Diversified Gas and Oil says it will target high dividends from strong cash flows after its float tomorrow
Tomorrow the London Stock Exchange's junior flotation market will welcome its largest initial public offering (IPO) from an oil and gas firm since oil prices tanked in 2014 – and the company says it sees potential for "substantial" growth.
US-based Diversified Gas & Oil is gearing up for its floatation on the Alternative Investment Market (Aim), which chief executive Rusty Hutson said will help the company produce "continued, steady success".
Hutson and executive chairman Robert Post founded the company from scratch in 2001. After years of steady growth, Diversified has exploded over the past two years. Its strategy is to pick up conventional low-risk oil and gas assets from larger American companies that are turning their focus to shale. As a small firm, Diversified can operate more efficiently and keep costs low.
The company has raised $50m (£39.7m) in capital for the listing. It operates around 7,500 gas and oil producing wells in the Appalachian Basin, and it produces 4,700 barrels of oil equivalent per day (boepd) mainly in the US states of Ohio, West Virginia and Pennsylvania.
This isn't the American company's first rodeo in London. Hutson told City PM the firm listed a bond in the City in 2015 to raise capital, and that helped them to develop relationships with institutions on this side of the pond.
Diversified's decision to list on Aim was also helped by the market's focus on growth companies – the US has no comparable junior market. The firm hopes to continue to raise funds for acquisitions with its listing and funnel cash flows into high dividends.
"We’re in a good position to take advantage of multiple opportunities this year," Hutson said. "We see a substantial increase in operating cash flow that would be progressively put back into dividends. We're anticipating putting 40 per cent of cash flows back in dividends."
The company will place shares at a price of 65p.
Chief executive Rusty Hutson Jr (left) and executive chairman Robert Post (right) (Source: Diversified Gas & Oil)
Oil and gas companies are rumoured to be making a comeback on Aim this year as commodity prices continue to recover, propping up mid- to large-cap miners, a report from broker FinnCap found.
By the end of 2016, iron ore prices had doubled from their January 2016 lows while other base metal prices like zinc also climbed, up nearly 70 per cent by December.
The rebound in commodity prices helped drive the recovery of the mining sector, with BHPBilliton's shares rising 84 per cent to the end of 2016 and Rio Tinto's 64 per cent.