Diversified Gas & Oil Plc acquired certain Cotton Valley upstream assets primarily in Louisiana from Indigo Minerals LLC, marking the addition of a new region to the portfolio of the London Stock Exchange-listed company.
The existing portfolio of Birmingham, Ala.-based Diversified comprises low-decline gas producing assets in the Appalachian Basin spread across West Virginia, Kentucky and Tennessee. However, the company, commonly referred to by the acronym DGO, now hopes to repeat the success of that business model, which its CEO says is proven to generate shareholder returns, in its newly established “regional focus area.”
“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,” Diversified CEO Rusty Hutson Jr. said in an April 30 company release.
According to the release, Diversified signed a purchase and sale agreement with Indigo to acquire producing gas assets consisting of 780 net operated wells and related facilities within the Cotton Valley and Haynesville producing area of northwest Louisiana and East Texas. The gross purchase price for the acquisition is $135 million.
The transaction follows the acquisition-focused business model Diversified has established since its IPO on the London AIM in 2017.
In an interview last year with Oil and Gas Investor magazine, Hutson explained what sets Diversified’s business model apart from other E&P companies is that it’s not a drill-and-build company.
“We’re more acquire-and-optimize,” he said.
“A lot of people get confused about how you can have an E&P company that’s not drilling,” he continued. “Our drilling is acquisition.”
Rather than acquiring undeveloped resource, Diversified focuses exclusively on buying proved developed producing (PDP) natural gas assets. As a result, since going public, Diversified has acquired some $1.7 billion in deals involving 710 million boe PDP reserves, which, until now, has all been located in the Appalachian Basin.
Click here to read Oil and Gas Investor’s interview with Diversified Gas & Oil CEO Rusty Hutson Jr.
More recently, Diversified lined up a $1 billion acquisition partnership last year with global investment firm Oaktree Capital Management LP, giving the company a financing structure that opened it up to larger acquisition opportunities.
Per the participation agreement announced November 2020, Oaktree has committed up to $1 billion in aggregate over three years to fund mutually agreed upon PDP acquisitions with transaction values of $250 million or more.
Despite its focus in Appalachia, Diversified’s vice president of investor relations, Teresa Odom, told Hart Energy last November the company would be open to acquisitions in other basins that fit the company’s business model.
“If we can find that in a different basin, then we’ve got another avenue that we can go down to build that scale immediately with a partner like Oaktree,” Odom said commenting on Diversified’s partnership with Oaktree Capital.
According to its release on April 30, 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.
“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 strategic expansion into a new producing region turns vision to reality and marks a key milestone in our development,” Hutson said in his statement on April 30.
The acquisition from Indigo creates a newly identified “central” regional focus area for Diversified that includes producing areas within Louisiana, Texas, Oklahoma and Arkansas, the company release said.
Production from the Indigo assets is about 16,000 boe/d or 95 MMcfe/d. Diversified said the acquisition will add about 50 million boe (305 Bcfe) in PDP reserves and a PV-10 of roughly $175 million using a full Nymex strip as of April 16.
Diversified expects to close the transaction later this month following its customary diligence, reviews and approvals, with an effective date of March 1.
According to the company, the estimated net purchase price of $115 million represents just a roughly 2.9x multiple of adjusted EBITDA and a PV-20 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 release said.
The company said it will initially fully fund the Indigo asset acquisition from existing liquidity on its revolving credit facility but plans to also evaluate its options for long-term financing including additional asset-backed securitizations, term loans or similar financing options.
Pro forma net debt/adjusted EBITDA after the acquisition will approximate 2.3x, in line with Diversified’s current leverage position, according to the company release.
In the release, Diversified also said that it 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.
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