Appalachian Basin-focused Diversified Gas & Oil (DGOC) has received investor backing for a $575m (£437m) deal to buy a large portfolio of low-cost producing wells. The deal, which looks set to make DGO the largest producer on the junior market, is being funded by a $250m share placing that company advisers have said was three times oversubscribed.
As the transaction was classed as a reverse takeover under listing rules, trading in DGO shares was suspended until last Friday (29 June). Ahead of re-listing, the targeted assets were revealed to be conventional wells, pipelines and compression stations owned by New York-listed EQT Corporation.
The acquired low-cost, long-life and low-volume wells are expected to almost quadruple cash profits, on a pro-forma basis. Proven reserves will also increase 142 per cent to 393m barrels of oil equivalent (mmboe). Further convinced that the shareholder register has been buffeted by yield-hungry institutional investors prepared to pay a premium for shares, the market promptly pushed up the stock by 30 per cent to 125p.
That approval appeared to overlook a few discrepancies in the counterparties’ description of the deal. According to EQT, it is selling around 12,000 wells with daily gas-equivalent output of approximately 200 million cubic feet (mmcfe), and which carry around $200m of decommissioning liabilities. On DGO’s numbers, these liabilities are just $69.9m, and the well count is 11,250 (revised down from 11,350) and output is expected to hit 186mmcfe.
Diversified Gas & Oil said the difference in well count and output was due to the non-operated nature of some of the licences, while decommissioning costs have been calculated on a longer-term basis, and on the assumption that wells can be plugged for less.
Arriving shortly after the CVX and Alliance Petroleum purchases (for a combined $180m), investors seem content with a deal-making spree which obscures the underlying cash flow generation. DGO says the quicker it can transact, the more value it can extract from shale-focused explorers looking for a low-multiple cash windfall and a steward for their productive assets. We have also been told that institutional investors are pushing the company to find deals at similar earnings multiples.
