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Diversified Gas & Oil agrees well retirement deal with Pennsylvania authorities

“This agreement is underpinned by our unwavering commitment to vigilantly manage a best-in-class asset retirement programme,” Rusty Hutson said
oil and gas operations
Fifty wells will either be retired or revived per year

Diversified Gas & Oil PLC (LON:DGOC) shares rose on Friday as the firm revealed it has agreed to a new 15-year agreement with the authorities in Pennsylvania, which defines the company’s asset retirement obligations in the state.

The company operates some 23,000 wells in Pennsylvania, which represents around 40% of the group's current well portfolio.

Under the new agreement, it is envisaged that DGOC will plug at least 20 wells every year. A further 30 non-producing wells will either be returned to production or will also be plugged.

If in any year DGOC plugs more than the quota of 50 wells, then the excess will be carried forward against future obligations.

WATCH: DGOC reports US$289.8mln of revenue as acquisitive growth continued

DGOC commits to compiling a report detailing all its non-producing wells in the states as at the end of the 2017 calendar year – this report will be due by 28 February 2021. This report will include details of which wells DGOC intends to return to production and which it intends to plug.

A similar follow-up report will be due in February 2024, at which point the company will also have the option to extend the asset retirement agreement for another five years (leaving 15 years from that point).

In the meantime, within 30 days of today’s agreement, DGOC will be required to post a US$7mln bond to the state.

Rusty Hutson, DGOC chief executive, described it as a significant agreement for the company.

“We have invested the time necessary to negotiate an agreement that meets the needs of Pennsylvania, the communities in which we employ its citizens and our shareholders. 

“This agreement is underpinned by our unwavering commitment to vigilantly manage a best-in-class asset retirement programme.”

Hutson added: “We are pleased that this process is complete and that we have accomplished our strategy to formalize agreements with each of the principal States in which we operate including Ohio, Kentucky, West Virginia and Pennsylvania.

“We now have formal, multi-year agreements covering virtually all of the wells we operate, which provides us with clear asset retirement parameters within which we can budget comfortably from the stable operating cash flows we generate from approximately 70,000 barrels of daily oil equivalency production."

Significant relief to investors

In afternoon trading, shares in DGOC were 6.7% higher at 112p.

In a note to clients, analysts at SPAngel commented: “The second long-term decommissioning agreement with the state in which the Company operates, this time Pennsylvania, should be a significant relief to investors as the overwhelming majority of the DGO's wells are within the state.”

They added: “As we have highlighted previously, these agreements are important as it allows the Company both time and space to address its abandonment liabilities, the vast majority of which can be considered "current" under state law.

“Furthermore, and as we have highlighted previously, now that there is no agreement for its entire well stock within the state, there can be no retrospective application of the planning and abandonment law for wells that are currently liable for abandonment.”

The analysts concluded: “We believe that the Company's owners should be pleased with the agreement, and one of the more significant headwinds preventing the price from strengthening has eased.”

 -- Adds share price, analyst comment --

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