Diversified Gas & Oil is set for a spike in share buying when it joins FTSE 250 – broker
DGOC was today confirmed as one of the next additions to the FTSE 250 index, effective September 21.
It elevates DGOC’s stature in the market and will bring buying interest from index trackers, as well as the broader investor base.
“We expect this event to trigger significant mandatory buying from index tracker funds which own somewhere between 10-15% of UK PLC freefloat – implying US$95-140m (66-99m shares) of incremental demand around the indexation event,” Mirabaud analyst Tim Hurst-Brown said in a note.
“Our understanding is most index tracker funds are reactive, awaiting confirmation from FTSE around index changes rather than taking pre-emptive action, implying that most of the buying demand is yet to occur.
“This may also be accompanied by some event driven flows too.”
DGOC, a profitable, dividend-paying America-focused gas and oil producer, has risen in prominence in recent years driven by a series of transactions that consolidate portfolios of established fields in the Appalachia basin, across states such as Pennsylvania, Ohio, West Virginia and Kentucky.
DGOC’s most recent results in August confirmed production at 109,000 barrels oil equivalent per day (boepd) in the month of June, with the first half rate averaging 95,100 boepd. It achieved first-half earnings (adjusted EBITDA) of US$146mln and net income was reported at US$18mln.
“Since listing in London just over three years ago, DGO has consistently delivered accretive growth, becoming the largest independent producer by volume listed on the LSE. DGOC’s differentiated business model, focused on low-risk cash flow to underpin reliable quarterly dividends, continues to deliver sustainable growth and value creation,” chief executive Rusty Hutson said in a note.
“I look forward to welcoming new investors through this index inclusion and to continuing our positive momentum.”
Meanwhile, Mirabaud’s Hurst-Brown, in his note, added: “Aside from the potential share price benefits, DGOC stands out as an oil & gas company in the ascendance – its MC has swollen from US$35m in 2017 (pre-money IPO valuation) to north of US$1bn today, on the back of its acquisition-led strategy in Appalachia.
“By comparison, the combined MC of UK E&P’s stalwarts Tullow, Premier and Cairn has shrivelled to US$1.7bn, around one-third of what it was at the start of 2017, with only Cairn retaining its place in the top flight (FTSE 250).
“The divergence in fortunes, in part, marks a wider shift by investors towards companies, such as DGOC, that generate substantial free cash flow and are more focused on returning capital to shareholders, than drilling for growth and jam tomorrow.”