Diversified Gas and Oil (DGO) has announced the successful completion of its securitised financing arrangement with a 5% coupon and 10-year maturity. The company issued $200m in notes secured by c 22% working interest of certain upstream assets’ cash flows. DGO also announced its Q319 results delivering a 10% q-o-q increase in production to c 91kboed and hedge adjusted EBITDA of $64m. Since our previous note, the company has completed three acquisitions encompassing assets located near DGO operations and announced it is pursuing a move to the Premium segment of the Main Market of the London Stock Exchange. We update our valuation to 157.2p/share affected by a decrease in short-term gas price assumptions and lower production in H119 compared to our last note.
DGO closed its inaugural BBB- investment grade securitised financing arrangement with a coupon of 5%, rated by both Fitch and Morningstar, having a 10-year scheduled maturity although providing for a longer, 17-year final legal maturity. DGO issued $200m in notes through its SPV secured by c 22% working interest of certain upstream assets whose cash flows remain fully owned and controlled by the company. Management estimate the notes create c $60m of additional liquidity and provide for flexible and limited financial covenants tied only to the performance of the securitised assets.
Since H119 results, DGO acquired EdgeMarc assets via a ‘stalking-horse’ bid for 13.5mmboe in proven developed producing (PDP) reserves for a gross cash consideration of $50m and through two separate deals secured 1,700 miles of natural gas gathering systems for net $7.7m located near DGO operations. The EdgeMarc acquisition included three drilled and uncompleted (DUC) wells and undeveloped acreage, which DGO sold for $10m, improving the acquisition metrics and aligning the acquisition with DGO’s strategy of focusing on its PDP reserves.
Edison’s updated base case valuation stands at 157.2p/share, from 166.3p/share, on inclusion of the H219 acquisitions and H119 results, which reflected lower production than in our previous note driven by Q119 unplanned stoppages related to weather conditions. Our valuation is based on an EIA gas price forecast of $2.67/mcf in 2019 and $2.61/mcf in 2020, 9% and 6% lower than in our previous note, resulting in a 5% decrease in our valuation. We forecast an FY19 dividend yield of 12.4% at the current share price.
