The Sound of Silence

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Today’s edition features:

  • Diversified Oil & Gas (DGOC.L)

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The Sound of Silence

"It’s all relative but the wall-to-wall onslaught of electioneering should have ceased by this morning to be replaced by the steady patter of feet to polling stations. There will not be much that the markets can do until indications of the shape of the election results emerges tomorrow. Typically, it will be Sterling that acts as the bellwether in this latest political storm.
Any perceived weakening of the Conservatives’ position can be expected to weaken the currency and stimulate demand for non-Sterling earners. However, other blue chips are likely to decline as investors contemplate the prospect of hikes in the rates of both corporate and personal taxation not seen in decades. Of course, the situation will not be that clear-cut since some companies can expect to benefit from new Government expenditure on the promises outlined in the manifestos of Labour and the SNP.

The mega-squabble in the Middle East left the crude oil price 3.6% lower on the day at $48.30 pbbl at the prospect of some unravelling in the agreement to cut production. Gold price is trading slightly softer at $1288 pto this morning. Almost certainly, the potential for intrigue in this would not have been lost on the high stakes arms dealer and fixer, Adnan Kashoggi, who died yesterday aged 81.

It was a rollercoaster day for the euro ahead of tomorrow’s meeting of the European Central Bank in Estonia. The currency spiked sharply at around 10.30 am following comments by ECB President Mario Draghi that, owing to softer energy prices, the rate of inflation in the eurozone was unlikely to pick up before 2019. The implied lack of a need for higher interest rates caused the euro drop by 0.7% before rallying and eventually easing back for a fall of just 0.3% on the day to $1.125. Previously, he had not ruled out the possibility of interest rates being raised even while Quantitative Easing was still taking place.

Other events coming up today include James Comey’s testimony to Congress which, if it suggests that the President tried to impede the FBI’s enquiry into links with Russia, may unsettle markets. Discussions continue about where Saudi Aramco, with an estimated valuation of over $2 trillion, may eventually be able to quote considering its huge size. Wednesday saw the FTSE 100 index close 46 points (0.6%) lower at 7487.62. This probably had much to do with defensive profit-taking ahead of the Election. The latest polling average shows the Conservatives on 43.0% and Labour on 36.5% – a 6.5% lead which may produce a slightly increased majority. However, polls are polls – whatever that means."
– Mike Franklin, Chief Investment Strategist



Markets

Europe
The FTSE-100 finished yesterday’s session 0.62% lower at 7,478.62 whilst the FTSE AIM All-Share index was down 0.48% at 970.72. In continental Europe, the CAC-40 finished down 0.07% at 5,265.53 whilst the DAX finished 0.14% lower at 12,672.49.

Wall Street
In New York last night, the Dow Jones rose 0.77% to 21,173.69, the S&P 500 firmed 0.16% to 2,433.14 and the Nasdaq gained 0.36% to 6,297.38.

Asia
In Asian markets this morning, the Nikkei 225 had risen 0.04% to 19,991.95, while the Hang Seng firmed 0.21% to 26,027.44.

Oil
In early trade today, WTI crude was up 0.59% to $45.99/bbl, and Brent was up 0.73% to $48.41/bbl.


Headlines

Does British Airways’ explanation stack up?
The ultimate boss of British Airways, Willie Walsh who runs the airline’s parent company, has offered a little more detail about why their computer system crash-landed last week. Put simply, an “engineer” cut the data centre’s power, messed up the reboot and fried the circuits, he has said. His explanation has raised eyebrows amongst former British Airways IT workers I’ve spoken to. There are big red “panic” buttons to cut all the power in the computer room. You hit them as a last resort, if there’s a fire or someone’s life is in danger. I’m told the buttons are mounted on the wall though and should be protected by a perspex box with a lift-up flap. Rebooting the whole shebang isn’t simple either. You can’t just pull the red button back out again. I’m told you normally need to turn a special key at the same time to return the power. There is also a strict check-list that you have to follow, just like BA’s pilots follow a strict check-list before taking off and landing their planes. I spoke to someone who used to write similar check-lists. “You must fire things back up in the right order, synchronising the data,” they said. After you’ve sorted the red button, you then need to flick all of the circuit breaker switches linked to each server, like flicking the switches back on in your fuse box at home after they’ve tripped. Finally, you restart each server. It’s a gradual process rather than a surge, I’m told. People I spoke to echoed the same thought: “I cannot see how that would cause a power surge”.

Source: BBC News



Company news

Diversified Gas & Oil (DGOC.L, Shares Temporarily Suspended) – Update
Diversified Gas & Oil Plc (‘DGOC’), the US based gas and oil producer, yesterday announced its results for the 12 months ended 31 December 2016 (‘FY2016’). During the period, revenue advanced by +52.5% to US$18.3m, operating profit rose to US$22.4m (FY2015: US$4.6m), resulted in income before tax of US$32.5m compared to a loss of US$413,000, against the comparative period (FY2015). Total borrowings at the period-end was US$41.3m (end-FY2015: US$44.4m), which the majority of the total borrowings were fully satisfied in the Q1 2017 as a result of DGOC’s IPO. On the operational front, the Group acquired conventional assets of Eclipse Resources (April 2016) and Seneca Resources Corporation (June 2016). Including these, the gross production at the period-end increased by +120% year-on-year to 26,500 mcfe/day. Diversified Gas & Oil’s CEO, Rusty Hutson, commented “We laid down solid foundations in 2016 with the addition of strategic acquisitions that resulted in increased cash flow and profitability. We have since leveraged these foundations to execute our more ambitious strategic objectives in the form of our admission to AIM and further acquisitions, the latest of which will more than double the size of the Company’s operations once completed. We are in a unique position whereby we have capitalised on the industry opportunities by acquiring complementary low-cost producing assets at compelling valuation metrics. This has enabled us to assemble a high-quality portfolio of assets in the Appalachian Basin, and in doing so establish ourselves as one of the largest conventional players in the region”. The Group said it is intends to recommend a final dividend in line with the stated dividend policy of ‘not less than 40% of operating free cash flow’ which is expects to be paid not later than 31 July 2017. The terms of this recommended final dividend will be announced in due course.

Post the period, DGOC successfully raised US$50m and admitted to the London’s AIM market in February 2017. In the same month, the Group acquired a package of 1,300 producing wells from a large US based oil and gas production company. Moreover, as announced on 5 May 2017, the Group has entered into a conditional sale and purchase agreement to acquire certain gas and oil assets from Titan Energy, LLC. As such transaction constitute a reverse takeover and is subject to DGOC shareholders approval, its shares were suspended on the same day. The Group confirmed that it has made “good progress” with respect to completing the financing of the acquisition and in preparing the information required to be included in the new AIM admission document. Publication of the new AIM Admission Document is expected during mid-June 2017. Upon this, the trading in the Group’s ordinary shares on AIM is expected to resume, while acquisition remain conditional on shareholder approval at a General Meeting to be held on or before 30 June 2017. The Group said it will update shareholders with further information as appropriate. Proposed acquisition of Titan Energy’s gas and oil assets is based in the Appalachian Basin, principally the states of Ohio, Pennsylvania, southern New York and northeast Tennessee. Cash consideration of US$84.2m will be funded through a new 3 year debt facility provided by Angelo, Gordon & Co with a proposed placing of new ordinary shares raising a minimum of US$20m. Following the Acquisition, the Company will be producing from licences held by production over a total area of approximately 1.6 million acres, an increase of some 42%. It increases Proved Developed Producing reserves by approximately 36.7 mmboe to 60.5 mmboe. The acquisition will increase DGOC’s gross oil and gas production to c.18,291 boepd (11,039 boepd net), comprised of gas production of 17,360 gross boepd (+12,518 boepd) and oil production of 931 boepd (+379 boepd). The Board confirmed that the new wells will be immediately accretive to EBITDA. Diversified Gas & Oil’s CEO, Rusty Hutson, commented on 5 May 2017 “This transformational deal for DGO will materially increase the scale of our portfolio within the Appalachian Basin, taking up further acreage in the states of Ohio and Pennsylvania and entering southern New York and northeast Tennessee. The proposed transaction highlights the strength of our business model in that we are able to acquire complementary assets in a proven, stable and low-risk environment at compelling valuation metrics. We believe that this deal will deliver significant benefits to our shareholders in the form of increased cash flow, proven developed reserves and acreage for future development opportunities whilst also supporting our dividend policy and enabling us to consider additional opportunities that we see within our region of focus”.

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Compiled by:
Barry Gibb, Kazunaga Senga, Sheldon Modeland, Charles Long & Ben Maitland
(t) +44 (0) 207 382 8384
(e) info@beaufortsecurities.com


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