Rockhopper Exploration — Market heavily discounting Sea Lion

Rockhopper Exploration — Market heavily discounting Sea Lion

Based on our analysis, we believe the current share price implies a c 20% chance of success for Sea Lion Phase 1 at $70/bbl or c 39% at a $60/bbl long term oil price (excluding any value for further phases of Sea Lion). Given recent progress with the award of letters of intent (LOIs) for key project components and with more than 60 people working on the development, we are more positive on the chance of success. In our view, the key outstanding risks are in project funding and politics. H119 has the potential to be eventful for Rockhopper with more definitive guidance on the availability of export credit funding and a hearing on the Ombrina Mare arbitration, scheduled for February. Our valuation increases to 78.9p/share (+7.2%) largely due to sterling weakness. This valuation assumes a 55% chance of Sea Lion Phase 1 progressing and 20% for subsequent phases at a $70/bbl long-term oil price. Given the subjectivity of key inputs, we provide sensitivities to these key value drivers in this note.

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Written by

Rockhopper Exploration

Market heavily discounting Sea Lion

Sea Lion update

Oil & gas

23 January 2019

Price

23.28p

Market cap

£106m

$/£0.77

Net cash ($m) at December 2018

40.4

Shares in issue

457.4m

Free float

98.9%

Code

RKH

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

11.6

(26.7)

(7.3)

Rel (local)

7.9

(25.4)

3.4

52-week high/low

44.0p

20.2p

Business description

Rockhopper is a London-listed E&P with fully funded development of Sea Lion, a 500mmbbl+ field in the Falklands as well as the potential for a similar size discovery to the south. It also holds production and exploration assets in the Mediterranean.

Next events

Funding progress

H119

Ombrina Mare arbitration outcome

Mid-2019

Sea Lion FID

2019

Analysts

Sanjeev Bahl

+44 (0)20 3077 5742

Carlos Gomes

+44 (0)20 3077 5700

Elaine Reynolds

+44 (0)20 3077 5713

Rockhopper Exploration is a research client of Edison Investment Research Limited

Based on our analysis, we believe the current share price implies a c 20% chance of success for Sea Lion Phase 1 at $70/bbl or c 39% at a $60/bbl long term oil price (excluding any value for further phases of Sea Lion). Given recent progress with the award of letters of intent (LOIs) for key project components and with more than 60 people working on the development, we are more positive on the chance of success. In our view, the key outstanding risks are in project funding and politics. H119 has the potential to be eventful for Rockhopper with more definitive guidance on the availability of export credit funding and a hearing on the Ombrina Mare arbitration, scheduled for February. Our valuation increases to 78.9p/share (+7.2%) largely due to sterling weakness. This valuation assumes a 55% chance of Sea Lion Phase 1 progressing and 20% for subsequent phases at a $70/bbl long-term oil price. Given the subjectivity of key inputs, we provide sensitivities to these key value drivers in this note.

Year end

Revenue
($m)

PBT
($m)

Cash from operations ($m)

Net (debt)/
cash ($m)

Capex
($m)

12/16

7.4

98.0

(21.2)

81.0

(40.2)

12/17

10.4

(9.0)

1.6

50.7

(26.8)

12/18e

10.8

(10.6)

7.4

40.1

(18.0)

12/19e

10.0

(8.1)

3.8

20.0

(24.0)

Note: Figures as reported

Sea Lion remains a key growth project for Premier

Sea Lion features as Premier Oil’s (PMO) next major growth project beyond Tolmount, while appraisal at Zama resumes. We believe Zama offers a more liquid exit opportunity for Premier on completion of the current appraisal campaign; although Premier’s high equity interest (60%) in Sea Lion has proved to be less liquid, it provides an opportunity for the group to replicate its FPSO project execution success at Catcher. We estimate a net unlevered, point-forward IRR for Premier of 23% for Phase 1 development at $70/bbl Brent.

Key remaining project risks

We see the key outstanding risks for Sea Lion Phase 1 as funding and political. It is difficult to quantify these risks, but we understand that export credit/debt finance processes are ongoing, although the timetable remains uncertain, and the recent introduction of a second weekly flight between South America and the Falklands suggests a potential improvement in cross-Atlantic relationships. While we use a 55% chance of success for Phase 1, this is subjective; hence we provide sensitivities to this in the valuation section of this note.

Valuation: Market implies 20% chance of success

Based on our oil price deck of $70/bbl Brent in the long term, we believe the market is implying just c 20% chance of success for Phase 1 and zero value for subsequent development phases, which we feel to be overly pessimistic.

Sea Lion heavily discounted

At the current share price, it appears the market has substantially discounted Sea Lion despite operator Premier Oil’s apparent commitment to the project. Below we outline what we feel are the key risks and uncertainties in relation to the development of Sea Lion, and we take a view on what the market is implying in terms of oil price expectations and chances of the project progressing.

Sea Lion key risks

Premier Oil’s commitment to Sea Lion

Premier has signed LOIs with the Sea Lion FPSO provider, drilling contractor, subsea equipment provider, well services, subsea installation contractor and for helicopter services alongside building a development team of more than 60 people. In our view, Premier is committed to progressing Sea Lion through to first oil; delivery of FPSO development, Catcher, on time and 30% below budget will provide Premier’s management with comfort in its execution capabilities.

Project threshold for commerciality: Premier Oil returns

Premier’s unlevered returns on Sea Lion Phase 1 will be to a large extent driven by oil the price, assuming cost to first oil can be maintained at $1.5bn gross. Below we provide our calculation of Premier’s point-forward returns at various long-term oil price expectations. We note that the project delivers unlevered IRRs over 20% to Premier at oil prices above $60/bbl in the long term (levered IRRs will depend on the cost of debt but are likely to be materially higher). In our view, our modelled levered returns should enable Premier Oil to justify investment at current spot oil prices.

Exhibit 1: Unlevered point-forward IRRs for Sea Lion Phase 1

Oil price LT (Brent $/bbl)

50

60

70

80

90

PMO IRR

16%

20%

23%

25%

27%

RKH IRR

22%

27%

32%

35%

39%

Source: Edison Investment Research

Securing project funding

A key investment consideration has been Premier Oil’s ability to fund the development of Sea Lion given its existing net debt and associated debt covenants. Funding for the project is expected to be split into vendor financing (c $375m), export credit/bank finance (c $750m) and upstream partner equity (c $375m). With Premier estimating end-FY18 net debt at $2.3bn and a year-end leverage ratio of 3x net/EBITDA, it remains well within its 5x covenant. Premier has committed to further reductions in covenant ratio (targeting net debt/EBITDA at 2.7x by end Q119) and this can be achieved by several means including a covenant-accretive transaction (Premier has said it continues to look at North Sea assets – we expect producing asset packages that can accelerate the monetisation of Premier’s tax loss position) or, alternatively, a sizeable asset divestment.

In our view, Premier’s 25% equity interest in Mexico Block 7, containing the Zama discovery, makes an attractive divestment opportunity post appraisal. We see equity in Zama as a liquid asset, demonstrated by the recent sale of Sierra Oil and Gas’s stake in the discovery.

DEA recently acquired Sierra Oil and Gas for c $500m (according to press reports). DEA has a 40% interest in the Zama discovery, which contains a Premier estimated 400–800mmbbls (P90-P10) recoverable. Although it is unclear exactly how much of the deal value is for Sierra’s net stake in Zama and/or cash held in the company, it does suggest there is sufficient industry interest in the discovery to enable Premier to transact.

On the other hand, we see Sea Lion as a less-liquid asset for Premier, largely due to jurisdiction. Nevertheless, risked returns for operator Premier Oil remain compelling at current oil prices. We estimate that Premier will generate a point-forward, unlevered 23% IRR based on its 60% working interest, based on a $70/bbl long-term oil price and after Rockhopper’s (RKH) cost-carry for Phase 1. This return is highly geared to underlying oil price assumptions, as can be seen in Exhibit 1. Rockhopper is funded for Phase 1 development of Sea Lion through existing cost-carry arrangements with Premier Oil.

We see some risk and uncertainty around the availability and timing of export credit/debt financing given the political backdrop. This is a key component of our project risking.

Technical risks

Sub-surface technical risks that can derail Sea Lion Phase 1 have been largely mitigated through an extensive appraisal programme. Operational risks remain, as with any development project, but existential risks are within the normal bounds expected for an offshore project of this nature.

Government approvals

The Falkland Islands government (FIG) is fully behind the development of Sea Lion and has shown its support in providing the required exploration, appraisal and development consent. We see the risk of FIG objecting to the project as minimal. The project FDP is substantially agreed and a final update is expected on project sanction. The Environmental Impact Statement (EIS) public consultation process has been completed.

Perceived political risks

Geopolitical risks are hard to dismiss completely, especially with varying views on the sovereignty of the Falklands among senior political figures on both sides of the Atlantic. Relationships have improved in recent months with the introduction of a second flight a week from South America (Sao Paulo via Cordoba in Argentina to Mount Pleasant in the Falklands) to the Falklands.

Sea Lion uncertainties

Timeline to first oil

Assuming Sea Lion is sanctioned and reaches final investment decision (FID) in H219, it is possible for first oil to be achieved in 2023 (assuming a 3.5-year project timeline). We add an additional element of conservatism in our base, assuming first oil in mid-2024. Slippage beyond this would likely be driven by funding/political delays rather than project execution.

Oil price and economics

We assume a $70/bbl long-term oil price in our base case and provide valuation sensitivities to commodity price. The oil price is a key driver of net project economics. Premier estimates total life of field opex and capex per barrel at $35/bbl and the full-cycle project break-even oil price varies between Premier and Rockhopper due to existing cost-carry arrangements. Gearing to the oil price is similar to that expected for North Sea FPSO developments.

Capex costs

LOIs with key service companies provide a basis for capex cost estimates of $1.5bn gross before first oil. Higher oil prices and an inflationary environment could lead to cost creep. At our base case $70/bbl long-term oil price and with spot prices remaining below this level, we do not expect a significant change to Premier’s current cost estimate.

Subsurface

Reservoir-related uncertainty is relatively constrained given that Sea Lion has been extensively appraised. We do not see this as outside the normal range for a project moving into development.

Other uncertainties: Production, fiscal and oil price benchmark/discount

Other key uncertainties are within the normal range we would expect for a project of this nature.

Ombrina Mare and Abu Sennan

Egypt and Italy are relatively small components in our overall Rockhopper valuation, at 3% and 4% respectively. Recent operational updates highlight a couple of recent positive developments in relation to both.

Ombrina Mare, Italy

Rockhopper commenced international arbitration proceedings against the Republic of Italy in relation to the Ombrina Mare field it acquired from Mediterranean Oil & Gas in 2017. Rockhopper believes it has strong prospects of recovering ‘significant monetary damages’ based on lost profits as a result of the Republic of Italy’s breaches of the Energy Charter Treaty. We estimate this will be recoverable at c $16m on a risked basis in our valuation but press reports suggest it could be materially higher with the claim running up to several hundreds of millions of euros. The hearing is scheduled for early February 2019.

Abu Sennan, Egypt

Average production rates for Abu Sennan in FY18 were 840boed net and Rockhopper expects to sustain current production levels in FY19, on inclusion of recent success at Al Jahraa-10. We forecast 840boed in FY19, a 6% increase on previous forecasts, and a slightly higher liquids yield than in FY18 (on inclusion of production from Abu Roash-C, which flowed at 130bopd gross). Rockhopper has joint venture approval for an active 2019 drilling programme which includes one exploration well, two development wells and a water injector. Drilling is expected to commence in Q119. Rockhopper’s Egyptian receivables position has reduced materially over the course of FY18, from $7.5m at the end FY17 to $1.5m at end FY18.

Valuation: Sea Lion risking and oil price key drivers

Our base case valuation increases by 11.7% from 73.6p/share to 82.2p/share (+5.0% in dollar terms). Sterling foreign exchange rates remain volatile ahead of Brexit (our FX assumption moves from £/$0.75 to 0.77 based on recent sterling weakness). Other key moving parts in our valuation are described below.

Key changes to valuation

Oil pricing: we move our short-term oil price deck from $70.6/bbl to $60.5/bbl for FY19, which affects Egyptian oil realisations, but our long-term oil price expectation of $70/bbl Brent in 2022 remains unchanged. We upgrade our Abu Sennan production profile, increasing our FY19 production expectation by 6% with a higher liquids yield, offsetting our lower FY19 oil price assumption.

FX: moves from £/$0.75 to 0.77 based on recent sterling weakness.

First oil: we move Sea Lion Phase 1 first oil from mid-2023 to mid-2024, essentially including a one-year contingency over and above management guidance. We also move subsequent phases back by one year.

Rolling forward of NAV: we roll forward our discount date for future cash flows from 1 January 2018 to 1 January 2019, largely offset by the one-year delay to first oil included in our update.

NAV breakdown by asset

A full breakdown of our valuation by asset is provided in the exhibit below, including a sensitivity to our underlying cost of capital assumption of 12.5%.

Exhibit 2: Edison breakdown of Rockhopper NAV

Asset

FX US$/£0.77

Recoverable reserves

 

Net risked value at WACC of 12.5%

Shares: 457m

First

WI

CoS

Gross

Net

NPV

Country

production

%

%

mmboe

mmboe

$/boe

$m

p/share

10%

15%

20%

Net (debt)/cash - Dec 2018

40

6.8

6.8

6.8

6.8

G&A (NPV12.5 of 5 years)

(21)

(3.5)

(3.5)

(3.5)

(3.5)

Production

Guendalina

Italy

20%

100%

0.8

0.2

23.2

4

0.6

0.6

0.6

0.6

Abu Sennan

Egypt

22%

100%

10

2.3

6.7

15

2.6

2.9

2.3

1.9

Civita

Italy

100%

100%

0.1

0.1

-22.2

(1)

0.0

0.0

0.0

0.0

Development

Sea Lion Phase 1

Falkland Islands

2024

40%

55%

221

88

5.3

256

43.2

58.0

32.0

17.0

Sea Lion Phase 2 in PL32

Falkland Islands

2029

40%

20%

87

35

4.6

32

5.4

8.2

3.6

1.6

Sea Lion Phase 2 in PL04

Falkland Islands

2029

64%

20%

214

137

4.6

125

21.2

32.0

14.0

6.1

Ombrina Mare - under arbitration

Italy

16

2.7

2.7

2.7

2.7

Risked NAV

 

 

 

 

533

262

 

466

78.9

107.6

58.5

33.1

Source: Edison Investment Research

What is the market implying?

With Rockhopper currently trading at 23p/share, the market is much more pessimistic on Sea Lion Phase 1 progression or oil price expectations than our base case 55% commercial chance of success (CoS) based on a long-term price expectation of $70/bbl Brent. The current share price suggests an implied chance of success of c 20% for Phase 1 at $70/bbl or c 39% at $60/bbl (see Exhibit 3), implying that the project is unlikely to proceed. Based on our analysis of the key risks and assuming a long-term oil price of $70/bbl, we believe the project is more likely to proceed than not. However, timeline uncertainty remains with funding on the critical path.

Exhibit 3: RKH core asset and Sea Lion Phase 1 valuation sensitivity

Phase 1 CoS/
Brent $/bbl LT

50

60

70

80

90

10%

6.5

10.4

14.3

18.1

21.9

20%

7.6

14.9

22.2

29.3

36.3

30%

8.6

19.3

30.0

40.5

50.8

40%

9.7

23.8

37.9

51.7

65.2

50%

10.7

28.2

45.7

62.8

79.7

Source: Edison Investment Research

Financials: Funded to Sea Lion Phase 1 first oil

Rockhopper expects to end FY18 with c $40m of cash on the balance sheet and no debt (in line with our forecasts). With SG&A running at c $4.5m pa and non-Sea Lion capital costs covered by c $3–$4m of positive cash flow from operations, Rockhopper should be funded through to Sea Lion Phase 1 first oil given current operator estimates of the project’s debt capacity. In addition, Rockhopper retains outstanding cost-carry balances for Phase 2 Sea Lion development and, depending on the precise capex schedule to this development phase, is likely to fund its share of development through a combination of existing carries and cash flows from Phase 1. Alternatively, equity in a producing Phase 1 Sea Lion development will provide the company with access to a borrowing base if Rockhopper looks to debt fund further phases.

Exhibit 4: Financial summary

Accounts: IFRS, Yr end: December, USD: Thousands

 

2015A

2016A

2017A

2018E

2019E

2020E

Total revenues

 

 

3,966

7,417

10,401

10,797

9,982

9,059

Cost of sales

 

 

(11,049)

(7,667)

(9,573)

(5,892)

(5,135)

(5,443)

Gross profit

 

 

(7,083)

(250)

828

4,905

4,847

3,616

SG&A (expenses)

 

 

(10,895)

(9,970)

(5,282)

(4,570)

(4,684)

(4,801)

Other income/(expense)

 

 

(22,934)

(8,237)

(3,422)

(3,975)

0

0

Exceptionals and adjustments

 

(10)

116,527

(1,830)

(490)

(1,246)

(1,296)

 

 

 

 

 

 

 

 

 

Reported EBIT

 

 

(40,922)

98,070

(9,706)

(4,130)

(1,083)

(2,481)

Finance income/(expense)

 

 

975

307

783

717

196

0

Other income/(expense)

 

 

(4,750)

(333)

(39)

(7,205)

(7,171)

(8,067)

Exceptionals and adjustments

 

0

0

0

0

0

0

Reported PBT

 

 

(44,697)

98,044

(8,962)

(10,618)

(8,058)

(10,548)

Income tax expense (includes exceptionals)

 

 

55,395

0

2,823

(25)

0

0

Reported net income

 

 

10,698

98,044

(6,139)

(10,643)

(8,058)

(10,548)

Basic average number of shares, m

 

 

293

446

457

457

457

457

Basic EPS

 

 

3.7

22.0

(1.3)

(23.3)

(17.6)

(23.1)

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

(32,814)

(15,163)

(2,403)

(1,111)

2,977

2,222

Adjusted EBIT

 

 

(49,010)

(21,751)

(13,349)

(6,169)

(2,652)

(4,593)

Adjusted PBT

 

 

(52,785)

(21,777)

(12,605)

(12,657)

(9,626)

(12,660)

Adjusted EPS (c)

 

 

120

(13)

(5)

(12)

(13)

(19)

Adjusted diluted EPS (c)

 

 

120

(13)

(5)

(12)

(13)

(19)

 

 

 

 

 

 

 

 

 

Balance sheet

 

 

2015A

2016A

2017A

2018E

2019E

2020E

Property, plant and equipment

 

 

12,637

18,025

11,585

12,610

30,610

32,883

Goodwill

 

 

0

0

0

0

0

0

Intangible assets

 

 

256,658

426,419

432,147

439,641

442,781

441,054

Other non-current assets

 

 

9,803

9,439

10,789

10,508

10,508

10,508

Total non-current assets

 

 

279,098

453,883

454,521

462,759

483,899

484,445

Cash and equivalents

 

 

110,434

81,019

50,729

40,075

30,000

30,000

Inventories

 

 

1,670

1,608

1,621

1,579

1,579

1,579

Trade and other receivables

 

 

6,199

17,184

16,840

9,385

9,385

9,385

Other current assets

 

 

2,192

495

4,354

4,746

4,746

4,746

Total current assets

 

 

120,495

100,306

73,544

55,785

45,710

45,710

Non-current loans and borrowings

 

 

0

0

0

0

9,952

10,930

Other non-current liabilities

 

 

106,893

93,174

85,245

91,289

98,459

106,526

Total non-current liabilities

 

 

106,893

93,174

85,245

91,289

108,411

117,456

Trade and other payables

 

 

30,457

34,012

12,772

6,739

6,739

6,739

Current loans and borrowings

 

 

0

0

0

0

0

0

Other current liabilities

 

 

9

9

9,450

9,064

9,064

9,064

Total current liabilities

 

 

30,466

34,021

22,222

15,803

15,803

15,803

Equity attributable to company

 

 

262,234

426,994

420,598

411,452

405,394

396,896

Non-controlling interest

 

 

0

0

0

0

0

0

 

 

 

 

 

 

 

 

 

Cashflow statement

 

 

2015A

2016A

2017A

2018E

2019E

2020E

Profit for the year

 

 

(44,697)

98,044

(8,962)

(10,618)

(8,058)

(10,548)

Taxation expenses

 

 

0

0

0

0

0

0

Net finance expenses

 

 

3,942

16

(743)

6,371

6,975

8,067

Depreciation and amortisation

 

 

2,744

4,725

5,687

2,575

2,860

3,454

Share based payments

 

 

1,937

994

864

1,244

2,000

2,050

Other adjustments (impairments)

 

 

26,075

(115,546)

5,652

2,827

0

0

Movements in working capital

 

 

3,143

(9,433)

(868)

5,000

0

0

Interest paid / received

 

 

0

0

0

0

0

0

Income taxes paid

 

 

0

0

0

0

0

0

Cash from operations (CFO)

 

 

(6,856)

(21,200)

1,630

7,399

3,777

3,022

Capex

 

 

(80,919)

(40,203)

(26,817)

(17,960)

(24,000)

(4,000)*

Acquisitions & disposals net

 

 

0

(13,527)

(6,266)

(658)

0

0

Other investing activities

 

 

39,791

77,755

521

532

196

0

Cash used in investing activities (CFIA)

 

 

(41,128)

24,025

(32,562)

(18,086)

(23,804)

(4,000)

Net proceeds from issue of shares

 

 

(2,733)

0

0

0

0

0

Movements in debt

 

 

0

0

0

0

9,952

978

Other financing activities (includes rig settlement)

 

 

2,219

(2)

(13)

10

0

0

Cash from financing activities (CFF)

 

 

(514)

(2)

(13)

10

9,952

978

Increase/(decrease) in cash

 

 

(48,498)

2,823

(30,945)

(10,677)

(10,075)

0

Currency translation differences and other

 

 

(794)

(2,238)

655

23

0

0

Cash at end of period

 

 

50,434

51,019

20,729

10,075

0

0

Net (debt) cash including term deposits

 

 

110,434

81,019

50,729

40,075

20,048

19,070

Source: Company accounts, Edison Investment Research. Note:*Sea Lion capex covered by existing cost-carry arrangements post FID.

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Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

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United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Diversified Gas & Oil — Updating short-term forecasts

We have updated our short-term forecasts to reflect better than expected post-Core Appalachia acquisition operational performance and our revised production forecasts and gas price realisations. Unit operating costs averaged $6.42/boe in October 2018 (12% lower than the average for 9M18), reflecting lower operating costs associated with acquired assets and realised synergies. Diversified Gas and Oil (DGO) has reached an agreement with two states on plugging and abandonment (P&A) schedules, providing greater certainty of its short-term P&A liabilities; we expect more agreements to follow. In December, DGO announced a 3.30c/share dividend, an increase of 18% from the previous quarter. Management intends to maintain this payout and we forecast a FY19 dividend yield of 8.9%. Our valuation is updated to 163.6p/share (+12%) driven by revised unit costs, an updated production forecast for FY19 and rolling forward the discount date. DGO’s cash flow is largely sheltered from oil price volatility with 88% of production linked to Henry Hub.

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