WTI $41.22 -73c, Brent $44.40 -69c, Diff -$3.18 +4c, NG $2.24 +7c
Last week the oil price continued to rise gently, just under a dollar was gained by both WTI and Brent as ‘good’ news held sway. Inventories drew and drivers drove, Labor Day and the end of the driving season isn’t until 7th September and the Non Farm Payroll number on Friday beat the whisper.
Added to that President Trump swerved the arguments in Congress and announced money, jobs and support for citizens in trouble as well as a restoration of subsidies. Add to that yet more rigs being stacked, 4 in oil last week down to 176 units meant yet more eventual cuts in domestic production.
Diversified Gas & Oil
Interims from DGO this morning, preceded by the announcement that the dividend for the quarter was to be 3.75c (3.5c) a 7% increase making the payment for the first half of 7.25c and giving DGO a yield of 12%…
The results were predictably good, production was 95.1 MBoepd up 26% (1H 2019 75.3 MBoepd) but the exit rate was 109.0 MBoepd including 18.7 MBoepd from the EQT and Carbon Energy acquisitions completed in May.
In the first half legacy assets were maintained at ˜70 MBoepd for the 8th consecutive quarter, a tremendous achievement. 1H adjusted EBITDA of $146m (+11% on 1H ’19 3% on 2H 19) gave net income of $18m leading to a net operating loss of $(31) million (1H19: -129% vs $108 million; 2H19: -142% vs $73 million) ‘includes a $110 million non-cash charge to mark derivative contracts to fair value’.
Cash operating expenses fell again to $7.05/boe, down 15% on 1H 2019 of $8.30 and $7.24 in 2H 2019. During the quarter DGO transitioned to the Premium Segment of the Main Market of the London Stock Exchange from AIM and also completed upstream and midstream asset acquisitions from EQT ($125 million) and Carbon ($110 million) in May financed through a successful $86 million (gross) share placing and $160 million (gross) amortising 10-year term loan underwritten by Munich Re Reserves Risk Financing, Inc.
On the conference call the DGO management were sprightly and so they deserved to be, they reminded the audience of the four key tenets which drive the company led by the 55% adjusted EBITDA cash margin. This is made possible by a robust, nay aggressive hedging programme ‘to protect downside’, all enabled by low cash Opex and G&A costs of $7.05/boe, and an average 2020 hedge floor of $2.69/MMBtu.
The free cash flow yield of 32% comes back to that 8 quarter stable, hedged production I mentioned earlier, which as the CEO pointed out means that this cash generation means that the shares must be too cheap, something one can only agree with.
All this means that shareholders are protected by a 12% yield, again validated by a combination of risk strategies that has been achieved despite the incredibly challenging environment. They added that the company has a disciplined attitude to growth and a prudent capital allocation all the time.
Rusty Hutson Jr, CEO of DGO said;
“As we enter the second half of 2020 with approximately $220 million of total liquidity, a healthy balance sheet and with a focused and efficient operation, we are well-positioned to capitalise on the opportunities these challenging times create, all with our unrelenting focus on creating long-term value for shareholders.”
DGO has rallied from the 60p level when markets really didn’t understand the concept or the model, at 101p given the fcf yield and dividend yield which more than supports this share price for a number of reasons.
The company ticks many boxes, operationally it is superb in legacy assets as well as the interesting unconventional ones it speaks highly of making record production. Other boxes ticked are the midstream assets that give it huge flexibility, optionality and revenue generation.
The acquisition team are clearly smart, they are already showing enhancing economics at EQT and Carbon with a number of opportunities going forward in conventional and unconventional prospects. For investors who havent yet looked at the DGO model with its associated yields it is high time they did so, the company has strong management and great visibility in these times that is quite something.
PetroTal has announced that due to ‘civil unrest’ outside the camp it has, as a preemptive measure closed down the Bretana field. The civil unrest has been conducted by the same group that the prior week took over Petroperu’s Pump Station No.5 at Saramiriza seeking Government assistance against the COVID-19 crisis. The company has kept a team of key employees on site to commence production ‘when it is appropriate’ whilst all non-essential personnel have been evacuated.
The company state that ‘It is important to highlight that the protests were against the Government of Peru, as PetroTal is known as a Peruvian led and operated oil company whose mission and vision is in tune with the local communities struggle to be empowered to manage their fair share of the Government’s oil contracts take. PetroTal has consistently promoted that Government and community revenue sharing should happen under full transparency’.
The share price has in my view rather over-reacted to this news but in these markets it is not surprising that a setback like this should hit the price so hard. In due course I am convinced that the long term attractions offered by PTAL will surely mean that buying down here will be rewarded.
Reabold has announced that it ‘does not intend to make an offer for Deltic’ which under the rules restricts any further activity on this front, at least for the time being. Whilst I was unable to speak to either party during the process, it did seem like the price suggested was a what might have been described as a ‘sighter’ as it didn’t to me seem the real deal but it should be remembered that it was a ‘paper’ suggestion.
In the absence of discussions between the sides and the the fact that Michael Spencer with his 16.8% went early with the defence this is probably understandable. The key discussion point was clearly West Newton where a possible mirroring of both sides’ assets on and offshore would definitely have made a difference. This now means that the drilling of the upcoming well at the onshore discovery will be even more pertinent.
England won a thrilling test match against Pakistan thanks to Buttler and Woakes and go 1-0 up in the three match series. There will be changes as Ben Stokes has flown to New Zealand for family reasons.
And Max Verstappen won the 70th Anniversary GP at Silverstone where yet again tyres were a major problem, Barcelona next…
In the Champions League on Friday the Noisy Neighbours were excellent in knocking out Real Madrid 4-2 over 2 legs although Chelski found Bayern Munich too much like hard work and lost 7-1 on aggregate.
Tonight in the Boropa Cup the Red Devils play FC Copenhagen in the quarter finals.