Diversified Gas & Oil Finally Wins Over Carbon with $110 Million Deal

Two years after Diversified Gas & Oil Plc’s on-again, off-again pursuit of Carbon Energy Corp.’s Appalachia Basin gas assets, the companies inked a deal in April for about $110 million.

Birmingham, Ala., based-Diversified also agreed to contingency payments of up to $15 million based on natural gas prices and scheduled proved developed producing (PDP) quantities, according to regulatory filings. Diversified has 45 days to conduct due diligence prior to executing the purchase agreement.

The assets fit with Diversified’s existing portfolio of conventional, low decline gas production and include acreage in West Virginia, Kentucky and Tennessee. Production in 2019 average 59,400 million cubic feet equivalent per day (Mcfe/d), of which 97% was natural gas. The agreement would add an additional 6,500 wells to Diversified’s arsenal of wells.

The deal additionally includes about 4,700 miles of intrastate gathering pipelines in West Virginia, which currently transports the majority of the production from Carbon's Appalachia wells and provides additional third-party transportation revenue along. The system interconnects to higher-priced interstate pipelines.

Carbon would also sell two active natural gas storage fields, which Diversified said gives it greater optionality while generating third-party storage revenue. The deal includes interests held by Carbon affiliate Nytis LLC.

Carbon reported that, as of year-end 2019, it owned working and royalty interests in Illinois, Indiana, Kentucky, Ohio, Tennessee, Virginia and West Virginia in its Appalachia and Illinois basins. The company said its Appalachian and Illinois basin leasehold consists of 304,700 net developed acres as well as 1.25 million net undeveloped acres. Carbon also owns assets in the Ventura Basin in California.

In first-quarter 2018, Diversified first broached a potential acquisition with Carbon with an offer for up to $165 million. At the time, the Nymex natural gas futures price for March 2018 was $2.698 per MMBtu. Carbon declined the offer, believing its assets should command a “materially higher valuation,” according to Securities and Exchange Commission documents.

During 2018 and 2019, three other parties approached Carbon concerning a possible acquisition of its Appalachia assets including Diversified in March 2019. Carbon ended up declining Diversified’s proposed purchase price of $135 million and broke off discussions. At the time, the Nymex natural gas futures price was $2.859/MMBtu.

Then, in October 2019, Diversified again approached Carbon to renew discussions regarding a possible deal. Negotiations continued through the new year, with Nymex natural gas prices at $2.122/MMBtu. The parties continued to hammer out the deal, including contingency payments, between February and April.

Diversified said the deal includes a hedge portfolio with an average Nymex downside protection of about $2.60/MMBtu for an 18-month period from the effective date. The hedges represent roughly 75% of the assets’ 2019 produced volumes.
 
"DGO is uniquely positioned to capitalize on compelling opportunities in the current market and moved quickly to secure exclusivity on this value accretive package,” said Diversified CEO Rusty Hutson Jr. “We can comfortably fund the acquisition without dilution to our loyal shareholders using our existing credit facility.”

Hutson said the assets are strategically located in the company’s existing area of operations and will allow it to leverage field personnel and technology across the additional assets. 

“Expanded scale combined with our focus on a variety of identified opportunities to further improve the assets' free cash flow will enhance operating margins and provide additional insulation and resilience in this low commodity price environment,” he said.

Diversified, which trades on the London-based AIM stock exchange, said the transaction falls within its criteria of paying less than 4x EBITDA. The deal would have an effective date of Jan. 1.