Diversified Gas & Oil - Longterm Hold - ISA Investment Possibly?

Industry Sector - Energy, not exploration (so plus point).

Rough Technical - Presently support 96p and resistance around 110 - 120p, though the stock ranks low for general momentum and quality. Present Presently 103p at 20200116. Price peaked at 125p in Jul 18 and 19. I am thinking of entry between 90-100p. Jan 2020 it is trading on future earnings of 8 thimes, which is average for the industry, though the sales growth has been phenomenal, so this could be a cheap share if the sales growth continues.

History - Came to market in 20170203 at around 55p, gas and oil producer. The Company is engaged in conventional natural gas and crude oil production in the Appalachian Basin of the United States. The Company owns and operates over 7,500 conventional natural gas and crude oil wells in Pennsylvania, West Virginia and Ohio. The Company's daily production is approximately 60,000 barrels of oil equivalent per day, which consists of approximately 26,000 million cubic feet ( mcf ) per day of natural gas and 475 barrels of oil per day. The Company operates over 3,000 wells in Ohio on approximately 164,000 leased acres in multiple counties along the I-75 corridor. The Company operates approximately 235 conventional wells in the West Virginia state and holds over 6,500 acres of leasehold. The Company operates over 4,000 wells and approximately 863,000 leasehold acres, in Pennsylvania, over multiple counties.

Accounts trade in dollars - so currency risk, as I am based in UK

Income - First dividend was at 5%, next dividend is forecast to be 9%. Div cover is over 7 times. Next Ex-Div date is 20200305 at 3.5 USX (2.5p UK) - though early to estimate, looks like 2 dividends a year March and September, though last year was 3 dividends.

Share liquidity - Heavily buying back shares from the market, directors have shares at around £1M at around 107p, In April 2019, Diversified Gas & Oil announced a maiden share buyback scheme of up to 54. 3m shares representing some 7.8% of the company’s outstanding share cap. The move is essentially a call on the relative merits of buying back stock versus using excess cash after dividends for further acquisitions.
DGOG suffered a "bear attack" in Jan 2018 and Directors bought to support. 3 month volume is over 700k, so passed my personal threshold of 120k. 49% of shares are held by investors with less than 5% holdings (this is good for liquidity and price discovery ).

Cashflow - Really only 2018 to see, sales income $201M, after admin etc.. $87.7M, Negative CF of -$767M (acquisitions) (this was funded from issuing stock of $426M and debt of £304M, plus retained cash). Overall retained cashflow was neg $13M, was Poss $24.9M year before. So early for this company which has been around 6 years.

Profit / Loss - Again only 2018 to view due to age of company. Revenue $290M, GP $140M, Op Profit $287M, Net ProfitBT $201M. Diluted EPS is 22.4p

BS - Nothing too awkward net assets are $749M. Tough it flags on my bankruptcy checker at cautious.

Proposed Listing upgrade - In September, the AIM-listed firm announced plans to move from the small caps to the premium segment of London’s main market after the publication of its full-year results for this year, to be released during the first quarter of 2020.
As part of the preparations for the main market, the company has completed a tender process to sign-up with a ‘big four’ accounting and auditing firms, for the fiscal year to end 31 December 2020. If it moves to the main market, then ETF's will be buying the share eventually (though AIM ETF's (which are smaller) will be selling.

The main Risk - Shale Gas - DGOG is heavily into the "dirty energy", not the cheapest to extract and is dependent on gas prices. For shale oil (not gas) the break even point is supposed to be somewhere around $40 per barrel, though it has been reported that that price is for the best sites, the horizontal sites are around $60 per barrel, with some rumoured to be $90 per barrel. This basically means that some shale oil sites are left idle when the oil price drops. I assume this will be the case for shale gas if gas prices fall low enough, at the time of writing (Jan 2020) the present gas price is $21.00, basically the lowest gas has been since 2016, 2012, 2009, 2002. So presumable shale gas producers must be running on tight margins. So this is the main risk.

I n the UK an ISA is like a mix between the US a 401K and IRA - but with softer tax rules.
I do not have a position as yet, but I am considering it - so please add comments if you like.


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