Ahead of President Trump’s State of the Union Address, ExxonMobil (US:XOM) gave its own ‘America First’ pitch. Hailing the recent cut in the corporate tax rate for creating “an environment for increased future capital investments”, the US oil major promised to triple output from the Permian Basin to more than 600,000 barrels of oil equivalent by 2025, spending more than $2bn (£1.43bn) on infrastructure in the process.
As analysts at BMO noted, Exxon’s commitment is not new, and echoes comments made last March. But it is yet another sign of US energy companies’ intense focus on domestic shale production, which alongside higher prices has pushed up the US onshore rig count 35 per cent since January 2017.
Yet for all the colossal side-effects of the shale revolution – US energy security, a chastened OPEC, deferred investment elsewhere in the industry to name just three – shareholders have seen a mixed return since oil prices first fell below $100 a barrel in 2014. On a five-year timeline, the VanEck Unconventional Oil & Gas ETF (FRA) has underperformed the S&P 500 (SPY) by 139 percentage points.
But this ongoing scramble for shale has been good news for one UK stock, Diversified Gas & Oil (DGOC), which has capitalised on US producers’ de-prioritisation of their conventional wells.
Last week, after this magazine went to press, the company marked the one-year anniversary of its Aim listing with the acquisitions of Alliance Petroleum and Appalachian Gas, for $95m (£66.9m) and $85m, respectively. Impressively, the company managed to raise the requisite $180m – a sum just above its total market capitalisation – entirely from new equity. Plus, at 80p a share, the fundraising was struck at a slight premium to last Wednesday’s closing price. The stock has since rallied to 87p.
For the uninitiated, this is the DGO playbook: step one, pay no more than four times’ annual cash flows for massive portfolios of low-cost, low-risk and long-life oil and gas wells in the Appalachian Basin; two, use the greater scale to reduce overheads and margins, while guaranteeing stable cash flows through hedging; three, use those cash flows to grow dividends and fund new acquisitions.
As DGO has pioneered this consolidation model, its recognition has grown among shale-focused players looking to cash in on the sale of their ‘non-core’ producing wells. With this growth comes scale: after these all-cash deals complete, the group’s share of production (from a staggering 30,000 wells) will nearly triple to around 28,000 barrels of oil equivalent per day, making it the largest producer on Aim. Reserves should also more than double to 173.2m barrels.
And while it has paid 3.9 times’ cash flows for the Alliance and Appalachian assets, DGO believes it can take 52 per cent out of general and administrative expenses, and another 13 per cent out of lease operating costs. Chief executive Rusty Hutson told us that unlike last year’s acquisition of assets from Titan Energy, when 20 per cent of the target’s headcount was cut “on day one”, the merging of Alliance and Appalachian assets will be “a little bit slower and more methodical”.
