Diversified Gas and Oil (DGO) has announced its Q319 and Q419 production, which averaged 91.1kboed and 96.3kboed in each quarter. DGO's Smarter Well Management programme continues to offset the companyâÂ€Â™s Legacy assetsâÂ€Â™ natural declines, delivering Q419 average production above 70kboed. DGO also presented an updated hedging book that covers c 85% of its natural gas production for 2020 at an average price of c $2.70/mmBtu. Hedging has been part of DGOâÂ€Â™s strategy, and the company reaffirms its focus on opportunities to increase its hedging and protect future cash flows from natural gas price decreases. The companyâÂ€Â™s share buyback programme is ongoing. We update our valuation to 150.6p/share, from 157.2p/share (-4%), affected by a decrease in short-term gas price assumptions compared to our last note.
DGO's Smarter Well Management programme has been proving pivotal in maintaining strong production from the company’s Legacy assets, with a production exit rate in 2019 of c 70.2kboed. The sustained optimisation of these assets has offset their natural declines for the sixth consecutive quarter. DGO’s H219 realised production, which averaged c 93.7kboed, results in a 2019 average production of c 85kboed, in line with our estimates of c 84kboed for the year.
Historically, hedging has been part of DGO’s strategy and the company reaffirms its focus on opportunities to protect future cash flows, especially in the current low gas price environment. Approximately 85% of DGO’s natural gas production is hedged at an average price of $2.70/mmBtu (Henry Hub currently trades at $1.85/mmBtu), while c 50% of all production is already hedge for 2021. This type of preventive measure will allow DGO to protect its revenue stream for 2020 and allow for sufficient cash generation for debt repayment and dividends distribution
Our updated base case valuation is 150.6p/share, down from 157.2p/share, on inclusion of updated EIA gas price forecasts of $2.29/mcf in 2020 and $2.62/mcf in 2021, 12% and 8% lower than in our December 2019 note, which is a 9% decrease in our valuation. We also rolled forward our discount date to 2020 for all producing assets and updated DGO’s hedging portfolio. We forecast an FY20 dividend yield of 12.8% at the current share price.