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Meet the man behind Diversified's laser-beam focus

Rusty Hutson's company has had a record-breaking IPO thanks to shrewdly concentrating on assets in the Appalachian 

Diversified Gas & Oil founder and chief executive Rusty Hutson Jr bet his house on his future in the oil and gas business.

Hutson was working as a banker in 2001 when he bought his first producing assets in the Appalachian basin with a combination of financing offered by the seller and a mortgage on his house.

Now, 16 years later, he has turned that house into a footprint of more than 1 million acres and the biggest initial public offering of an oil and gas company on the London Stock Exchange since 2014.

As a small company with growing US natural gas production that pays a dividend, Diversified fits into a unique investment niche, Hutson says, and found a warm welcome with UK investors.

The company raised $50 million from its share offer to take advantage of what he saw as a unique time in the market for the types of gas fields that the company likes to buy.

“We were seeing assets on the market and knew there was a tidal wave of these assets coming and that we needed to do something to put ourselves in position from a capital perspective,” he says.

Many of those assets are in the Appalachian basin, where Hutson grew up and where his father worked in the oil and gas fields for more than 40 years. Now Hutson’s father, Rusty Hutson Sr, works for his son as Diversified’s vice president for operations in Ohio and West Virginia.

“It’s an experience that I wish every son and father could experience,” he says. “I can always call him up and get a good feel for what is going on out there.”

The Appalachian basin is the largest gas-producing area of the US, due to the prolific Marcellus and Utica shale plays. Hutson has considered getting into the shale game, “but every time I do I hit myself”, he says.

“It’s just such a highly capital-intensive business compared to what we do,” he says. “It’s a whole different level of complication and engineering and geology that we don’t necessarily have or need.”

Acquisitions

The Diversified model is also more focused on acquiring and operating existing wells, rather than drilling new ones, Hutson says.

“Right now the internal rate of returns from the acquisitions are so much greater than the rate of return on drilling that we would be foolish to chase the lower rate of return with our capital projects,” Hutson says. 

“As long as the acquisitions are presenting themselves, we will continue to focus our capital and time there.”

Moreover, Hutson sees more opportunity in conventional fields, where there is less competition for assets, a situation he says is “completely opposite from what you see in the Permian”, where a buying frenzy has driven acquisition costs to upwards of $30,000 an acre.

“Right now, I would say competition for these deals is not intense,” he says. “I think that a lot of the players in the Appalachian basin either moved on to the Marcellus and Utica, or moved on altogether.”

For example, Diversified’s latest acquisition included 1300 wells across more than 75,000 net acres that were producing 3.8 million cubic feet of natural gas and 110 barrels per day — for $1.75 million.

The prices are right but operators are choosy about who to sell those assets to because, often, the production from shallow conventional horizons is used to hold rights to the deeper shale zones, Hutson explains.

“They want to get rid of the operations — they’re not efficient because that’s not a focus for them — but they are also very intent that the buyer of the wells is an operator that is proficient and can keep the wells in production,” he says. “Their biggest nightmare would be to lose that acreage.”

Eventually Hutson could see Diversified investing in shale fields, but not until they have matured and begin to function more like the conventional assets the company owns now, Hutson says.

"We feel like that will be another opportunity there, to buy mature production with low operating costs and low risk,” he says.

Maximising production

As soon as Diversified acquires a package, Hutson and his team look at how they can minimise operating costs and maximise production.

“We can cut costs out that the larger companies cannot because they haven’t focused on it,” he says. Whether it is in compression, midstream gathering and transportation or labour, Diversified is able to optimise its operating costs by identifying and prioritising work on its most lucrative fields and infrastructure, Hutson says.

With cash in the bank and growing production, Hutson now hopes to repeat his acquisition success over the next few years.

“For the next one to three years we will continue to focus on the acquisitions coming to market, and  evaluate and execute on those,” Hutson says. 

“We have a big opportunity to grow the company very, very materially.”

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