London, UK, 1 October 2018

Edison issues initiation on Diversified Gas & Oil (DGOC)

Diversified Gas & Oil (AIM:DGOC) has grown exponentially since listing on AIM in February 2017. The company's acquisition-led strategy has enabled it to amass over 6.5m net acres in the US Appalachian Basin, taking net production to 32.5kboed in FY18, underpinned by a 1P PDP 393mmboe net reserve base. We see potential for further inorganic growth, diligent management of existing well stock and infill drilling in the event of a gas price recovery to provide a platform for further growth. DGO trades below our base case valuation of 138.1p per share, which excludes asset consolidation and the infill drilling option value. A 2019 6.6% dividend yield supports the current share price and investment risk/reward is skewed to the upside given the potential for further value accretive M&A. Key sensitivities include gas price realisations and cash operating costs.

We provide a base valuation of DGO at 138.1p/share based on a long-term Henry Hub price of $3.10/mcf (2022). We see potential downside to 100.4p/share based on a 15% decrease in gas pricing and equivalent increase in costs. Risk/reward remains skewed to the upside with a valuation of 176.2p/share based on a 15% increase in gas price, and materially higher on inclusion of option value for further M&A and infill. It is not possible to quantify this option value without further data; however, we attempt to qualify prospective value in this note.

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For more information please contact Edison:

Sanjeev Bahl, +44 (0)20 3077 5742
Carlos Gomes, +44 (0)20 3077 5722
Elaine Reynolds, +44 (0)20 3077 5713
oilandgas@edisongroup.com

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