Diversified Gas & Oil to buy Carbon Energy Appalachian assets
By Josh White
Date: Wednesday 08 Apr 2020
(Sharecast News) - Natural gas, natural gas liquids, oil wells and midstream assets owner and operator Diversified Gas & Oil has signed a conditional purchase and sale agreement to acquire certain conventional Appalachian upstream and midstream assets from Carbon Energy Corporation and its affiliates, it announced on Wednesday.
The AIM-traded firm said that, while it could provide no certainty that it would complete the transaction, it was continuing to negotiate terms.
It explained that the transaction remained subject to ongoing due diligence, which DGO would complete to its satisfaction prior to confirming the final terms, including the gross purchase price which it expected to be around $110m, subject to various purchase price adjustments.
DGO said the transaction fell within its stated valuation criteria of less than 4x EBITDA, based on diligence to date, and would have an effective date of 1 January if completed.
The assets are located within its existing West Virginia, Kentucky and Tennessee footprint, and would further increase its operating scale and efficiencies, the board said.
Specifically, they included mature, low decline conventional net daily production in 2019 of 59,400 million cubic feet equivalent, or around 9,900 barrels of oil equivalent, of 97% natural gas primarily from 6,500 net operated wells.
They also included intrastate gathering pipeline of about 4,700 miles in West Virginia, which currently transports the majority of the production from Carbon's Appalachia wells and provides additional third-party transportation revenue along with direct interconnects to higher-priced interstate pipelines.
There were also two active natural gas storage fields that generate third-party storage revenue and greater control optionality for DGO, as well as a "robust" hedge portfolio that included an average NYMEX downside protection of about $2.60 per million British thermal units for a period of 18 months from the transaction effective date, representing about 75% of the asset's 2019 produced volumes.
DGO said it believed the assets would complement its portfolio of existing assets, and were capable of generating accretive returns.
If successful, the firm said it intended to fund the cash purchase price, net of purchase price adjustments, with funds available on its existing revolving bank facility or similar financing.
The company said it expected that the non-dilutive growth would enhance the accretion to the dividend, while maintaining leverage below 2.4x net debt-to-adjusted EBITDA.
Notably, it said that because DGO targeted producing wells that generated "significant" positive cash flow, and because the company was always committed to maintaining a strong balance sheet, it would continue to allocate appropriate amounts to debt repayments alongside its stated commitment to the dividend.
The board said it would provide an update in due course, as it completed the necessary due diligence and reviews.
"DGO is uniquely positioned to capitalise on compelling opportunities in the current market and moved quickly to secure exclusivity on this value accretive package," said chief executive officer Rusty Hutson Jr.
"We can comfortably fund the acquisition without dilution to our loyal shareholders using our existing credit facility.
"These assets, strategically located in our existing area of operations, will allow us to leverage our talented field personnel and smarter well management program across additional assets as we relentlessly drive operating efficiencies and cost savings."
Hutson said the expanded scale, combined with the company's focus on a variety of identified opportunities to further improve the free cash flow of the assets, would enhance operating margins and provide additional insulation and resilience in the current low commodity price environment.
"Further expanding our midstream system will provide both greater certainty and optionality to transporting our production, and together with the storage fields, provide ways to generate additional third-party revenue.
"This proposed complementary acquisition, if completed, remains consistent with our commitment to pursue prudent growth that enhances our dividend per share to shareholders."
At 1618 BST, shares in Diversified Gas & Oil were down 2.17% at 90p.
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