DGO announces $135 million acquisition of Cotton Valley upstream assets from Indigo Minerals LLC
LONDON: Diversified Gas & Oil plc (DGO) announced the $135 million conditional acquisition of certain Cotton Valley upstream assets and related facilities primarily in the state of Louisiana from Indigo Minerals LLC.
Diversified Gas & Oil plc’s strategy of acquiring producing assets supported by their existing operational personnel is naturally and highly transferable to other producing regions across the United States.
Retaining the assembled workforce with its collective understanding of the acquired assets while eliminating the expense, complexity and risk associated with drilling. as well as corporate and related management costs, aligns with the Company’s Smarter Asset Management programme and commitment to low operating costs.
Diversified has actively been evaluating a variety of regions as its first step outside of Appalachia to identify the optimal area to replicate its success in Appalachia through systematically adding scale and driving operational efficiencies with additional accretive acquisitions.
Today’s announced Acquisition represents the Company’s strategic entry into a new RFA that includes producing areas within Louisiana, Texas, Oklahoma and Arkansas. In addition to a large opportunity set, the RFA benefits from an industry-friendly regulatory environment and mature infrastructure, which complement Diversified’s low-cost operating profile.
The Company has signed a purchase and sale agreement with Indigo to acquire ~780 net operated wells producing ~16 MBoepd (~95 MMcfepd) located within the Cotton Valley/Haynesville producing area of northwest Louisiana and east Texas. The Acquisition will add ~50 MMBoe (~305 Bcfe) in PDP reserves, with a PV10 of ~$175MM using a full NYMEX strip as of 16 April 2021.
DGO expects to close the transaction in the latter half of May 2021 following its customary diligence, reviews and approvals, with an effective date of 1 March 2021.
Consistent with Diversified’s acquisition strategy, the long life and low-decline nature of the Assets’ annualised ~$40MM of Adjusted EBITDA(a) (“Cash Flow”) enhances the Company’s free cash flow generation and strong Cash Margins with access to the favourable Gulf Coast pricing market and historical Cash Margins of ~50%.
The estimated net purchase price of $115MM represents just a ~2.9x multiple of Adjusted EBITDA and a ~PV20 value of the acquired PDP reserves before any anticipated synergies. Accordingly, the Acquisition both supports Diversified’s current dividend distribution and complements its existing operations.
The Company will retain ~25 field personnel currently servicing the wells to ensure operational continuity and smooth integration into its Smarter Asset Management programme. Replicating its success in Appalachia, DGO will continue to optimise the operations and cost structure as it acquires additional assets in the RFA.
The Company expects to initially fully fund the Acquisition from existing liquidity on its Revolving Credit Facility as it evaluates its options for long-term financing including additional asset-backed securitisations, term loans or similar financing options. Pro forma Net Debt/Adjusted EBITDA after the Acquisition will approximate 2.3x, in line with the Company’s current leverage position.
The Company continues to evaluate other acquisition opportunities, both in and out of the Appalachian Basin, with a keen focus on opportunities that align with the parameters of its participation agreement with Oaktree, including a purchase price threshold of greater than $250 million.
Commenting on these accomplishments, CEO Rusty Hutson, Jr. said: “Over the past four years as a listed company, I shared my vision for expanding the Diversified mission with its emphasis on cash flow and tangible shareholder returns into other producing regions across the country. Our commitment to acquiring cash-generative assets and retaining the talented men and women who operate those assets establishes a highly transferable business model.
Our strategic expansion into a new producing region turns vision to reality and marks a key milestone in our development. The expansion also provides significant runway for us to replicate our success in Appalachia: reducing unit expenses, improving margins and optimising production.
“Our new regional focus area covers a multi-state area in a similar size footprint to Appalachia, and meets our expansion criteria in terms of asset quality, infrastructure, market dynamics, opportunity set and supportive regulatory environment.
This first strategic acquisition outside of Appalachia also reflects our continued commitment to a consistent asset profile and valuation while affording us expanded value-accretive roll-up opportunities in this new region that will enable us to quickly build scale and drive efficiencies. Our financial and operational strengths continue to uniquely position Diversified to capitalise on current market conditions as the PDP buyer of choice.
I’d also like to commend our field team on their continued commitment and diligence through the first quarter and its harsh winter climate. Despite the challenging environment, our team continued to deliver strong financial performance through the quarter with continued strong Cash Margins.
As detailed in our recently released second Sustainability Report, we also made significant progress enhancing our sustainability practices as we seek to optimise the stewardship of our assets in line with the global energy transition. I’m proud of what we’ve already accomplished, and look forward to working with our team of dedicated professionals to further build on this success as we responsibly enlarge the Diversified footprint.”
I haven't had time to do any research but from the press release, I'd have to agree. Doesn't sound like they drill new wells just manage, optimize and operate existing wells. This could very well be areas of LA & E TX CV deemed not suitable for horizontal development by Indigo.