Diversified Gas & Oil Plc (AIM:DGOC) Proposed Acquisition

Diversified Gas & Oil PLC (AIM:DGOC), a US based gas and oil producer, is pleased to confirm that it has entered into a conditional sale and purchase agreement to acquire certain gas and oil assets of Titan Energy, LLC (the “Acquisition Agreement”) in the Appalachian Basin, principally the states of Ohio, Pennsylvania, southern New York and northeast Tennessee (the “Acquisition”).

Acquisition Highlights

  • A transformational acquisition that will increase DGO’s gross oil and gas production to approximately 18,300 boepd (11,000 boepd (net*))
  • Cash consideration of $84.2 million to be funded through a new term debt facility provided by Angelo, Gordon & Co and a proposed placing of new ordinary shares raising a minimum of $20 million (the “Placing”)
  • Increases Proved Developed Producing reserves by approximately 36.7 mmboe to 60.5 mmboe
  • Following the Acquisition, the Company will be producing from licences held by production over a total area of approximately 1.6 million acres, an increase of some 42%
  • Addition of approximately 7,300 producing wells, with the majority of the wells in DGO’s existing operating geography
  • Total gas production at 75,000 gross Mcfd, more than trebling current gross production to approximately 104,200 Mcfd
  • Total oil production at 380 gross bopd, representing an 69% increase to current gross production
  • The new wells will be immediately accretive to EBITDA
  • The Acquisition will constitute a reverse takeover under the AIM Rules and accordingly trading in the Company’s ordinary shares has been suspended. An admission document, setting out full details of the Company and the proposed Acquisition, is expected to be published on or before 31 May 2017 at which time trading in the ordinary shares is expected to be restored

Commenting on the proposed Acquisition, CEO, Rusty Hutson said:

“This transformational deal for DGO will materially increase the scale of our portfolio within the Appalachian Basin, taking up further acreage in the states of Ohio and Pennsylvania and entering southern New York and northeast Tennessee. The proposed transaction highlights the strength of our business model in that we are able to acquire complementary assets in a proven, stable and low-risk environment at compelling valuation metrics.

We believe that this deal will deliver significant benefits to our shareholders in the form of increased cash flow, proven developed reserves and acreage for future development opportunities whilst also supporting our dividend policy and enabling us to consider additional opportunities that we see within our region of focus.”

* Net production is stated after working interest and royalty adjustments.

Transaction Overview

At the time of DGO’s flotation on the AIM Market on 3 February 2017 the Company stated its intention to capitalise upon the numerous opportunities for further acquisitions of which the Directors were aware. Subsequently, on 24 February 2017 the Company announced the acquisition of a package of 1,300 new producing wells in Ohio and Pennsylvania for a total cash consideration of $1.75 million. This acquisition completed on 18 April 2017.

Daily gas production from the Acquisition is approximately 75,000 gross Mcfd (39,300 net Mcfd) and oil production is 380 gross bopd (266 net bopd). This transformational Acquisition will more than triple DGO’s gross gas production, to approximately 104,200 Mcfd, and will increase gross oil production by 69% to approximately 930 bopd. Overall gross production will increase from approximately 5,400 boe to 18,300 boe.

The production figures in the table below show barrel of oil equivalent per day (boepd):

DGO

Acquisition Assets

Pro forma total

Gross

Net*

Gross

Net*

Gross

Net*

Gas

4,842

3,793

12,518

6,547

17,360

10,340

Oil

552

434

379

266

931

699

Total

5,394

4,227

12,897

6,813

18,291

11,039

 * Net production is stated after working interest and royalty adjustments.

The Acquisition includes 264 wells that are operated in seven general partnership entities (the “Partnership Wells”). The consideration for the Partnership Wells is approximately $19.2 million. The Partnership Wells will be acquired in accordance with the terms of the Acquisition Agreement, although completion of the purchase of these wells is anticipated to occur on or before 31 August 2017.

On the basis of the terms summarised in this announcement the Acquisition is expected to be both cash and earnings accretive.

Rationale

The Acquisition delivers high impact material growth to DGO, both operationally and financially. The recent advances in shale production have caused a significant shift in emphasis of many investors and companies in mainland USA, resulting in conventional gas and oil opportunities becoming available at reasonable prices to credible and proven operators who can maintain production from the conventional reservoirs and in doing so, retain the rights to the shale licences on behalf of the vendors. The Directors believe that value accretive opportunities lie in field optimisation and the application of production techniques used across the existing portfolio. The Company has a proven track record in reducing the operating costs of acquired assets through the implementation of operating and financial efficiencies.

The Board believes that these opportunities will continue as energy prices remain in the current trading range, and it continues to evaluate complementary opportunities.

Consideration and Financing

The consideration for the Acquisition will be $84.2 million (subject to adjustment in accordance with the terms of the Acquisition Agreement), to be satisfied in cash at completion conditional on, inter alia, the approval of the Acquisition by DGO’s shareholders and admission of the enlarged share capital to trading on AIM.

The Acquisition will be funded by a combination of a new three year debt facility and the Placing. The Company has signed a term sheet for a new debt facility with Angelo, Gordon & Co.’s energy lending group in Houston, Texas. The proposed debt facility comprises a $110 million senior secured credit facility, with a high single digit interest rate, of which $75m is available to the Company in the initial draw. The facility will provide liquidity to close the Acquisition and additional working capital, as well as providing delayed draw liquidity for future development and acquisitions.

Reverse Takeover and Timetable

The Acquisition will constitute a reverse takeover in accordance with Rule 14 of the AIM Rules for Companies and is subject to approval by DGO shareholders. Accordingly, the Company’s ordinary shares have been suspended from trading on AIM with immediate effect and will remain suspended until a new AIM admission document has been published.

The Company expects to issue an AIM admission document together with a Notice of General Meeting to approve the Acquisition and to grant the necessary authorities for the Placing, on or before 31 May 2017. Following publication, the Board expects that trading in the Company’s ordinary shares on AIM will resume, with the only remaining conditionality relating to the closing of the Acquisition being DGO shareholder approval at the General Meeting.

The Company will update shareholders with further information as appropriate.

This announcement is inside information for the purposes of Article 7 of EU Regulation 596/2014..

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