Diversified Gas & Oil has been on a mission to buy as many non-shale (conventional) oil and gas wells as it can in the Appalachian Basin. It owns close to 3 million acres of leases with some 60,000 (mostly) conventional oil and gas wells. That’s changing. Yesterday Diversified announced it has cut a deal to buy 107 operating (and 3 non-operating) shale wells in Pennsylvania and West Virginia for $400 million.
This is a departure in strategy for Diversified. Until now, Diversified pursued old conventional wells with steady, predictable returns that generate income with next-to-nothing in the way of capital investment. Diversified was zagging with conventional wells while everyone else was zigging with shale wells (see Diversified Zags, Finds Profit in Appalachian Conventional Wells).
Last June Diversified Gas & Oil burst on the Marcellus/Utica scene when they bought 2.5 million acres of leases with thousands of conventional gas (and oil) wells in Appalachia from EQT (see Diversified Gas & Oil Adds to Conventional Assets in KY, VA, WV). The sale included nearly 12,000 conventional wells with 200 million cubic feet per day of natural gas production and some 6,400 miles of gathering pipelines.
Diversified has continued to grow, picking up wells in West Virginia, Ohio, Kentucky and Pennsylvania. They now own some 60,000 wells! Out of which 23,000 wells are located in PA.
Yesterday’s announcement is a surprise, sort of. In broad brush strokes, Diversified said they are buying 107 functioning shale wells from HG Energy for $400 million. No word on how much acreage is included. The wells currently produce 20,000 barrels of oil equivalent per day (of natural gas), which translates to roughly 116 million cubic feet per day (MMcf/d). A very healthy flow.
Some 56 of the HG wells are located in PA, and the other 51 are in WV. Diversified mentions there are an additional three wells currently not online that they intend to bring online once the deal closes.
Is this really a departure in strategy for Diversified? Maybe not so much.
As in the past, Diversified is buying lower-producing wells, relatively speaking. In the announcement (which we’ve posted below), Diversified says this of the wells they are buying: “Although the HG Energy Assets are, in aggregate, relatively mature and beyond the high decline initial phase of production, they produce significant volumes of gas from relatively few wells, meaning that operating costs are significantly lower than the Company’s existing portfolio.” In other words, Diversified picked up some older shale wells that are past their prime. Shale wells produce maybe 60-70% of all the gas they will ever produce in the first five years. But an “old” shale well still produces way more gas than an old conventional well.
Diversified has applied the same strategy to the shale world they have used in conventional world–buying wells that require little to no money to maintain, yet keep chugging along. It’s really a brilliant strategy. These people are smart.
How will Diversified finance the HG purchase? By drawing down their line of credit at KeyBank, and by using $225 million they plan to make in a quick sale of new shares of stock in the company. In the finance world, a super fast sale (one to two days) of new shares of stock is called an “accelerated bookbuild.”
Here’s a good summary of the news, with the key points and highlights:
Diversified Gas and Oil has signed an agreement to acquire a number of producing gas assets in the US states of Pennsylvania and West Virginia from HG Energy for $400m.
Under the conditional sale and purchase agreement, Diversified Gas and Oil will acquire 107 unconventional producing gas wells with a combined net daily production of more than 20,000boe.
The wells are located close to the company’s existing operations in the Appalachian Basin.
Diversified Gas and Oil also announced a proposed placing of shares via an accelerated bookbuild to raise at least $225m to fund the deal.
The company will also fund the acquisition using a combination of a drawdown from its existing KeyBank facility.
Diversified Gas and Oil CEO Rusty Hutson said: “This package comprises significantly higher volumes per well than our previous acquisitions and achieves higher realised gas prices, resulting in a positive impact for the overall economics of the enlarged portfolio as we continue to reduce operating costs and drive higher margins.
“With an estimated net average production of over 90,000boed post-completion, the company will be established in the top-tier of London listed producers, supported by an extremely strong cash flow profile and a healthy balance sheet.”
Upon completion, the pro forma net production is expected to increase to more than 90,000boed and PDP reserves to 566mmboe.*
*Hydrocarbons Technology (Mar 28, 2019) – Diversified Gas & Oil to acquire HG Energy assets in US for $400m
What about the seller, HG Energy. Who are they?
HG is privately held (does not have publicly traded shares of stock), headquartered in Parkersburg, WV and founded in 2011. HG’s West Virginia assets were purchased from East Resources, Inc. at the inception of the company. East sold most of its Marcellus assets in previous transactions, turning Terry Pegula into a billionaire (he later purchased both the Buffalo Sabres NHL team and the Buffalo Bills NFL team). HG management are all former East employees.
In 2017, Noble Energy sold all of their Marcellus leases and wells to HG (see Noble Energy Sells Remaining M-U Assets for $1.2B – Who Bought?).
HG isn’t going anywhere–they have plenty of assets left after this sale. It’s our sense this sale is a small part of HG’s assets, selling off old inventory in locations that are close to Diversified’s existing conventional assets.
Below is documentation that took us a while to unearth. It is publicly available information (contrary to all of the warnings on it about not redistributing). Diversified’s stock is listed on the London AIM exchange, a sub-exchange of the London Stock Exchange. As part of that listing, the company is required to file certain financial documentation upon taking major actions, like floating new shares. This document contains a great many more details about the HG purchase than can be found in any of the media accounts we reviewed.
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