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Sunday share tips: Diversified Gas & Oil, Water Intelligence

05 May, 2019 19:26

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(Sharecast News) - In her 'Inside the City' column for the Sunday Times, Rachel Millard took a look at American ex-banker Rusty Hutson, and Diversified Gas & Oil - the producer he had mortgaged his house to get off the ground.

Hutson had come knocking on City doors in 2015 but was swiftly turned away, instead turning to American bond markets to raise around $13m, which was quickly invested into new wells across Pennsylvania, Virginia and Ohio.

He came back across the pond in 2016, boasting higher production numbers, and was taken on by brokers Mirabaud, floating DGO on AIM in 2017 and raising around £50m in the process.

That was just the start of something quite rapid, with DGO since raising money in debt and equity, and investing around $1.4bn on oil and gas wells across Appalachia which have been offloaded by majors.

DGO reckons it can operate such wells more efficiently, bringing down production costs and squeezing out more gas.

Millard noted that DGO is the biggest oil and gas play on AIM, producing over 90,000 barrels of oil equivalent per day across 7.8 million acres, up from just 6,000 boepd in early 2017, with most of that being gas.

Its most recent transaction saw it pour $400m into buying 107 mature shale gas wells.

In that time, DGO's market cap has soared too, growing almost tenfold to around £850m, and now boasting such shareholders as HSBC and Sand Grove Capital.

The shares closed at 122p on Friday, up from 56p in February 2017, and yet despite the meteoric growth, Millard said the company had managed to keep debt below $500m and maintained a 10% dividend yield.

It was still some way off cooling its jets on the purchasing front, too, with 50-year-old Hutson keen to leap at opportunities left by the oil majors as they abandon conventional wells to raise cash for shale drilling.

According to Millard, DGO was also keen to make the jump to the man market, with its market cap likely to see it placed firmly into the FTSE 250, alongside established peers such as Enquest, Premier Oil and Tullow.

It wasn't going to be an entirely risk-free venture, however, with DGO susceptible to swings in gas prices both ways - low prices putting a dent in earnings, and higher prices making its asset purchasing game more difficult.

The portfolio could also become increasingly difficult to manage, with Millard pointing out its low-productivity wells in particular.

"On the other hand, the house brokers believe the market has yet to catch up with DGO's rapid growth, and a move to the main market as soon as September could result in a re-rating - possibly to 170p," she wrote.

"Buy."

Over in the Mail on Sunday, Joanne Hart was looking at the expensive problem of leaky pipes in America, where water damage claims are thought to be worth almost $13bn per year, and a company that promises a solution, Water Intelligence.

She said it boasted "state-of-the-art" technology to find and fix leaks in the most efficient way possible, with the business growing rapidly under the captaincy of chairman Patrick De Souza.

De Souza's does not come from a typical plumber's background, graduating from Yale Law School, completing a PhD at Stanford, and working as a director on the National Security Council at the White House, before ending up at Water Intelligence, right around the corner from Yale in Connecticut.

That relationship with the Ivy League university remained important for the company, with De Souza using it to develop acoustic and infrared technologies to the detection and repair of leaks.

According to Hart, it meant Water Intelligence enjoyed a reputation for speed and success, with most of its sales coming from its 250,000-odd residential clients in the US, where in many states swimming pools were as much of a concern as potable water pipes.

The company derived much of its early success from advertising directly to homeowners, but more recently had started to focus on inking deals with big insurers, who would rope in Water Intelligence when their policyholders made leak claims.

It had signed two of those contracts in the last two years, adding a third last week, with Hart noting that such deals had a real impact on the business, generating 50,000 pieces of leak detection work in 2018.

They were also beneficial as a way for the company to enter the corporate market, finding leaks in offices, industrial buildings and other commercial premises.

De Souza began Water Intelligence when he purchased the franchise group American Leak Detection, and while franchisees were still responsible for much of the company's sales, the firm itself had recently been buying up underperforming franchises.

Over in the UK, Water Intelligence was also involved with the privatised water utilities, working with the likes of Thames Water, Southern Water and Northumbrian Water to help them pinpoint underground leaks in the quicker and more accurate way than some of its rivals.

Looking ahead, it was also trying to devise a method to repair spillages from sewers, which was a major sanitation issue on both sides of the Atlantic.

The firm will publish its 2018 results this week, with brokers picking a 44% improvement in sales to $25.3m and a 17% rise in profits to $2.5m.

They were also keen to see additional growth this year and next, with the company set to add new customers, boost its sales from former franchise operations, and expand further internationally.

"Water shortages are a growing problem and leakages do nothing to help," Hart wrote.

"Water Intelligence is at the forefront of its field and the opportunities for growth are substantial - at 376p, the shares should gain ground.

"De Souza is a significant shareholder too, so he is highly motivated to deliver the goods."

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