“We set it up from day one to focus on free cash flow and, as we’ve grown, that strategy really hasn’t changed. The industry has operated for too long on negative free cash flow.”
For Rusty Hutson Jr, co-founder and chief executive of production company Diversified Gas and Oil (DGO), it’s always been about sticking to his guns.
Since taking out an equity loan to purchase his first package of wells in West Virginia in 2001, he has been at the company’s helm, using his background in banking to refine its approach and backing it to the hilt.
And for DGO and Hutson, the proof has been in the pudding.
In 2017, the company went public on the London Stock Exchange’s alternative investment market and from there it’s gone from strength to strength.
In the last few years, it has completed around $2 billion worth of acquisitions, the majority of which have been in the Appalachian Basin, and has raised more than $800 million of equity.
It has expanded its headcount from fewer than 30 employees pre-2017 to around 1,100 today and, until the Chrysaor/Premier merger is rubber stamped, it’s behind only BP and Shell on the London Stock Exchange in terms of production, with approximately 109,000 barrels of oil equivalent per day, about 91% of which is gas, with 8% NGL and just 1% oil.
Hutson said: “The decision to take the company public was to finance the growth strategy that we saw coming in 2014. In that timeframe there were a lot of companies that were starting to make decisions about moving to shale which was becoming a bigger part of the industry.
“When they made that decision they started divesting assets that were non-core and fit the profile of assets that we like – long life, low-decline, mature type that we can manage efficiently to drive and enhance production on wells that have been neglected.”
He added: “I still have about 3% of the shares in the company and I’ve bought more since we went public too.
“I believe in this company and its plan. We’ve got a long way to go in terms of growth so a significant amount of my net worth is tied up in DGO.
“The company has been return-on-equity focused since day one and has paid out almost $200m in dividends since the IPO.”
The Covid-19 pandemic, which has caused widespread turmoil in the oil and gas sector, has also done little to stunt DGO’s growth or Hutson’s ambition.
In May, the company completed two deals – a $100m acquisition of upstream and midstream assets from Carbon Energy Corporation and a $125m agreement to take on resources in Appalachia from EQT, the biggest producer of US natural gas.
The move allowed DGO to increase its dividend by 14% this year, something Hutson is particularly proud of.
He said: “We’ve done that in the midst of everybody else cutting dividends so we feel like we’re in a very good position.
“We’ve made it clear to our shareholders that we’re not going to do dilutive deals. I’ve got a big stake and the last thing on earth I want to do is hurt my holdings.
“That’s the difference I think between us and a lot of other E&P companies that are out there – there’s a true alignment between management and the shareholders.
“A lot of people have been in defence mode due to the pandemic. We’ve been in offence for the last six months – our financials are very clean, we’ve got great earnings and abundant cash flow.
“I’ve said all along that your balance sheet is your most important thing and if you can keep that strong then you can weather all sorts of storms.”
DGO is now looking to build on its strong position and recently signed an agreement with global asset management firm Oaktree, with both parties putting in $1bn for transactions of $250m or larger.
Hutson described the deal as a “win-win”, adding: “It opens up some big transactions that we probably would have had a hard time doing by ourselves.
“Some big assets are going to become available over the next few months and it gives us credibility with the seller that we can take down big deals.”
However, current pressures on the oil and gas sector are not only financial and the drive for net zero is likely to take centre stage in the coming years, especially in the US following the recent election.
On DGO’s energy transition strategy, Hutson said: “You always have to be aware of it. We feel that natural gas is a bridge fuel that’s going to be part of the green energy mix policies going forward.
“There’s just no way to wean off every carbon fuel and act like we can do without them.
“I think natural gas is going to play a major part over the next several decades and our shareholders, even the ones with climate change interests, have said ‘don’t go out and apologise for what you do’.
“We continually look for ways to improve from an environmental, social and governance perspective.”
When asked about his future goals for the company, Hutson revealed he’d love to list the company back in the US.
He said: “I feel we have to have $2bn to $2.5bn market cap to get there but at some point I think it would make a lot of sense. But, that’s in the future and we’ll keep doing the things that have made us successful to get there in the meantime.”
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