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Diversified Gas & Oil’s dividend delights
The biggest oil exploration and production IPO (initial public offering) since the oil price collapse in 2014 is set to be something of a rare beast in the sector as it plans to pay a generous dividend.
The uniqueness of its proposition helped US-focused Diversified Gas & Oil (DGOC:AIM) raise $50m as it joined AIM on 3 February.
The company has been in existence since 2001 but has supercharged its growth in recent years by picking up conventional oil and gas assets in its Appalachian basin base spanning Ohio, West Virginia and Pennsylvania.
The company currently has production of 4,700 barrels of oil equivalent per day and 27.9 million barrels of oil equivalent of proved reserves.
It plans to pay 40% of operating cash flow in dividends. We believe the stock could yield in the region of 5.5% based on forecasts by financial services group Mirabaud.
The rest of its cash flow plus the $5m left over from the IPO, after paying off bondholders and an existing credit facility, will be funnelled back into acquisitions.
With three quarters of its revenue accounted for by natural gas, the company would be a beneficiary of any recovery in US gas prices as demand for industrial use increases and shale gas supply begins to level off.
Chief executive and founder Rusty Huston says the asset base would generate free cash flow at an oil price of $9.50 per barrel of oil equivalent ($1.20 per million cubic feet in natural gas terms).
LONG LIFE PRODUCTION
Unlike many unconventional wells which often see rates of production decline rapidly, Diversified’s well inventory has long lives, low decline rates and minimal maintenance costs.
Hutson explains there is an opportunity to acquire these wells because larger oil firms are not set up to operate them efficiently. ‘I would characterise these as annuity-type assets, delivering very predictable and stable output,’ he says.
‘We’ve seen a transformation in the way these deals are priced,’ he adds. Huston says historically assets would have been struck on a percentage of the level of reserves but the company is now evaluating acquisitions on multiples of one to three times annual cash flow.
He believes there are plenty of deals to be done in the Appalachian basin and says that if management were to look elsewhere the wells would have to enjoy the same low cost, low decline qualities to be of interest.
Buy at 59.5p.