First Berlin – Diversified Gas & Oil PLC Research Update (07/10/2020)

First Berlin Equity Research has published a research update on Diversified Gas & Oil PLC (ISIN: GB00BYX7JT74). Analyst Simon Scholes reiterated his BUY rating and maintained his GBp 150.00 price target.

DGOC does not drill wells itself and so output growth (natural gas accounted for 90% of 2019 production by volume) is achieved almost solely through acquisitions. DGOC has made ca. USD1.7bn of acquisitions since its early 2017 listing in London. These acquisitions account for over 95% of current revenue. Current low commodity prices are likely to drive consolidation within the gas and oil sector. The strategic participation agreement announced with Oaktree on 5 October will allow DGOC to access deals on a scale which would not have been feasible on a standalone basis while significantly reducing capital intensity. Under the terms of the agreement Oaktree will contribute funding of up to USD1bn for mutually agreed acquisitions of PDP (produced developed producing) assets with transaction valuations greater than USD250m for a period of three years. DGOC will match the funding provided by Oaktree and will be the operator of any assets acquired. Under the Initial Promote component of the agreement DGOC will receive a 52.5% working interest for a 50% investment and Oaktree a 47.5% interest for a 50% investment. Under the Reversion Promote component of the agreement Oaktree transfers 15% of its working interest to DGOC on achieving a 10% unlevered IRR on its investment. In this scenario DGOC's stake in an acquired asset would rise to 59.625% and Oaktree's stake would fall to 40.375%. Assuming Oaktree and DGOC both invest USD1bn, Initial Promote provides immediate USD50m accretion to DGOC shareholders. Reversion Promote provides opportunity for enhanced longer term economics. We retain our Buy recommendation and GBP1.50 price target.