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Diversified Gas and Oil plc

Diversified Gas & Oil PLC Acquisition of Core Appalachia Holding Co LLC for a total consideration of $183 million

Diversified Gas & Oil PLC (LON:DGOC), the US based gas and oil producer, today announced the acquisition of Core Appalachia Holding Co LLC from TCFII Core LLC for total consideration of approximately $183 million comprised of a $130 million cash payment and the issuance of 35,000,000 new ordinary shares of 1 pence at an effective issue price of £1.15 ($1.51) per share.

Acquisition Highlights:

· Purchase price is consistent with the Company’s stated multiple of PDP cash flows and with the ratio of purchase price-to-PV10 for assets purchased from EQT in July 2018

· Immediately accretive to cash flow and earnings

· Assets are highly complementary to the upstream and midstream assets acquired from EQT in July 2018, and allow the Company to unlock significant incremental value through consolidation to a single operator

· Upstream Assets:

o Daily production of ~11,200 boe/d (~90% gas) from ~5,000 wells located in Kentucky, West Virginia and Virginia

o High ~1,230 BTU gas is largely unprocessed allowing for significant NGL realization upside, supporting strong cash margins

o Production benefits from low differentials that enhance realized prices

· Midstream Assets:

o Significant midstream assets including ~4,100 miles of pipe and ~47,000 horsepower of compression which increases the Company’s total midstream assets to more than ~10,500 miles of pipe covering a significant portion of Kentucky and West Virginia

o Additional revenue stream (~$14m annualized from 1H18) from midstream assets that move ~26 MDthd of third-party volumes and support an incremental ~14 MDthd of third-party gas purchases that enhance pipeline and proved reserves economics

· Following the Acquisition, the Company anticipates that its:

o Total net working interest production increases by 19% to approximately 71,000 boed

o Net working interest PDP reserves will increase by 25% to 493mmboe

Commenting on the Acquisition, Diversified Gas & Oil’s CEO Rusty Hutson said:

“Our strategic acquisition of Core will allow us to unlock significant value from our enlarged base of assets in Kentucky and West Virginia that would otherwise not be achievable on a stand-alone basis. 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. 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.

This acquisition increases our exposure to liquids pricing, and the expansion of our midstream assets enhances the underlying economics of our sizeable proved-developed-producing reserves by allowing us to realize the processing uplift from our natural gas liquids while simultaneously reducing our transportation costs. Additionally, the midstream assets allow us the optionality to move our production to different sales points, maximizing realized pricing. 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.”

Details of Core’s business

Core is a producer and processor of natural gas in the Devonian region across 1.3 million net acres with wells located in the following US States:

West Virginia

3,036

Kentucky

1,812

Virginia

4

Total operated wells

4,852

Total non-operated wells

148

Total producing wells acquired

5,000

Core’s assets consist of approximately 100 mmboe of proved developed producing reserves and ~4,100 miles of gathering infrastructure with a pre-tax PV10 of $255 million, based on management’s internal estimates rolling forward the most recently available data from Core’s independent reserve engineer. Consistent with DGO’s significant base of PDP reserves in the Appalachian Basin, these reserves have long lives and demonstrated low annual declines approximating 4%. per annum since 2011. Core’s produced gas has a high BTU content of approximately 1,230 BTU and is largely unprocessed at present. This dynamic creates the potential for significant natural gas liquids-driven margin improvement by redirecting rich gas to processing capacity that was historically inaccessible without combining the two midstream systems.

Given the tight geographic proximity of Core’s assets with the recently acquired EQT package, the Company has identified significant immediate and near-term operational synergy opportunities that positively impact the Acquisition. Annualising the first half of 2018, Core has generated approximately $44 million of field level cash flow. To this current base of operating cash flow, DGO expects to add an incremental $5 million to $10 million over the immediate to near term through the following operational synergies:

· Capturing higher realized prices by processing liquids from BTU-rich gas

· Streamlining of Core’s field operations structure

· Rationalizing the number of pipeline compression stations

· Optimizing well tender routes to leverage the increased density of operated wells

· Utilizing EQT’s existing NGL processing / marketing arrangements to process Core’s rich gas

Incremental to the aforementioned operational synergies, DGO can leverage its existing corporate and back-office infrastructure to drive significant corporate synergies through the Acquisition. These include:

· Administrative and office cost savings and rationalizing redundant office space

· Consolidating insurance plans, software suites, technology infrastructure, etc.

These savings will be in addition to the savings DGO has already achieved through each of its previous acquisitions. During the six months ended 30 June 2018, Core reported total upstream revenues of $38.4 million (excluding reservation charges on contracted firm transportation capacity), third party midstream revenues of $7.0 million, and field level cash flow or net cash operating profit of $22.1 million. In the 12 months to 31 December 2017, Core reported total revenues of $127.8 million and EBITDA of $28.7 million.

Details of the Acquisition

The cash consideration of $130 million has been funded 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. Collectively, these components comprise approximately 70% of the purchase price.

For the remaining 30% of the purchase price, the Company has applied for admission of the Consideration Shares to trading on AIM, and expects that admission will occur on 12 October 2018 (“Admission”). Following Admission, the Consideration Shares issued and allotted to the seller are subject to a lock-in period of eight months and an orderly-market agreement for a further six months thereafter, which collectively serve to align the seller’s interests with that of the Company’s existing shareholders and on the creation of long-term value through the realization of various administrative and operational synergies. The Consideration Shares will rank pari passu with the Company’s existing ordinary shares.

Following Admission the Company will have 541,806,087 ordinary shares of 1 pence each in issue. No ordinary shares are held in treasury. The figure of 541,806,087 may be used by the Company’s shareholders as the denominator in the calculations by which they will determine if they are required to notify their interest in, or a change to their interest in, the Company under the Financial Conduct Authority’s Disclosure Guidance and Transparency Rules.

Decommissioning Liabilities

The Company estimates that the PV10 value of its assumed decommissioning liabilities on Core’s wells, nearly all of which are in West Virginia and Kentucky, totals approximately $7 million based on a weighted average per well abandonment cost of approximately $25,000 and timing assumptions consistent with its existing portfolio.

Core 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. This is consistent with DGO’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. DGO is committed to negotiating a long-term agreement with the Commonwealth of Pennsylvania that satisfies the needs of its citizens and those of DGO’s shareholders.

A presentation providing more detail on the Acquisition and the assets can be found on the Company’s website within the Investor Relations section on the Document Downloads page.