Diversified Gas & Oil PLC rated as a ‘buy’ as analyst expects more deals

() has been written up by First Berlin Equity Research analyst Simon Scholes who rates the US focussed firm as a ‘buy’.

Scholes has a 150p price target, suggesting substantial upside to the current price of 106p.

The analyst highlights that DGOC is not a well-driller and it achieves production growth almost solely through acquisition, and, he believes currently low commodity prices will likely drive further consolidation within the oil and gas sector.

READ: DGOC eyes distressed assets as it teams up with Oaktree

Moreover, Scholes noted that the strategic participation agreement, announced October 5, will allow DGOC to access deals on a scale which would not have been feasible on a standalone basis, and, will significantly reduce capital intensity of deals.

On Monday, DGOC announced its deal with Oaktree.

Oaktree agreed to commit up to US$1bn in aggregate over three years for mutually agreed upon “proved developed producing” (PDP) acquisitions with transaction valuations greater than US$250mln.

DGOC will match Oaktree’s investment on a dollar for dollar basis and will act as the sole operator of all assets acquired.

The deal will also feature a deal whereby DGOC will initially receive a 52.5% working interest in an asset for a 50.0% asset, leaving Oaktree with a 47.5% working interest. Upon achieving a 10.0% ungeared internal rate of return on its investment by acquisition tranche, DGOC’s ownership of the relevant acquisition will increase to 59.625%, leaving Oaktree with 40.375%.

The company will have first dibs on acquiring Oaktree’s interest when the latter decides to sell up so long as it matches the terms of the best offer for the interest.