Diversified Gas and Oil PLC Announces Interim Results
*BIRMINGHAM, AL / ACCESSWIRE / August 10, 2020 / *London-LSE quoted Diversified Gas & Oil PLC (LSE:DGOC); "DGO" or the "Company"), the U.S. based owner and operator of natural gas, natural gas liquids and oil wells as well as midstream assets, announces its Interim Results for the six months ended 30 June 2020.
Highlights
Key Highlights
· June 2020 exit rate net production of 109.0 MBoepd (653.8 MMcfepd)
· Exit rate net production of 18.7 MBoepd (112.0 MMcfepd) from the EQT Corporation ("EQT") and Carbon Energy ("Carbon") acquisitions completed in May 2020 (collectively, the "Acquisitions")
· 1H20 Legacy^1 assets maintained at ~70 MBoepd for 8^th consecutive quarter
· 1H20 average net production of 95.1 MBoepd (570.9 MMcfepd) (1H19: +26% vs 75.3 MBoepd; 2H19: +1% vs. 94.2 MBoepd)
· 1H20 Adjusted EBITDA^2 of $146 million (1H19: +11% vs $131 million; 2H19: +3% vs. $142 million)
· Net income of $18 million (1H19: -71% vs $62 million; 2H19: -51% vs $37 million)
· Net operating loss of $(31) million (1H19: -129% vs $108 million; 2H19: -142% vs $73 million) includes a $110 million non-cash charge to mark derivative contracts to fair value
· Net income also includes an offsetting $70 million benefit from federal well tax credits related to wells with production of less than 90 Mcf/day
· Cash derivative contract settlements of $83.5 million during the period significantly offset historically low commodity prices; Unsettled derivative contracts had a net current asset value of $61.5 million at 30 June 2020
· Declared 2Q20 interim dividend of $0.0375 per share (1Q20: $0.035), an increase of 7% reflecting the Board's confidence in the Company's outlook
· Total cash operating expenses, including total operating expenses and Adjusted General and Administrative^2 expenses, of $7.05/Boe ($1.17/Mcfe) (1H19: -15% vs $8.30/Boe; 2H19: -2% vs $7.24/Boe)
· Completed transition to the Premium Segment of the Main Market of the London Stock Exchange from AIM
· Completed upstream and midstream asset acquisitions from EQT ($125 million) and Carbon ($110 million) in May financed through successful $86 million (gross) share placing and $160 million (gross) amortising 10-year term loan underwritten by Munich Re Reserves Risk Financing, Inc. ("MRRF")
Other Financial Highlights
· Base Lease Operating Expense of $2.50/Boe ($0.42/Mcfe) (1H19: -34% vs $3.78/Boe; 2H19: -15% vs $2.93/Boe)
· 55% Cash Margin^2 in 1H20 (1H19: 54%; 2H19: 53%), supported by a $2.70/MMBtu average 1H20 natural gas hedge price
· 1H20 Free Cash Flow^2 of ~$120 million supports $47 million in distributed shareholder dividends and $16 million in share buybacks in the year to date
· 32% Free Cash Flow Yield^2 in 1H20 (1H19: 26%; 2H19: 26%)
· Closed a $200 million (gross) fully-amortising financing to refinance a portion of the Company's revolving credit facility
· June 2020 liquidity (including available cash) of $220 million reflective of a successful, full reaffirmation of the $425 million borrowing base
· Net Debt-to-Adjusted EBITDA^2 of 2.2x
Rusty Hutson, Jr., CEO of Diversified, commented:
"I'm pleased to report another successful period of stable production that recently surpassed the 100 MBoepd milestone, healthy cash generation funding an increasing dividend and prudent growth as we navigate a global pandemic and commodity price volatility. In traditional Diversified fashion, we have remained busy over the past several months, and as an essential services provider, our operations continue without interruption or negative impact from COVID while our teams work diligently to integrate the recent acquisition of assets from EQT and Carbon.
"Our field operations have continued to deliver with production from our Legacy assets essentially flat for the past eight consecutive quarters as they continue to execute our Smarter Well Management programme while they also work diligently to integrate the recently acquired assets from EQT and Carbon. Our finance team successfully funded the recent acquisitions and further strengthened the balance sheet with the closings of two secured, amortising financing transactions and an equity raise which combined totaled nearly $450 million in aggregate. Notably, our teams did all of this while supporting our successful transition from AIM to the Premium Segment of the London Stock Exchange.
"Our commitment to an opportunistic yet fiscally disciplined business strategy continues to deliver tangible results for our shareholders with nearly $150 million of adjusted EBITDA during the first half of the year, supported by a robust hedge portfolio and low operating costs that underpin a 55% cash operating margin including operating and all administrative cash costs. While others have been forced to cut or suspend their dividends over the past several months, the strength and durability of our cash flows allow us to not just sustain but to increase our second quarter dividend by 7% to 3.75 cents per share, wholly reflective of the confidence the Board has in the near-medium-term outlook for the business.
"As we enter the second half of 2020 with approximately $220 million of total liquidity, a healthy balance sheet and with a focused and efficient operation, we are well-positioned to capitalise on the opportunities these challenging times create, all with our unrelenting focus on creating long-term value for shareholders."
^1 Legacy assets defined as assets owned at 31 December 2018 and excluding the Company's 2019 and 2020 acquisitions of HG Energy, EdgeMarc Energy, EQT and Carbon.
^2 This non-IFRS alternative performance measure referenced throughout is defined and reconciled within the Company's Interim Report under the caption "Alternative Performance Measures".
Conference Call and Webcast
The Company will host a conference call and webcast on Monday, 10 August 2020 at 11:00 a.m. BST (5:00 a.m. CDT) to discuss the interim financial and operating results. To participate, dial international toll-free 800-756-3429 or US toll-free 877-407-5976. The conference call will webcast live at https://www.dgoc.com/news-events/ir-calendarevents and will be available as a replay, subsequent to the event.
A mid-year results presentation will be posted to the Company's website before the conference call and webcast. The presentation can be found at https://ir.dgoc.com/presentations.
*Company Contact: *Teresa Odom, VP Investor Relations | IR@dgoc.com | 205 408 0909
*DIVERSIFIED GAS & OIL PLC*
*Strategic Review*
*(Unaudited)*
*Focused Execution Creates Opportunities in a Challenging Environment*
I am pleased to provide shareholders of Diversified Gas & Oil PLC ("DGO" or the "Company") with an overview of another eventful period, during which, we:
· Uplisted to the Premium Segment of the Main Market at the London Stock Exchange;
· Completed two acquisitions (the "Acquisitions") for $235 million (gross) producing ~18,100 Boepd;
· EQT Corporation ("EQT") upstream assets ($125 million) producing ~9,000 Boepd;
· Carbon Energy ("Carbon") upstream assets ($110 million) producing ~9,100 Boepd; and
· Financed by
· $85 million (gross) equity raise; and
· $160 million ten-year fully-amortising term loan (the "Term Loan I") with Munich Re, underpinned by a long-term hedging programme.
· Refinanced a portion of our Credit Facility with a successful $200 million (gross) fully-amortising note ("ABS II Note") with Nuveen (investment manager of ESG-focused TIAA) as the lead investor, underpinned by a long-term hedging programme matching long-term assets with low-cost, long-term financing; and
· Solidified nearly $220 million in liquidity by completing the redetermination of the borrowing base of our Credit Facility with a successful re-affirmation of the $425 million base.
Collectively, these successes reflect our commitment to create long-term shareholder value through a relentless focus on:
· Maintaining a healthy balance sheet, strong liquidity and systematic debt repayment;
· Pursuing disciplined growth;
· Utilising our long-life, low -decline asset base to secure long-term hedges to solidify our cash flows; and
· Continuing to drive operational excellence that improves production, lowers costs and ultimately generates high cash margins to strengthen the visibility to consistent, reliable dividends even during periods of low commodity prices.
While our operations were essentially unaffected by the global COVID-19 pandemic, we have observed volatility in commodity prices and uncertainty for the broader economy. For financially healthy companies like DGO, these times provide rare opportunities for growth and to create long-term shareholder value through responsible, consistent execution of our clearly stated strategy.
Today, with an expanded base of low-decline wells across which to deploy our Smarter Well Management programmes, we remain focused on delivering impressive operational and financial results. Additionally, we remain diligent in our efforts to reduce leverage and maintain a strong financial profile, which we've enhanced by replacing interest-only Credit Facility debt with fully-amortising structures. Today, approximately two-thirds of our debt resides in these stable, declining structures, and we have once again demonstrated that our business model, supported by a proactive hedging policy, positions us to generate compelling margins and returns in future periods.
*Financial Results Overview*
For the six months ended 30 June 2020, we recorded net income of $18 million and Adjusted EBITDA[1] of $146 million. These results reflect average production of 95 MBoepd, including one month's contribution from the Acquisitions, which continues to benefit from our Smarter Well Management programme and continues to maintain our Legacy production at nearly 70 MBoepd. Historically low commodity prices drove a 23% decline in commodity revenue, which was offset by a 1,025% increase in our net cash settlements from commodity derivative contracts, demonstrating the strength of our robust hedging programme.
We also reported a gross profit of $30 million and a net operating loss of $31 million, reflective of the low commodity prices and non-cash $110 million charge to adjust our long-dated derivative contract portfolio to their estimated current market value. Our proactive hedging programme and low-cost operating structure sustained an operating Cash Margin^1 above 50%, since the second half of 2018. As we look out across the natural gas futures price curve, we're encouraged to see supply rebalancing and thus providing a foundation for higher prices. To reduce the volatility of our cash flows and to support our long-life, low-cost financing strategy, we utilise long-tenor hedging to provide price protection on a portion of our production for up to 10 years.
Of course, while we benefit from rising prices on the unhedged volumes we produce and sell, higher prices can generate non-cash mark-to-market valuation adjustments on existing derivative contracts, particularly those that are long-dated with significant time-related option value. As we see the futures natural gas price curve, signaling higher prices, certain of our long-term derivatives sit in a liability position.
While at 30 June 2020, our commodity derivative contract portfolio reflects a net $40 million liability, when we compare the futures price curve to our actual hedged prices, the cash settlement value of the portfolio is a positive $31 million, which will positively impact our cash flow. This analysis demonstrates that the contracts' option value over such a long horizon drives the estimated net liability balance. As time passes and the option time value declines, absent changes to the future price curve, this liability will decline with no impact to cash flow.
During the first half of 2020, we received approximately $84 million from our derivative contract settlements, and they are poised to continue positively contributing to our cash flow, with a $62 million net current asset value. Net income also includes the benefit of significant federal tax credits we earn from producing gas in a low price environment that sustains hundreds of jobs and pays millions of dollars of production taxes into the local economies in which we operate. These tax benefits of approximately $70 million in 2020, not only offset much of the current-period non-cash unsettled derivative contracts valuation adjustment, but more importantly may offset significant federal cash taxes for several years based on current earnings levels.
*Corporate Milestones*
Reflective of a differentiated business model, we successfully secured both debt and common equity financing during a time when these markets have been firmly closed to most U.S. producers. We used this access to further strengthen our balance sheet, positioning us for continued success in the current environment.
We began the year welcoming Credit Suisse, Goldman Sachs and Morgan Stanley to the lending syndicate, increasing our Credit Facility lending group to 17 banks, and further enhancing the suite of available hedging counterparties to protect our cash flow. We rounded out the half-year in the midst of a turbulent market environment with this group of banks collectively reaffirming our borrowing base at $425 million, whilst many other producers saw their facilities reduced as the result of lower commodity prices. Our lenders' reaffirmation is a testament to the quality of our low-decline, long-life reserves and their confidence in our team's ability to continue the successful progression of our strategy.
Beyond our bank syndicate, in April 2020, we announced the ABS II Note, principally anchored by ESG-focused investors like Nuveen, the investment manager of TIAA. The ABS II Note is fully-amortising over 8.5 years and has a 5.25% fixed -rate coupon demonstrating our commitment to prudently use our Free Cash Flow^1 to repay debt ratably over time supported by our robust hedging portfolio and long-life, low-decline assets.
In May, we funded a portion of the Acquisitions with the Term Loan I, underwritten and funded by Munich Re Reserve Risk Financing, Inc. "(MRRF"), a wholly-owned subsidiary of Munich Re. While its 6.5% fixed coupon is slightly higher than the ABS II Note, and reflects a widening in credit spreads during the pandemic, the rate supports an accretive addition of assets to our asset portfolio and benefits from its own 10-year hedge portfolio to protect the financed assets' underlying cash flows. MRRF's financing of the secured term loan marked the second time in seven months that it invested in our business model, increasing their investment in Diversified to $360 million including its investment in our inaugural $200 million fully-amortising note ("ABS I Note") in November 2019.
To complement the Term Loan I and complete our funding of the Acquisitions, we completed a successful equity raise of approximately $85 million from a broadening base of institutional investors.
During the last nine months, we successfully completed three financings, the ABS I Note, ABS II Note and Term Loan I, that refinanced at more compelling rates than Credit Facility borrowings, thus reducing our reliance on the bank syndicate and eliminating redetermination risk. As a result, approximately 72% of our debt now sits within fully-amortising structures over an eight to ten year period, which provides visibility to our declining leverage and eliminates the refinancing risk associated with bullet maturities. We have proactively positioned ourselves with a strong balance sheet and supportive group of lenders to pursue growth opportunities.
Turning to the Acquisitions, for $112 million (net of customary purchase price adjustments to the effective date) we acquired from EQT approximately 900 net operated conventional and unconventional wells along with the related infrastructure. Due to the geographic concentration of these wells within our own existing operational footprint, we have been able to leverage our talented Legacy field personnel to manage the assets, successfully folding these wells into our portfolio. The EQT assets also included 13 wells classified as proved, developed non-producing, or PDNP, which offer additional upside to the transaction since we allocated no value to these wells in our valuation. We are currently evaluating these wells to determine the time and costs required to turn them to production. Notably, this purchase marks the second package of wells we purchased from EQT (the first being the $575 million largely conventional package of wells in mid-2018) demonstrating the value of our established, in-basin relationships as EQT and others pursue strategic initiatives such as asset sales to reduce debt, focusing their operations around core areas, or both.
The Acquisitions also included approximately 6,100 conventional wells and 4,700 miles of midstream assets from Carbon for cash consideration of $98 million (net of customary purchase price adjustments to the effective date). Strategically, the addition of these midstream assets expands our midstream system to nearly 17,000 miles and enhances our ability to (1) control the flow of our own production, (2) access premium priced markets, and (3) generate third-party revenue by transporting others' production on the system. We recognised immediate synergies from the acquisition of these geographically proximate assets by retaining approximately 80% of the existing Carbon workforce, reducing associated payroll expense by approximately 25%.
The Acquisitions in total add approximately 6,900 conventional and some 70 unconventional producing wells to our Appalachian portfolio. The conventional wells further establish our presence throughout the basin, uniquely allowing us to rapidly scale our operations. Adding the unconventional wells to the portfolio with their higher per-well production rates allows us to leverage the fixed costs of an already assembled workforce and further reduce unit-level operating costs.
Having closed on the Acquisitions, we now turn our attention to the successful integration of these assets into our Smarter Well Management Programme with its proven ability to enhance well productivity while reducing unit-level expenses. Inclusive of these newly acquired assets, we exited the mid-year with net daily production of 109 MBoepd.
*Strong Cash Flow Translates to Dividends and Liquidity*
Our focus on acquiring assets from which we can generate healthy Free Cash Flow^1, even in an environment of lower commodity pricing, remains central to our business model. Our discipline in properly valuing acquired assets, protecting the associated cash flows with an opportunistically placed hedge portfolio and proactively working to enhance the assets' productivity and reduce expenses, ensures their accretion to earnings and dividends. This period was no exception as we maintained a strong Cash Margin^1 of 55% through the six months ended 30 June 2020, exited the half-year with a Free Cash Flow Yield^1 of 32% and increased our 2Q20 dividend by 7% over the 1Q20 dividend.
Our long-life, low-decline assets require minimal ongoing capital expenditures, thus generating significant Free Cash Flow^1. Since our 2017 IPO, we've consistently distributed approximately 40% of this Free Cash Flow^1 to our shareholders through our stable dividend with a similar amount allocated to debt repayments. Over the same time period, our dividends paid and declared are approximately $218 million and total $166 million paid through June 2020. With a consolidated Trailing Twelve Month ("TTM") Net Debt-to-Adjusted EBITDA^1 at 30 June 2020 of 2.19x and approximately $220 million in liquidity, inclusive of cash and availability on our Credit Facility, we are well-positioned to respond to opportunities that create long-term shareholder value.
During this period of economic uncertainty stemming from the COVID-19 pandemic, companies across all sectors have cut, suspended or eliminated their dividends, and volatile commodity prices have increased the strain on companies within our sector. Our sustained dividend differentiates us from our peers, and in the first six months of this year we have paid more than $47 million in dividends. Further, differentiating our model and following another operating period of consistent and strong cash flows, our Board is pleased to declare an interim dividend of 3.75 cents per share in respect of the three-month period ended 30 June 2020, which as previously mentioned is 7% higher than the immediately preceding period per share dividend.
*Commodity Volatility*
For the six months ended 30 June 2020, we recorded net income of $18 million and Adjusted EBITDA^1 of $146 million. Net income was largely reflective of a $110 million non-cash loss on unsettled mark-to-market derivatives partially offset by $70 million in federal well tax credits while Adjusted EBITDA^1 was primarily driven by the strength of our hedge portfolio and high-margin assets.
Commodity price volatility continued during the first half of 2020 when realised natural gas prices (unhedged) averaged $1.67/Mcf, well below that of our realised natural gas prices (hedged) of $2.34/Mcf for the period. The strength of our well-placed commodity hedges contributed to a total $84 million settled hedge gain for the period and drove an Adjusted EBITDA^1 of $146 million. Current forward commodity prices have since begun to rebound, driving natural gas prices in excess of our longer tenor portfolio hedged prices and generating a $110 million non-cash mark-to-market loss on unsettled derivatives as of 30 June 2020. The non-cash loss on derivatives adversely impacted net income of $18 million for the period. The rebound in commodity prices, however, does bode well for our future revenue as future unhedged production stands to benefit from higher market prices.
Our relentless focus on expense management has served to bolster our already lean cost structure and to meaningfully offset lower commodity prices as experienced in the first half of 2020. Our daily operational goals focus on "Efficiency-every dollar counts" and "Production-every unit counts" and empower our employees to seek out and implement cost reducing processes and activities so we can thrive in any commodity price environment and continuously return value to our shareholders.
Our focus on expense management is only half the story as we strive to fully enhance margins with a proactive and consistent hedging policy. Our prudent risk management practices result in timely layering in short and long-term hedge protection in the form of financial NYMEX swaps, collars and basis swaps. We strategically execute NYMEX hedges when the respective prices move higher, or add basis hedge protection when prices move lower, and basis differentials are often compressed. Our long-life, Free Cash Flow asset portfolio dictates a longer-term approach to hedging than most of peers in our industry. The longer-tenor hedges in our portfolio not only insulate our fully-amortising debt from commodity price volatility, they also add durability to our cash flows and support a consistently strong dividend to our shareholders.
We also seek to minimise the impact of lower commodity prices with our vertically integrated upstream and midstream systems by strategically moving gas production to alternative accessible markets. Our midstream system provides important flow assurance and allows us to nimbly shift transportation of our production to more attractively priced markets to capture value beyond the wellhead.
*Continued Operational Excellence*
We are living in an unprecedented, challenging time with the global COVID-19 pandemic which is having a substantial impact to people and economies around the world. I would like to thank our more than 1,000 employees at DGO who have quickly adapted to these challenging times to ensure the uninterrupted production of low-cost, reliable energy for the communities in which we operate. It is a testament to the daily commitment and care of our family that we have managed through this time with unwavering perseverance and dedication to deliver operational excellence.
With a midstream system that now spans approximately 17,000 miles, we similarly expand our "Acquire-Optimise-Produce" business model to be "Acquire-Optimise-Produce-Transport' to better reflect our strict focus on cost discipline and operational efficiencies. While we fully integrate our newly acquired EQT and Carbon assets, we continue to engage in daily activities in both our upstream and midstream operations that seek to increase production, minimise costs, and maximise revenue - all of which contribute to our ongoing ability to fund dividends and reduce leverage. Some of the many examples of these activities within our midstream system include:
· Transporting gas production to premium-priced markets and re-routing Btu-rich gas from NGL processing plants during periods of low NGL prices to maximise realised prices;
· Right-sizing and eliminating redundant or leased compression equipment to help ensure flow control and optionality in addition to lowering operating expenses and increasing production; and
· Gathering and transporting third-party gas volumes to optimise assets and further supplement revenue.
*ESG and Corporate Responsibility*
Environment and Sustainability
As announced in our full-year results and evidenced by our inaugural Sustainability Report in March of this year, our Board and Management team continue to place significant focus on ESG. We believe wisely stewarding the resource already developed by our industry is central to ESG. Accordingly, we've placed particular emphasis on effectively managing later-life producing wells to fully realise their productive lives before safely and responsibly retiring those wells.
With approximately 99% of our total production coming from natural gas and NGLs, we are supporting the U.S.' drive to reduce carbon dioxide emissions. Approximately 37% of total U.S. natural gas supply comes from Appalachia, and that production continues to be a major contributor to the consistent and substantial reductions in U.S. carbon dioxide emissions as natural gas fills the market share lost by coal and oil. The positive environmental benefits of increased natural gas consumption for energy generation are evident when you consider that natural gas emits approximately 50% less carbon dioxide emissions compared to coal.
Our business model is built on the concept of sustainability - we acquire neglected or non-core assets and then focus on optimising their productivity or usefulness until the end of their natural lives. This model works for both our upstream and midstream assets where we consistently engage in smarter "asset" management activities that not only reduce unit operating costs, create efficiencies and increase margins but also eliminate potential associated emissions that may be present. We recently enhanced our emission detection efforts with the implementation of multiple hand-held leak detection devices capable of detecting flows as small as one part per million of methane in the air. While these devices serve to aid in the detection of carbon emissions, they do not replace the daily efforts our well tenders apply in inspections of the wells, related equipment or midstream assets during their routine well site visits.
We also serve as good stewards of the environment in our cooperative agreements for the retirement of wells within our operating states. In March 2020, we extended our original five-year definitive asset retirement agreement with the state of Ohio by an additional five years, now covering asset retirement activities through the period ending 31 December 2029. This action brings all our retirement agreements, alongside those in Kentucky, West Virginia and Pennsylvania, to a minimum of 10 years - establishing ourselves as a long-term partner with our primary states of operation and providing us with operational and financial stability and visibility in regard to the plugging programme.
In the year to date, we have retired 52 wells at an average cost of $24,779 per well as compared to our expected average cost to retire of $25,054 per well, in line with our cost estimates and reflective of our diligence to plug wells safely and efficiently. These retirements represent approximately 60% of our current year retirement obligation as per the agreements. Since inception of our retirement agreements with the states in 2018, we have now retired 192 wells at an average cost of $23,463 per well.
Social
During this ongoing COVID-19 pandemic, we remain fully committed to the health and safety of our employees and the citizens of the communities in which we operate. We are pleased to report that though this unprecedented time has been economically challenging for many individuals and companies, DGO has not experienced similar difficulty and instead has incurred no personnel layoffs nor reduced the salaries or benefits paid to any of our employees. In fact, as part of our continued growth through acquisitions, we welcomed 124 employees to the Diversified family who came from the Carbon acquisition and we extended the same excellent health and wellness benefits to these newest team members. Additionally, as part of our expanding employee resources, our new team members are also eligible to participate in our recently adopted company-wide educational assistance programme which encourages continuing education in job-related areas or that may lead to promotional opportunities within our company.
Governance
As an acquisitive company, we've experienced tremendous change and growth since our IPO on AIM in February 2017, spending during this time nearly $1.7 billion to acquire accretive, cash generative assets that have allowed us to build both scale and operating synergies. The AIM was a tremendous springboard for us in our pursuit to establish and build our position on the London market through the successful execution of a clearly defined growth strategy. As a result of that growth and after just three years, we announced last year our intention to obtain admission to the Premium Segment of the London Stock Exchange, and we saw that goal come to fruition in May with our move up to the Main Market. We believe the move to the Main Market, among many benefits, provides a better suited and enlarged funding platform to continue the execution of our growth plan that is driven by both a disciplined fiscal policy and rewarding dividend policy.
Our step up to the Main Market came under the vision and leadership of a governance structure that was also transforming. Last year, we increased the composition, independence and diversity of our Board with the addition of three new independent non-executive Directors. We named an independent Board Chairman and Lead Director, and also appointed independent non-executive Directors to chair the Audit & Risk, Remuneration, and newly created Sustainability & Safety committees of the Board. We further appointed new independent legal advisors, accounting auditors and reserve auditors. A move to the Main Market inherently brings with it a commitment to strong governance, reporting and operating standards, and we believe these Board and advisory changes will support that commitment as we progress our strategy.
*Positive Outlook*
Despite the current market backdrop, we are well-positioned to step into the second half of 2020 and continue to do what we do best - engage in operational activities that minimise cost and maximise production; create value through opportunistic hedging practices and value-adding financing arrangements; and, strive to maintain a clear line of sight to cash flows that provide strong shareholder returns and drive debt reductions. As near-term priorities, we will continue to integrate the EQT and Carbon assets and identify value-deriving smarter "asset" management activities for both the existing and newly acquired upstream and midstream assets.
This lingering period of low commodity prices has not been helpful for our natural gas and oil industry peers who have traditionally focused on expensive growth through the drill bit and now find themselves over-leveraged and with near-term maturities that must be satisfied. Recognising the need to lower costs and generate positive cash flow, those companies are now being forced to reevaluate their portfolios and determine what assets they can trim to best re-fortify their balance sheets. As these companies work to realign their forward growth and financial strategies, we believe it will provide ample opportunity for continued complementary and accretive growth for us, and we continue to look for such opportunities.
*Financial Review*
*Six Months Ended*
*30 June 2020*
*30 June 2019*
*Change*
*% Change*
*Net production*
Natural gas (MMcf)
94,043
73,196
20,847
28
%
NGLs (MBbls)
1,453
1,313
140
11
%
Oil (MBbls)
190
189
1
1
%
*Total (MBoe)*
*17,317 *
*13,701 *
*3,616 *
*26 *
*%*
Average daily production (Boepd)
95,148
75,696
19,452
26
%
% Gas (Boe basis)
91
%
89
%
*Average realised sales price*
*(excluding impact of derivatives settled in cash)*
Natural gas (Mcf)
$
1.67
$
2.66
$
(0.99)
(37)
%
NGLs (MBbls)
4.84
14.04
(9.20)
(66)
%
Oil (MBbls)
36.33
53.16
(16.83)
(32)
%
*Total (MBoe)*
*$*
*9.86 *
*$*
*16.30 *
*$*
*(6.44)*
*(40)*
*%*
*Average realised sales price*
*(including impact of derivatives settled in cash)*
Natural gas (Mcf)
$
2.34
$
2.64
$
(0.30)
(11)
%
NGLs (MBbls)
16.76
21.08
(4.32)
(20)
%
Oil (MBbls)
51.87
52.96
(1.09)
(2)
%
*Total (MBoe)*
*$*
*14.69 *
*$*
*16.84 *
*$*
*(2.15)*
*(13)*
*%*
*Revenue (in thousands)*
Natural gas
$
156,900
$
194,810
$
(37,910)
(19)
%
NGLs
7,029
18,439
(11,410)
(62)
%
Oil
6,903
10,048
(3,145)
(31)
%
*Total commodity revenue*
*$*
*170,832 *
*$*
*223,297 *
*$*
*(52,465)*
*(23)*
*%*
Other revenue
663
1,396
(733)
(53)
%
Midstream revenue
13,383
12,765
618
5
%
*Total revenue*
*$*
*184,878 *
*$*
*237,458 *
*$*
*(52,580)*
*(22)*
*%*
*Gains (losses) on derivative settlements (in thousands)*
Natural gas
$
63,233
$
(1,780)
$
65,013
(3,652)
%
NGLs
17,321
9,241
8,080
87
%
Oil
2,952
(39)
2,991
(7,669)
%
*Net gain (loss) on derivative settlements*
*$*
*83,506 *
*$*
*7,422 *
*$*
*76,084 *
*1,025 *
*%*
*Per Boe metrics*
Realised price (including impact of derivatives settled in cash)
$
14.69
$
16.84
$
(2.15)
(13)
%
Other revenue
0.81
1.03
(0.22)
(21)
%
Base lease operating expense
2.50
3.78
(1.28)
(34)
%
Gathering and compression, owned
1.41
1.50
(0.09)
(6)
%
Adjusted G&A^1
1.34
1.35
(0.01)
(1)
%
Production taxes
0.45
0.53
(0.08)
(15)
%
Gathering and transportation, third party
1.35
1.13
0.22
19
%
*Operating margin*
*$*
*8.45 *
*$*
*9.58 *
*$*
*(1.13)*
*(12)*
*%*
% Operating margin
54.5
%
53.6
%
Production, Revenue and Hedging
Total revenue (unhedged) in 1H20 of $184.9 million decreased 22.1% from $237.5 million reported for 1H19. This decline is primarily due to a 39.5% decrease in the average realised sales price. This was offset in part by 26.4% higher production. We ended 1H20 with net sales of approximately 17,317 MBoe versus prior year sales of approximately 13,701 MBoe. The increase in production was driven by the full integration of the previously acquired HG Energy and EdgeMarc assets in 2019 and the Carbon and EQT assets in May 2020. Average realised sales prices dropped as a result of decreases in commodity prices. The average Henry Hub quoted price for 1H20 was $1.83 per MMBtu versus $2.89 per MMBtu for 1H19. The average Mont Belvieu quoted price for 1H20 was $18.65 per barrel versus $27.58 per barrel for 1H19. The average WTI quoted price for 1H20 was $37.01 per barrel versus $57.33 per barrel in 1H19.
Refer to Note 3 in the Notes to the Group Interim Financial Information for additional information regarding our acquisitions.
Commodity Revenue (Unhedged)
The following table is intended to reconcile the change in commodity revenue (excluding the impact of hedges settled in cash) for 1H20 by reflecting the effect of changes in volume and in the underlying prices (in thousands):
*Natural gas*
*NGLs*
*Oil*
*Total*
*Commodity revenue for the six months ended 30 June 2019*
*$*
*194,810 *
*$*
*18,439 *
*$*
*10,048 *
*$*
*223,297 *
Volume increase (decrease)
55,453
1,966
53
57,472
Price increase (decrease)
(93,363)
(13,376)
(3,198)
(109,937)
Net increase (decrease)
(37,910)
(11,410)
(3,145)
(52,465)
*Commodity revenue for the six months ended 30 June 2020*
*$*
*156,900 *
*$*
*7,029 *
*$*
*6,903 *
*$*
*170,832 *
To manage our cash flows in a volatile commodity price environment, we utilise hedges. See the tables below for our hedging impact on revenue and average realised prices (in thousands, except per unit data):
*Six Months Ended 30 June 2020*
*Natural gas*
*NGLs*
*Oil*
*Total Commodity*
*Revenue*
*Realised $*
*Revenue*
*Realised $*
*Revenue*
*Realised $*
*Revenue*
*Realised $*
*Excluding hedge impact*
*$*
*156,900 *
*$*
*1.67 *
*$*
*7,029 *
*$*
*4.84 *
*$*
*6,903 *
*$*
*36.33 *
*$*
*170,832 *
*$*
*9.86 *
Hedge impact
63,233
0.67
17,321
11.92
2,952
15.54
$
83,506
4.82
*Including hedge impact^1*
*$*
*220,133 *
*$*
*2.34 *
*$*
*24,350 *
*$*
*16.76 *
*$*
*9,855 *
*$*
*51.87 *
*$*
*254,338 *
*$*
*14.69 *
*Six Months Ended 30 June 2019*
*Natural gas*
*NGLs*
*Oil*
*Total Commodity*
*Revenue*
*Realised $*
*Revenue*
*Realised $*
*Revenue*
*Realised $*
*Revenue*
*Realised $*
*Excluding hedge impact*
*$*
*194,810 *
*$*
*2.66 *
*$*
*18,439 *
*$*
*14.04 *
*$*
*10,048 *
*$*
*53.16 *
*$*
*223,297 *
*$*
*16.30 *
Hedge impact
(1,780)
(0.02)
9,241
7.04
(39)
(0.21)
$
7,422
0.54
*Including hedge impact^1*
*$*
*193,030 *
*$*
*2.64 *
*$*
*27,680 *
*$*
*21.08 *
*$*
*10,009 *
*$*
*52.96 *
*$*
*230,719 *
*$*
*16.84 *
Refer to Note 16 in the Notes to the Group Interim Financial Information for additional information regarding our hedging portfolio.
Expenses
(In thousands, except per unit data)
*Six Months Ended*
*Per*
*Per*
*Total Change*
*Per Boe Change*
*30 June 2020*
*Boe*
*30 June 2019*
*Boe*
*$*
*%*
*$*
*%*
Base lease operating expense ^(a)
$
43,368
$
2.50
$
51,777
$
3.78
$
(8,409)
(16)
%
$
(1.28)
(34)
%
Production taxes ^(b)
7,748
0.45
7,277
0.53
471
6
%
(0.08)
(15)
%
Gathering and compression ^(c)
24,380
1.41
20,552
1.50
3,828
19
%
(0.09)
(6)
%
Gathering and transportation ^(d)
23,455
1.35
15,523
1.13
7,932
51
%
0.22
19
%
*Total operating expense*
*$*
*98,951 *
*$*
*5.71 *
*$*
*95,129 *
*$*
*6.94 *
*$*
*3,822 *
*4 *
*%*
*$*
*(1.23)*
*(18)*
*%*
Adjusted G&A^1^(e)
23,129
1.34
18,470
1.35
4,659
25
%
(0.01)
(1)
%
Non-recurring and/or non-cash G&A ^(f)
11,567
0.67
3,212
0.23
8,355
260
%
0.44
191
%
*Total operating and G&A expense*
*$*
*133,647 *
*$*
*7.72 *
*$*
*116,811 *
*$*
*8.53 *
*$*
*16,836 *
*14 *
*%*
*$*
*(0.81)*
*(9)*
*%*
Depreciation and depletion
55,837
3.22
45,342
3.31
10,495
23
%
(0.09)
(3)
%
*Total expenses*
*$*
*189,484 *
*$*
*10.94 *
*$*
*162,153 *
*$*
*11.84 *
*$*
*27,331 *
*17 *
*%*
*$*
*(0.90)*
*(8)*
*%*
1. Base lease operating expense is defined as the sum of employee and benefit expenses, well operating expense (net), automobile expense and insurance cost.
2. Production taxes include severance and property taxes. Severance taxes are generally paid on produced natural gas, natural gas liquids and oil production at fixed rates established by federal, state or local taxing authorities. Property taxes are generally based on the taxing jurisdictions' valuation of our oil and gas properties and midstream assets.
3. Gathering and compression expenses are daily costs incurred to operate our owned midstream assets inclusive of employee and benefit expenses.
4. Gathering and transportation expenses are daily costs incurred to gather, process and transport the Group's natural gas, natural gas liquids and oil.
5. Adjusted general and administrative expense ("Adjusted G&A")^1 includes payroll and benefits for our corporate staff, costs of maintaining corporate offices, costs of managing our production operations, franchise taxes, public company costs, non-cash equity issuance, fees for audit and other professional services, and legal compliance.
6. Non-recurring and/or non-cash general and administrative expense ("Non-recurring and/or non-cash G&A") includes costs related to acquisitions, our uplist to the main market of the LSE, non-cash equity compensation and one-time projects.
As a result of our significant, value-focused growth, per unit expenses decreased 8%, or $0.90 per Boe as a result of the following:
· Lower per Boe base lease operating expenses, which declined 34%, or $1.28 per Boe, through a mixture of disciplined cost reductions and economies of scale whereby fixed operating costs were spread across a larger base of producing assets;
· Lower per Boe production taxes, which declined 15%, or 0.08 per Boe, primarily due to a decrease in severance taxes as a result of a decrease in revenue. Declines also resulted from taxes on our midstream assets, that are generally fixed, being spread across a larger base of producing assets; and
· Lower per Boe gathering, processing and compression expenses, which declined 6%, or 0.09 per Boe, primarily due to economies of scale whereby fixed operating costs for our owned midstream assets were spread across a larger base of producing assets.
Partially offsetting these per Boe declines were increases due to:
· Higher per Boe gathering and transportation due to third-party transportation expense related to the HG Energy and EdgeMarc assets acquired in April 2019 and September 2019, respectively;
· Higher Adjusted G&A^1 as a result of investments made in staff and systems to support our growth; and
· Higher non-recurring and/or non-cash G&A due to costs associated with the uplist to the main market of the LSE, expenses related to the Carbon and EQT acquisitions, and expenses for a one-time hedge portfolio restructuring.
Refer to Note 3 in the Notes to the Group Interim Financial Information for additional information regarding our acquisitions.
Derivative Financial Instruments
We recorded the following gain (loss) on derivative financial instruments in the Consolidated Statements of Comprehensive Income for the periods presented:
(In thousands)
*Six Months Ended*
*30 June 2020*
*30 June 2019*
*$ Change*
*% Change*
Net gain (loss) on derivative settlements ^(a)
$
83,506
$
7,422
$
76,084
1025
%
Gain on foreign currency hedge
-
4,120
(4,120)
(100)
%
*Total gain (loss) on settled derivative instruments*
*$*
*83,506 *
*$*
*11,542 *
*$*
*71,964 *
*623 *
*%*
Gain (loss) on fair value adjustments of unsettled financial instruments ^(b)
(109,680)
21,252
(130,932)
(616)
%
*Total gain (loss) on derivative financial instruments*
*$*
*(26,174)*
*$*
*32,794 *
*$*
*(58,968)*
*(180)*
*%*
1. Represents the cash settlement of hedges that settled during the period.
2. Represents the change in fair value of financial instruments net of removing the carrying value of hedges that settled during the period.
Total loss on derivative financial instruments of $26.2 million in 1H20 decreased $59.0 million compared to a gain of $32.8 million in 1H19, primarily due to a loss of $109.7 million on fair value adjustments of unsettled financial instruments in 1H20, a decrease of $130.9 million, as compared to a gain of $21.3 million in 1H19. Offsetting the loss was a gain of $83.5 million attributable to derivative instruments settled in cash in 1H20, an increase of $72.0 million over 1H19.
Refer to Note 16 in the Notes to the Group Interim Financial Information for additional information regarding our derivative financial instruments.
Finance Costs
(In thousands)
*Six Months Ended*
*30 June 2020*
*30 June 2019*
*$ Change*
*% Change*
Interest expense, net of capitalised and income amounts
$
17,476
$
15,676
$
1,800
11
%
Amortisation of deferred finance cost
3,515
1,930
1,585
82
%
Other
421
2
419
20,950
%
*Total finance costs*
*$*
*21,412 *
*$*
*17,608 *
*$*
*3,804 *
*22 *
*%*
Interest expense on borrowings of $17.5 million in 2020 increased $1.8 million compared to $15.7 million in 2019, primarily due to the increase in borrowings used to fund our previously mentioned acquisitions. As of 30 June 2020 and 2019, total borrowings were $771.1 million and $625.2 million, respectively. The weighted average interest rate on borrowings was 4.6% for 1H20 as compared to 5.2% for 1H19.
Refer to Notes 3 and 14 in the Notes to the Group Interim Financial Information for additional information regarding our acquisitions and borrowings, respectively.
Taxation
The effective tax rate is calculated on the face of the Statements of Comprehensive Income by dividing Income (loss) before taxation by the amount of recorded Income tax benefit (expense) as follows:
*Six Months Ended*
*30 June 2020*
*30 June 2019*
*$ Change*
*% Change*
*Income (loss) before taxation*
*$*
*(59,227)*
*$*
*84,047 *
*$*
*(143,274)*
*(170)*
*%*
Income tax benefit (expense)
77,712
(21,881)
99,593
(455)
%
*Effective tax rate*
*131.2 *
*%*
*26.0 *
*%*
*105 *
*%*
The differences between the statutory US federal income tax rate and the effective tax rates are summarised as follows:
*Six Months Ended*
*30 June 2020*
*30 June 2019*
Expected tax at statutory US federal income tax rate
21.0
%
21.0
%
State income taxes, net of federal tax benefit
3.8
%
5.0
%
Federal credits
108.5
%
(4.5)
%
Other, net
(2.1)
%
4.5
%
*Effective tax rate*
*131.2 *
*%*
*26.0 *
*%*
We reported a tax benefit of $77.7 million for 1H20, an increase of $99.6 million, compared to expense of $21.9 million for 1H19. The resulting effective tax rates for 1H20 and 1H19 were 131.2% and 26.0%, respectively. The effective tax rate is primarily impacted by recognition of the federal well tax credit available to qualified producers in 2020 due to the low commodity pricing environment.
Refer to Note 7 in the Notes to the Group Interim Financial Information for additional information regarding Taxation.
EPS and Adjusted EBITDA^1
We reported a loss before taxation of $59.2 million in 1H20 compared to income of $84.0 million in 1H19, a decrease of 170%, and reported statutory income for 1H20 per diluted ordinary share of $0.03 compared to income of $0.10 per diluted ordinary share in 1H19. However, when adjusted for certain non-recurring and/or non-cash items and similar items, we reported Adjusted EBITDA^1 (hedged) per diluted ordinary share of $0.22, consistent with the prior year's $0.22. Our Adjusted EBITDA^1 (hedged) for 1H20 was $146.3 million, a 11% increase from $131.3 million in 1H19.
Refer to Notes 8 and 6 in the Notes to the Group Interim Financial Information for additional information regarding our EPS and Adjusted EBITDA^1, respectively.
Liquidity and Capital Resources
Our principal sources of liquidity have historically been cash generated from operating activities and, to the extent necessary, commitments available under our credit facility. We monitor our working capital to ensure that the levels remain adequate to operate the business. In addition to working capital management, we have a disciplined approach to allocating capital resources by focusing on flexible assets, capital modification and re-use, when and where appropriate, and managing our fixed costs, all of which support overall cash flow generation in our business operations.
(In thousands)
*Six Months Ended*
*30 June 2020*
*30 June 2019*
*$ Change*
*% Change*
Net cash provided by operating activities
$
123,359
$
130,541
$
(7,182)
(6)
%
Net cash used in investing activities
(231,396)
(407,193)
175,797
(43)
%
Net cash provided by financing activities
113,091
275,280
(162,189)
(59)
%
*Net change in cash and cash equivalents*
*$*
*5,054 *
*$*
*(1,372)*
*$*
*6,426 *
*(468)*
*%*
Net Cash Provided by Operating Activities
Net cash generated by operating activities decreased by $7.2 million, or 6%, to $123.4 million in 1H20 from $130.5 million in 1H19. The change in operating activities was predominantly attributable to the following:
· A decrease in revenue, offset by an increase in settlements of hedges;
· An increase in certain operating expenses related to acquired properties;
· An increase in Adjusted G&A^1 as a result of investments made in staff and systems to support our growth;
· An increase in non-recurring and/or non-cash G&A due to costs associated with the uplist to the main market of the LSE, expenses related to the Carbon and EQT acquisitions, and hedge portfolio restructuring costs; and
· A change related to the timing of working capital payments and receipts.
Production, realised prices, operating expenses, and general and administrative expenses are discussed above in the Financial Review. Refer to Notes 3 and 16 in the Notes to the Group Interim Financial Information for additional information regarding our acquisitions and derivatives, respectively.
Net Cash Used in Investing Activities
Net cash used in investing activities decreased by $175.8 million, or 43%, to $231.4 million in 1H20 from $407.2 million in 1H19. The change in net cash used in investing activities was primarily attributable to the following:
· For 1H20, we paid purchase consideration of approximately $103.6 million and $119.4 million for the Carbon and EQT acquisitions, respectively. For 1H19, we paid a purchase consideration of $384.0 million for the HG Energy acquisition.
Refer to Note 3 in the Notes to the Group Interim Financial Information for additional information regarding our acquisitions.
Net Cash Provided by Financing Activities
Net cash provided by financing activities decreased by $162.2 million, or 59%, to $113.1 million in 1H20 from $275.3 million in 1H19. The change in net cash provided by financing activities was primarily attributable to the following:
· During 1H20 our Credit Facility activity resulted in net repayments of $225.4 million versus net proceeds of $119.9 million in 1H19;
· Proceeds from borrowings, net of repayments, on our new debt facilities was $344.2 million, an increase of $336.9 million as compared to 1H19;
· A decrease of $140.3 million in proceeds from an equity issuance in 1H20 that raised $81.6 million as compared to $221.9 million raised 1H19.
· An increase of $10.9 million in dividends paid in 1H20 as compared to 1H19; and
· A decrease of $3.5 million in repurchases of shares in 1H20 as compared to 1H19.
Refer to Notes 9, 12 and 14 in the Notes to the Group Interim Financial Information for additional information regarding our dividends, share capital and borrowings, respectively.
Principal Risks and Uncertainties
The directors have reconsidered the principal risks and uncertainties we face, particularly in relation to COVID-19. The directors consider that the principal risks and uncertainties published in the Annual Report for the year ended 31 December 2019 remain appropriate. The risks and associated risk management processes, including financial risks, can be found in our 2019 Annual Report, which is available in the Investor Resources section of our website at www.dgoc.com.
The risks referred to and which could have a material impact on our performance for the remainder of the current financial year relate to:
· Managing growth;
· Commodity price volatility;
· Market risk;
· Liquidity risk; and
· Environmental and regulatory risk.
COVID-19
The COVID-19 pandemic has brought considerable change to the risk landscape in the first half of the year, increasing the impact of many of our principal risks and creating uncertainty in how the future risk landscape will unfold. We have reassessed all of our principal risks and, where necessary, we have implemented further mitigation activities. COVID-19 has severely impacted our industry particularly when considered in connection with the decline in oil, gas, and NGLs prices in 2020. However despite this negative trend in the industry, COVID-19 has resulted in limited direct disruption to our ability to operate, and our unique business model has allowed us to continue to grow and deliver shareholder returns.
COVID-19 also has the potential to be a health and safety risk to our employees. To help safeguard our employees, we responded proactively by issuing personal protective equipment ("PPE") guidance, establishing social distancing policies and supporting remote working environments where possible. We have also closely monitored guidance issued by state and local governments as well as the Center for Disease Control and Occupational Health and Safety Administration to ensure we are compliant with all regulatory authorities. Our business model also naturally lends itself to a socially distant operating environment provided our employees are most commonly working in small teams in remote areas when servicing wells. We will continue to monitor the changing risk landscape and respond proactively to ensure the health and safety of our employees.
Going Concern
As described in Note 2 in the Notes to the Group Interim Financial Information, the directors have formed a judgement, at the time of approving the Group Interim Financial Information, that there is a reasonable expectation that we are sufficiently well funded to be able to operate as a going concern for at least the next twelve months from the date of approval of the Group Interim Financial Information. In making this judgement, they have considered the impacts of current and severe but plausible consequences arising from COVID-19 to our activities. For this reason, the directors continue to adopt the going concern basis in preparing the Group Interim Financial Information.
Responsibility Statement
We confirm to the best of our knowledge that:
1. The Group Interim Financial Information has been prepared in accordance with IAS 34 "Interim Financial Reporting";
2. The interim Strategic Review includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and
3. The interim Strategic Review includes a fair review of the information required by DTR 4.2.8R (disclosure of related party transactions and changes therein).
*Conclusion*
We have enjoyed an eventful and successful 2020 so far, and look forward to continued progress as we focus our attention towards the second half of 2020. I would like to thank the growing Diversified family for its commitment to safe and efficient operations, the Board for its diligent oversight and guidance, and our shareholders and stakeholders who entrust to us the capital to fuel our growth. I look forward to reporting back to you with our full-year results.
*David Johnson*
*Chairman*
*DIVERSIFIED GAS & OIL PLC*
*Alternative Performance Measures*
*(Amounts in thousands, except per share data)*
*Alternative Performance Measures*
This interim report refers to Alternative Performance Measures ("APMs") such as "Adjusted EBITDA," "Cash Margin," "Free Cash Flow," "Net Debt," and "Total Revenue (Hedged)." See definitions and reconciliations below. These measures are provided in addition to, and not as an alternative for, the information contained in the Group's financial statements prepared in accordance with IFRS including the Notes thereto, and should be read in conjunction with the Group's annual reports and related presentations.
The Group uses APMs to improve the comparability of information between reporting periods and to more accurately evaluate cash flows, either by adjusting for uncontrollable or non-recurring factors or, by aggregating measures, to aid the users of this interim report in understanding the activity taking place across the Group. APMs are used by the Directors and Management for planning and reporting. The measures are also used in discussions with the investment analyst community and credit rating agencies.
*Adjusted EBITDA*
As used herein, Adjusted EBITDA represents earnings before interest, taxes, depletion, depreciation and amortisation and adjustments for non-recurring and non-cash items such as gain on the sale of assets, acquisition related expenses and integration costs, mark-to-market adjustments related to the Group's hedge portfolio, non-cash equity compensation charges and items of a similar nature.
Adjusted EBITDA should not be considered in isolation or as a substitute for operating income or loss, net income or loss, or cash flows provided by operating, investing and financing activities. However, Management believes it is useful to an investor in evaluating the Group's financial performance because this measure (1) is widely used by investors in the oil and natural gas industry as an indicator of underlying business performance; (2) helps investors to more meaningfully evaluate and compare the results of the Group's operations from period to period by removing the often-volatile revenue impact of changes in the fair value of derivative instruments prior to settlement; (3) is used in the calculation of a key metric in one of the Group's Credit Facility financial covenants; and (4) is used by our Directors as a performance measure in determining executive compensation.
*1H20*
*1H19*
*2H19*
*Operating profit (loss)*
*$*
*(30,780)*
*$*
*107,763 *
*$*
*72,744 *
Depreciation and depletion
55,837
45,342
52,797
Gain on bargain purchase
-
-
(1,540)
(Gain) loss on oil and gas programme and equipment
-
336
-
(Gain) loss on fair value adjustments of unsettled financial instruments
109,680
(21,252)
982
Non-recurring costs
10,061
2,804
14,678
Non-cash equity compensation
1,506
408
2,657
Gain on foreign currency hedge
-
(4,120)
3
*Total adjustments*
*$*
*177,084 *
*$*
*23,518 *
*$*
*69,241 *
*Adjusted EBITDA (hedged)*
*$*
*146,304 *
*$*
*131,281 *
*$*
*141,985 *
Less: Cash portion of settled hedges
83,506
11,542
42,042
*Adjusted EBITDA (unhedged)*
*$*
*62,798 *
*$*
*119,739 *
*$*
*99,943 *