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Diversified Gas & Oil - Updating short-term forecasts

We have updated our short-term forecasts to reflect better than expected post-Core Appalachia acquisition operational performance and our revised production forecasts and gas price realisations. Unit operating costs averaged $6.42/boe in October 2018 (12% lower than the average for 9M18), reflecting lower operating costs associated with acquired assets and realised synergies. Diversified Gas and Oil (DGO) has reached an agreement with two states on plugging and abandonment (P&A) schedules, providing greater certainty of its short-term P&A liabilities; we expect more agreements to follow. In December, DGO announced a 3.30c/share dividend, an increase of 18% from the previous quarter. Management intends to maintain this payout and we forecast a FY19 dividend yield of 8.9%. Our valuation is updated to 163.6p/share (+12%) driven by revised unit costs, an updated production forecast for FY19 and rolling forward the discount date. DGO’s cash flow is largely sheltered from oil price volatility with 88% of production linked to Henry Hub.