Diversified Gas & Oil (DGO) recently announced the acquisition of 107 gross unconventional producing wells in Pennsylvania and West Virginia with combined 2018 net production of approximately 21kboed and proven developed producing (PDP) reserves of 92mmboe. The $400m acquisition is to be funded through a combination of new equity and draw down of existing borrowing capacity. We estimate that leverage will remain below a target range of 2.0–2.5x at 1.7x FY19e net debt/adjusted EBITDA. We expect the transaction to be accretive to FCF/share for FY20 (+8%) with potential to support an increased dividend payout – management indicates there is potential for a post-acquisition annualised payment of 16.0c/share. On addition of the acquired assets, assumption of incremental group debt and new equity, our valuation rises to 166.3p/share (+2%).
The acquired asset base of 107 wells includes an inventory with an average well age of five years and average production per well of 196boed. Given the limited number and long-life nature of wells, the associated abandonment liability equates to an NPV10 of just c $300k. Management has not quantified potential synergies with existing operations, but expects immediate benefits from the consolidated assets, which are located near DGO’s legacy assets in Pennsylvania and West Virginia.
DGO published a list of 10 potential acquisition targets in the Appalachia region, which range from packages of 150–650 wells spanning production from 50kboed to 150kboed. Post the acquisition of the HG Energy assets, DGO expects to have c $300m of debt capacity under its expanded borrowing base. We expect further acquisitions from the prospects identified to be funded through a combination of debt and new equity.
Edison’s base case valuation of 162.7p/share rises to 168.0p/share on inclusion of the HG Energy asset transaction, making the deal 3% accretive to our NAV. Our valuation is based on an EIA gas price forecast of $2.92/mcf in 2019 and $2.88/mcf in 2020, with a long-term gas price of $3.10/mcf (2022) and a WACC of 10%. Assuming management increases the quarterly dividend to 4.00c/share, we forecast an FY19 dividend yield of 9.5% at the current share price, which can be funded from cash flows materially below current strip for FY19e and FY20e.