase consideration including assets expected to close by 30 September 2017 was $84,200.  The cash consideration for the purchase was funded by a new $110,000 Senior Secured Loan Facility, of which $64,000 was drawn upon closing on 30 June 2017, and an equity placing of DGO’s stock.  DGO placed 39,300 new ordinary shares at $0.89 per share with certain existing and new institutional investors to raise $35,020. The equity placing occurred in two tranches of 11,400 shares which raised $10,158 and 27,900 shares were placed with the second tranche, which raised $24,862.

 

Of the total $84,200 purchase consideration, DGO funded $72,800 in cash on 30 June 2017 for approximately 8,240 of the total wells. The remaining $11,400 of the purchase price is allocated to Titan Energy assets that are held within public partnership structures and include a number of horizontal wells. The Company continues to anticipate closing on the remaining assets by 30 September 2017 pending regulatory approval within the United States.

 

Management considered the fair value of the reserves held in the assets acquired on 30 June 2017 to be $79,272, which was the 25% cumulative cash flow discount reserve valuation derived from a third-party engineer at the time of purchase. The provisional estimated fair values of the assets and liabilities assumed were as follows:

Total purchase consideration   $ 84,200  
     Less: Net purchase price adjustments   (4,928 )
Oil and gas properties purchased at 30 June 2017   $ 79,272  
Oil and gas properties (Decommissioning provision, asset portion)   14,896  
Decommissioning liability   (14,896 )
Gain on bargain purchase for properties purchased at 30 June 2017   (6,472 )
     Purchase price as at 30 June 2017   $ 72,800  

 

Note 10 – Other Liabilities

 

The following table reconciles the Company’s other liabilities for the periods presented:

  Unaudited   Unaudited   Audited
  30 June 2017   30 June 2016   31 December 2016
Other non-current liabilities          
   Customer deposits $ 55     $ 52     $ 52  
   Revenue to be distributed 3,128     306     362  
   Derivative financial instruments – net non-current liability 1,855     99     –  
Total Other non-current liabilities $ 5,038     $ 457     $ 414  
           
Other current liabilities          
   Accrued expenses $ 896     $ –     $ 1,112  
   Net revenue clearing 2,461     –     498  
IPO related expenses 2,768     –     –  
Acquisition related short term financing 3,500     –     3,500  
   Derivative financial instruments – net current liability –     583     939  
Other 1,213     125     473  
Total Other current liabilities $ 10,838     $ 708     $ 6,522  

 

Note 11 – Oil and Gas Properties

 

As discussed in Note 9, the Company completed two acquisitions during the first half of 2017. The following table summarizes the Company’s oil and gas properties for each of the periods presented:

    Costs     Depletion and Impairment      
Period   Beginning Balance   Additions   Disposals   Ending Balance     Beginning Balance   Period Charges   Disposals   Ending Balance     Net Book Value
                                         
As at and for the 6-months ended 30 June 2017 (Unaudited)   $ 94,608     101,645     (12 )   $ 196,241       $ (17,815 )   (1,890 )   –     $ (19,705 )     $ 176,536  
                                         
As at and for the 6-months ended 30 June 2016 (Unaudited)   56,659     37,809     (28 )   94,440       (14,306 )   (283 )   13     (14,576 )     79,864  
                                         
As at and for the year ended 31 December 2016 (Audited)   56,659     41,077     (3,128 )   94,608       (14,306 )   (3,553 )   44     (17,815 )     76,793  

 

Note 12 – Property and Equipment

 

The following table summarizes the Company’s property and equipment for each of the periods presented:

    Plant, Property & Equipment     Accumulated Depreciation and Disposals      
Period   Beginning Balance   Additions   Disposals   Ending Balance     Beginning Balance   Period Charges   Disposals   Ending Balance     Net Book Value
                                         
As at and for the 6-months ended 30 June 2017 (Unaudited)   $ 5,223     2,657     (5 )   $ 7,875       $ (1,875 )   (336 )   4     $ (2,207 )     $ 5,668  
                                         
As at and for the 6-months ended 30 June 2016 (Unaudited)   3,506     911     (6 )   4,411       (1,395 )   (224 )   6     (1,613 )     2,798  
                                         
As at and for the year ended 31 December 2016 (Audited)   3,506     1,791     (74 )   5,223       (1,395 )   (486 )   6     (1,875 )     3,348  

 

Note 13 – Derivative Financial Instruments & Hedging Activities

 

The following table summarizes DGO Group’s calculated fair value of derivative financial instruments:

    Unaudited   Unaudited   Audited
(Liabilities)/Assets   30 June 2017   30 June 2016   31 December 2016
             
Natural gas            
     Swaps   $ (747 )   $ (474 )   $ (99 )
     Collars   (57 )   –     (685 )
     Basis swaps   (568 )   53     –  
     Put options   –     (140 )   –  
          Total natural gas derivative financial instruments   $ (1,372 )   $ (561 )   $ (784 )
             
Oil            
     Swaps   $ –     $ –     $ –  
     Collars   (254 )   –     (155 )
     Basis swaps   –     –     –  
     Put options   –     (121 )   –  
          Total oil derivative financial instruments   $ (254 )   $ (121 )   $ (155 )
             
Total derivative financial instruments   $ (1,626 )   $ (682 )   $ (939 )

 

The Company reports the derivative financial instrument assets and liabilities net in its balance sheet. The following table reconciles the Company’s derivative financial instrument gross assets and gross liabilities for the periods presented:

Derivative Financial       Unaudited   Unaudited   Audited
Instruments   Balance Sheet line item   30 June 2017   30 June 2016   31 December 2016
                 
Non-current assets       $ 1,585     $ 380     $ –  
Current assets       2,012     466     640  
     Total assets       $ 3,597     $ 846     $ 640  
                 
Non-current liability       $ (3,440 )   $ (479 )   $ –  
Current liabilities       (1,783 )   (1,049 )   (1,579 )
     Total liabilities       $ (5,223 )   $ (1,528 )   $ (1,579 )
                 
Net (liabilities)/assets – Non-current   Other Non-current (liabilities)/assets   $ (1,855 )   $ (99 )   $ –  
Net assets/(liabilities) – Current   Other Current assets/(liabilities)   229     (583 )   (939 )
     Net (liabilities)/assets       $ (1,626 )   $ (682 )   $ (939 )

 

For the periods indicated, the Company recorded the following related to its derivative financial instruments in the consolidated statements of comprehensive income as gain (loss) on derivative financial instruments:

    Unaudited   Unaudited   Audited
    30 June 2017   30 June 2016   31 December 2016
             
Net gain on settlements   $ 147     $ 391     $ 147  
Net loss on fair value adjustments on unsettled financial instruments   (687 )   (699 )   (957 )
   Total loss on derivative financial instruments   $ (540 )   $ (308 )   $ (810 )

 

Listed in the table below are the outstanding natural gas and oil derivative financial instruments as of 30 June 2017:

Derivative Financial   Remaining   Ending   Swap   Floor   Short Put   Ceiling   Mark-to-Market
Instrument Type   Volumes   Month   Price   Price   Price   Price   As of 30 June 2017
                             
Natural Gas                        
Swap   307,500 MMBTUs   Oct-17   $ 3.38     $ –     $ –     $ –     $ 102  
Swap   1,500,000 MMBTUs   Oct-17   2.92     –     –     –     (181 )
Swap   6,000,000 MMBTUs   Mar-19   2.89     –     –     –     (266 )
Swap   6,000,000 MMBTUs   Mar-20   2.81     –     –     –     (191 )
Swap   6,000,000 MMBTUs   Mar-21   2.82     –     –     –     (211 )
Two-Way Collar   152,500 MMBTUs   Dec-17   –     3.25     –     3.75     31  
Two-Way Collar   1,000,000 MMBTUs   Dec-17   –     2.87     –     3.32     (97 )
Two-Way Collar   1,500,000 MMBTUs   Mar-18   –     3.00     –     3.55     (145 )
Three-Way Collar   688,500 MMBTUs   Dec-17   –     3.00     2.50     3.48     24  
Three-Way Collar   688,500 MMBTUs   Dec-17   –     3.30     2.80     3.77     130  
Basis Swap: Dominion SP   1,230,000 MMBTUs   Oct-17   (0.67 )   –     –     –     493  
Basis Swap: Dominion SP   3,600,000 MMBTUs   Dec-18   (0.60 )   –     –     –     (420 )
Basis Swap: Dominion SP   305,000 MMBTUs   Dec-18   (0.53 )   –     –     –     (13 )
Basis Swap: Dominion SP   7,668,000 MMBTUs   Sep-20   (0.59 )   –     –     –     (567 )
Basis Swap: TCO   2,100,000 MMBTUs   Sep-20   (0.39 )   –     –     –     (61 )
                             
Oil                        
Two-Way Collar   30,728 BBLs   Dec-17   –     $ 50.00     $ –     $ 59.00     $ 133  
Two-Way Collar   30,600 BBLs   Dec-17   –     40.00     –     49.00     (35 )
Two-Way Collar   146,000 BBLs   Dec-18   –     42.00     –     51.00     (204 )
Two-Way Collar   146,000 BBLs   Dec-19   –     44.00     –     52.00     (197 )
Three-Way Collar   22,800 BBLs   Dec-17   –     47.00     37.00     59.00     49  
                             
Total Derivative Financial Instruments                       $ (1,626 )

 

Listed in the table below are the natural gas and oil derivative financial instruments executed subsequent to 30 June 2017:

Derivative Financial   Remaining   Ending   Swap   Floor   Short Put   Ceiling
Instrument Type   Volumes   Month   Price   Price   Price   Price
                         
Natural Gas                    
Swap   900,000 MMBTUs   Nov-18   $ 2.84     $ –     $ –     $ –  
Basis Swap: TCO   20,000 MMBTUs   Nov-17   (0.24 )   –     –     –  
Basis Swap: TCO   20,000 MMBTUs   Apr-18   (0.21 )   –     –     –  
Basis Swap: TCO   320,000 MMBTUs   Oct-18   (0.34 )   –     –     –  
Basis Swap: TCO   65,000 MMBTUs   Feb-19   (0.32 )   –     –     –  
Basis Swap: Leidy   320,000 MMBTUs   Oct-18   (0.71 )   –     –     –  
                         
Oil                    
Two-Way Collar   23,000 BBLs   Oct-17   $ –     $ 38.00     $ –     $ 50.90  
Two-Way Collar   2,800 BBLs   Feb-18   –     39.00     –     53.35  
Two-Way Collar   5,600 BBLs   Feb-19   –     40.00     –     56.05  

 

Note 14 – Share Capital

 

In February 2017, DGO placed 61,000 new ordinary shares at 65 pence per share to raise gross proceeds of $49,563 (approximately £39,650). DGO used the funds raised for the repurchase of bonds, repayment of existing debt facilities, costs of admission to AIM and working capital requirements of the Company. Following this initial placing, and as discussed in Note 9, in June 2017, DGO issued an additional 39,300 ordinary shares at 70 pence per share to raise additional gross proceeds of $34,938 (approximately £27,510) to fund part of the purchase price of an additional acquisition. The following table summarizes the Company’s share capital for the periods presented:

    Number of Shares   Total Share Capital
         
Balance as of 1 January 2017   44,210     $ 669  
         
Issuance of share capital, primarily initial offering   61,381     768  
Issuance of share capital, primarily secondary offering   39,485     503  
         
Balance as of 30 June 2017   145,076     $ 1,940  
         
    Number of Shares   Total Share Capital
         
Balance as of 1 January 2016   41,200     $ 630  
         
No activity during the period   –     –  
         
Balance as of 30 June 2016   41,200     $ 630  
         
    Number of Shares   Total Share Capital
         
Balance as of 1 January 2016   41,200     $ 630  
         
Issuance of share capital, Board Member   800     12  
Issuance of share capital, Chief Operating Officer & Finance Director   2,210     27  
         
Balance as of 31 December 2016   44,210     $ 669  

 

Note 15 – Decommissioning Liability

 

The Company records a liability for future cost of decommissioning production facilities and pipelines on a discounted basis. The decommissioning liability represents the present value of decommissioning costs relating to oil and gas properties, which are expected to be incurred up to 2047, which is when the producing oil and gas properties are expected to cease operations. These liabilities are recorded based on the Directors’ internal estimates. Assumptions based on the current economic environment have been made, which the Directors believe are a reasonable basis upon which to estimate the future liability. These estimates are reviewed regularly to take into account any material changes to the assumptions. However, actual decommissioning costs will ultimately depend upon future market prices for the necessary decommissioning works required that will reflect market conditions at the relevant time. Furthermore, the timing of decommissioning is likely to depend on when the fields cease to produce at economically viable rates. This, in turn, will depend upon future oil and gas prices, which are inherently uncertain. The discount rate and the cost inflation rate used in the calculation of the decommissioning liability were 8.0% and 3%, respectively as at each of the periods presented. See Note 9 for a discussion of acquisition activity that drove the increase in the liability since 31 December 2016:

Period   Beginning Liability   Additions   Accretion   Disposals   Change of Estimate   Ending Liability
                         
As at and for the 6 months ended 30 June 2017 (Unaudited)   $ 12,265     $ 18,780     $ 585     $ –     $ –     $ 31,630  
As at and for the 6 months ended 30 June 2016 (Unaudited)   8,869     5,706     223     –     –     14,798  
As at and for the year ended 31 December 2016 (Audited)   8,869     5,457     797     (4 )   (2,854 )   12,265  

 

Note 16 – Borrowings

 

As discussed in Note 14, the Company used part of the equity proceeds raised through its IPO on AIM to repay much of the debt outstanding at 31 December 2016. DGO’s borrowings consist of the following amounts for the periods presented:

    Unaudited   Unaudited   Audited
    30 June 2017   30 June 2016   31 December 2016
             
Financial institution, with interest rate of 3.25%, matured December 2016, secured by oil and gas properties   $ –     $ 16,118     $ 15,768  
Financial institution, interest rate of 4.00%, matured August 2016, secured by oil and gas properties   –     3,225     3,165  
Financial institution, interest rate of WSJ Prime Rate plus 0.50%, maturing July 2017, secured by oil and gas properties   –     2,000     2,000  
Financing companies, interest rates of 10%-12%, maturing September 2016 – November 2016, secured by oil and gas properties   –     6,650     4,750  
Individuals and institutional investor bonds, interest rate of 8.50%, maturing June 2020, unsecured   118     13,009     13,928  
Financial institution, interest rate of 8.25% plus LIBOR, maturing July 2020, secured by oil and gas properties (a)   64,000     –     –  
Miscellaneous notes, primarily for equipment, real estate and operational cash flow   497     1,537     1,728  
     Total borrowings   $ 64,615     $ 42,539     $ 41,339  
             
Less current portion of long-term debt   (305 )   (29,194 )   (27,181 )
Less deferred financing costs (b)   (2,994 )   (3,753 )   (4,045 )
     Total non-current borrowings, net   $ 61,316     $ 9,592     $ 10,113  

 

  1. In June 2017 the Company closed a new $110,000 Senior Secured Credit Facility, of which $64,000 was drawn upon closing on 30 June 2017. Of the $46,000 undrawn, $11,000 is reserved to close on the remaining oil and gas assets discussed in Note 9. The remaining $35,000 availability can be used within the first twelve months of the facility’s life to finance additional acquisitions, of which $25,000 would require an additional underwriting process by the lender.

 

  1. Subsequent to 31 December 2016, all deferred financing costs were expensed when applicable borrowings were paid in full using IPO proceeds. The deferred financing costs outstanding at 30 June 2017 were incurred with the financing of the Senior Secured Term Loan.

 

The following table provides a reconciliation of DGO’s future maturities of its total borrowings for each of the periods presented:

    Unaudited   Unaudited   Audited
    30 June 2017   30 June 2016   31 December 2016
             
Not later than one year   $ 305     $ 29,194     $ 27,181  
Later than one year and not later than five years   64,310     13,345     14,158  
Later than five years   –     –     –  
     Total borrowings   $ 64,615     $ 42,539     $ 41,339  

 

Note 17 – Subsequent Events

 

Subsequent to 30 June 2017, the Directors determined the need to disclose within the interim financial statements the following material items:

 

  1. Dividend Paid & Declared: See Note 8 for a discussion of dividends paid and declared subsequent to 30 June 2017.

 

  1. Hedging Activities:  See Note 13 for a detail of derivative financial instruments executed subsequent to 30 June 2017.

 

This information is provided by RNS

The company news service from the London Stock Exchange

 

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