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Diversified Gas & Oil banks bargain gain

The alternative play on the unconventional oil and gas boom was extremely busy in 2018
March 1, 2019

What’s this, a resource stock with an operating profit that exceeds its top-line? That’ll be the 2018 income statement for Diversified Gas & Oil (DGOC), which recognised a $173.5m (£130m) "gain on bargain purchase" for the $938m-worth of assets it acquired in 2018, and which helps to explain the somewhat confusing table below.

IC TIP: Hold at 117p

Chief executive Rusty Hutson Jnr was keen to point out to us that the uplift reflects the "accretive nature" of the deals struck last year, and is subject to lots of scrutiny from auditors.

Investors should brace themselves for further revaluations in 2019. That’s because Mr Hutson and his team believe the financial condition of US onshore players continues to weaken, giving rise to forced-sale opportunities. With a $1.5bn revolving credit facility now under its belt, and backed by the $439m-worth of equity raised last year, DGO has clearly won over capital markets.

The implicit command within this support is for further transactions. So investors might have wondered whether a near-term objective to "extract maximum operating synergies and cost efficiencies" might be a sign the group is slowing down? Apparently not. "I’ve said this before – it’s not really about location or geography, it just has to be somewhere we can scale," Mr Hutson told us, citing opportunities within unconventional assets in the Marcellus and Utica shale basins.

Stifel forecasts adjusted pre-tax profits of $120m and EPS of 18.2¢ this year, having forecast $65.8m and 16.8¢ in 2018.

DIVERSIFIED GAS & OIL (DGOC)  
ORD PRICE:117pMARKET VALUE:£ 635m
TOUCH:116-118p12-MONTH HIGH:130pLOW: 80p
DIVIDEND YIELD:7.2%PE RATIO:3
NET ASSET VALUE:138¢NET DEBT:64%
Year to 31 DecTurnover ($m)Pre-tax profit ($m)Earnings per share (¢)Dividend per share (¢)
20146.3-0.2n/anil
201518.5-0.4n/anil
201617.132.542.02.0
2017 (restated)41.829.723.05.4
201829026252.011.2
% change+594+781+126+106
Ex-div:7 Mar & 30 May*   
Payment:29 Mar & 28 Jun*   
*Reflects dividend payments for the third and fourth quarters                     £1=$1.33