DGO Continues Appalachia Buildout With $183 Million Acquisition

Diversified Gas & Oil Plc (DGO) said Oct. 11 it continued its “contrarian” strategy in the Appalachian Basin with the acquisition of privately held Core Appalachia Holding Co. LLC in a cash-and-stock transaction worth about $183 million.

The acquisition, which includes both upstream and midstream assets in southwestern Appalachia Basin, also interlocks with DGO’s recent $575 million purchase from EQT Corp. (NYSE: EQT). DGO expects significant, near-term synergies, as a result, said the company’s CEO, Rusty Hutson.

“Core’s assets are highly contiguous to the assets we acquired from EQT earlier this year and materially expand our midstream footprint in Southern Appalachia,” Hutson said in a statement. “We expect to deliver both immediate and near-term synergies by combining these assets, resulting in higher revenues and lower operating expenses, which will support our exceptional EBITDA margins across the portfolio and drive dividend payouts higher.”

Core Appalachia is an independent, conventional producer and processor of natural gas in the Devonian region of the Appalachian Basin. The company is headquartered in Charleston, W.Va.

Core’s 5,000 producing wells are strategically positioned throughout 1.3 million net acres in Kentucky, Virginia and West Virginia. Daily production is about 11,200 barrels of oil equivalent per day (boe/d), 90% of which is gas.

In July, DGO acquired EQT’s noncore Huron position in Kentucky, Virginia and southern West Virginia. The purchase consisted of roughly 2.5 million net acres and about 12,000 wells producing roughly 200 million cubic feet equivalent per day.

Additionally, the company acquired 6,400 miles of low-pressure gathering lines and 59 compression stations from EQT, which at the time significantly extended DGO’s existing pipelines and network of compression stations.

DGO said it expects the acquisition of Core’s roughly 4,100 miles of pipeline and 47,000 horsepower of compression to be “highly complementary” to the EQT midstream assets.

“Additionally, the midstream assets allow us the optionality to move our production to different sales points, maximizing realized pricing,” Hutson said. “We have strategically diversified our business beyond upstream, and now own a significant network of gathering assets in Kentucky and West Virginia providing added control over the flow of our production and an additional revenue stream as we transport gas for other operators.”

Following the Core acquisition, DGO’s midstream assets will grow to more than 10,500 miles of pipelines across Kentucky and West Virginia.

DGO is a Birmingham, Ala.-based company traded on the London stock exchange that targets conventional legacy Appalachian wells to increase production and lower overhead.

Following its IPO in February 2017, the company kicked off its quest with the purchase of 1,300 producing wells from EnerVest Ltd. for $1.75 million. It followed that up with an acquisition of Titan Energy LLC’s 7,300 producing gas and oil wells for $35 million.

In 2018, DGO’s strategy was in full swing with closing of two deals in March: the acquisition of Alliance Petroleum Corp. for $95 million and, at the end of the month, a second deal with CNX Resources Corp. (NYSE: CNX) for $85 million.

“Our model is a contrarian model,” Hutson told Hart Energy earlier this year. “We’re looking at assets no one else is looking at.”

Upon completion of its EQT acquisition in the summer, DGO’s expected to hold a position in the Appalachian Basin of 6.5 million acres with proven developed producing (PDP) reserves of 393 million boe.

DGO said it expects its total net working interest production to increase by 19% following the close of its acquisition of Core Appalachia to about 71,000 boe/d. The company’s PDP reserves are anticipated to grow by 25% as well to 493 million boe.

Additionally, Core’s produced gas has a high British thermal unit (BTU) content of about 1,230 BTU and is largely unprocessed at present. Hutson said this will give DGO the potential for NGL-driven margin improvement by redirecting rich gas to processing capacity that was historically inaccessible without combining the two midstream systems.

“This acquisition increases our exposure to liquids pricing, and the expansion of our midstream assets enhances the underlying economics of our sizeable PDP reserves by allowing us to realize the processing uplift from our NGL while simultaneously reducing our transportation costs,” he said in the release.

Core also has an existing agreement in place with the State of West Virginia that extends through 2025, which requires that Core plug or produce 24 wells per year. Since the inception of this agreement in 2017, Core has been able to satisfy the agreements by placing the required specified wells back onto production, according to the press release.

DGO said this is consistent with the company’s own efforts to place nonproducing wells back into service, which not only defers the cost to decommission the well, but increases revenues from the well, often for many years to come.

Core has no wells located in Pennsylvania where DGO remains engaged in ongoing discussions with the state’s Department of Environmental Protection to complete a long-term decommissioning agreement, according to the release.

Total consideration for the Core Appalachia acquisition is comprised of a $130 million cash payment and the issuance of 35 million new ordinary DGO shares priced at about $1.51 per share.

DGO said it funded the cash payment, which comprises 70% of the total purchase price, through the assumption of the $93 million balance on Core’s revolving credit facility led by KeyBank and an incremental draw of $40 million under the company’s existing KeyBank debt facility.

Core’s facility will remain outstanding at close and will be separate from DGO’s current facility. DGO said it will work with lenders to consolidate the two facilities into a new revolving credit facility following completion of the transaction.

Emily Patsy can be reached at epatsy@hartenergy.com.