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This oil and gas stock looks set to outperform BP plc

One good thing for oil companies about the lower price of oil over the last couple of years is that many assets are selling cheaper than they were when oil was high.

If a firm has the cash to spend, investing now could pay off down the line, and that’s the tactic that US-focused Diversified Gas & Oil (LSE: DGOC) is employing.

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Oil in the blood

The firm came to the London AIM market in February raising $50m for its war chest, which makes the company all the more interesting to me because the shares of newly-listed firms often do well. At the point of flotation they can be well financed and driven by entrepreneurial management teams keen to make their mark.

Diversified Gas & Oil’s chief executive is certainly equipped with a full-blooded oil company boss name in Rusty Hutson, Jr (I’m already thinking of Red Adair and Dallas). He explained in this month’s full-year results report that during 2016, strategic acquisitions increased cash flow and profitability. Now, the firm’s flotation on the London market has “leveraged these foundations to execute our more ambitious strategic objectives,” he reckons.

Focused in the good old US of A

Indeed, the firm announced today the acquisition of certain producing gas and oil wells, close to the company’s existing operations in the Appalachian Basin in the eastern United States, from Titan Energy. The deal will almost double the size of operations and Mr Hutson reckons it will be transformational for the company, making it a leading conventional player in the Appalachian Basin, with low-cost production and predictable cash flow. He thinks the synergies and streamlining of the firm’s expanded operations will enable lower operating costs, making the business resilient in an ongoing low-commodity-price environment.

Meanwhile, the directors are focusing on a “buoyant” acquisition pipeline, which they hope to pursue after the Titan Energy acquisition. To finance all this activity, the firm will use existing funds along with a further placing this month that raised $35m at a share price of 70p, and a $110m loan facility.

A massive uplift in earnings

City analysts see the firm as on course to lift earnings around 260% next year and the forward price-to-earnings (P/E) ratio sits just below 15. I reckon the company has every chance of outperforming its larger peers such as BP (LSE: BP) over the next few years.

BP looks set to grow earnings by around 28% during 2018 and the forward P/E rating runs just under 14. The big difference between BP and Diversified Gas & Oil is that BP pays a dividend with the forward yield running at 6.8%, although future dividend payments are on the agenda at Diversified Gas & Oil, too.

Reshaping for growth

Since the Gulf-of-Mexico oil blow-out disaster and its aftermath, BP has been selling assets and reconfiguring operations to support a more-nimble approach to growth. But I think the firm’s sheer size is against it as a growth proposition. With a market capitalisation of £88bn or so, it dwarfs little £81m Diversified Gas & Oil. To me, investor capital gains seem more likely from Diversified. However, the two firms could complement each other in a balanced portfolio if you are looking for exposure to commodities.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended BP. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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