News & Analysis

Green Dragon Gas Ltd. (GDG: AIM) review and analysis

By PSQ Analytics

Green Dragon Gas Ltd. (“GDG”) is the parent company of Greka China Ltd (“Greka”). GDG was incorporated in March 2006 and listed on AIM in August 2006. Headquartered in Hong Kong, GDG is a vertically integrated player engaged in development, production, distribution and sale of natural gas, having exclusive focus on China. It is the largest independent gas company in China, operating as Greka in the following segments:

– Upstream: Greka China is engaged in the exploration, development and production of coal bed methane (CBM) gas in collaboration with Petro-China and China United Coal Bed Methane Company Ltd. (CUCBM). Greka has six production sharing contracts (PSCs) of CBM blocks in four provinces of China - Shanxi, Jiangxi, Anhui and Guizhou - covering 7,566 sq. km, with an estimated 25 Tcf of gas in place. The company deployed its proprietary surface-to-inseam (SIS) drilling technology in its Shizhuang South (GSS) project, which led to an increased drilling productivity ratio of 48% in 1H 09 from 13% in 2008.

– Technical Services: Greka Technical Services (GTS) is engaged in drilling natural gas from the CBM blocks. This unit has seven advanced drilling rigs, out of which two are dedicated to drill surface-to-inseam wells.

– Midstream: In June 2008, GDG acquired Giant Power International which established the company in the midstream sector in Henan and Anhui provinces. These distribution centers have long term supply contracts from the China National Petroleum Company (CNPC) west-east pipeline and a sales market that exceeds the current supply.

– Downstream: GDG has a 28.9% equity stake in Beijing Huayou (BHY), a leading gas distributor in Beijing. BHY sold over 5 Bcf of gas in 1H 09, a 13.8% increase over the same period last year. GDG also owns and operates two retail CNG stations in Henan.

– Technology and manufacturing: GDG has a wholly-owned unit producing CNG dispensers in Zhengzhou, Henan. It is also a pioneer of skid-mounted gas-refilling equipment in China. The subsidiary is developing a pioneering proprietary Software and Supervisory and Control Data Acquisition systems for 24/7 monitoring of the entire process from Coal Seam drilling through production, transportation and retail gas sales. In February 2008, GDG acquired Pacific Asia China Energy which included a 50% operating joint venture with Mitchell Drilling, an Australian drilling company with expertise in surfaceto- inseam drilling technology.

Key recent news

8 December 2009: Announced that it paid approximately USD55 mn to redeem in full its only outstanding convertible bond. The amount was financed through the issue of 12 mn shares at a price of USD6.25 per share to BlackRock, raising a total of USD75 mn.

24 August 2009: Announced that Greka Energy (International) BV, a wholly-owned subsidiary of GDG, entered a farm out agreement with ConocoPhillips, wherein the latter will pay an initial USD20 million to the former towards costs incurred to date and also fund up to USD30 million of Greka’s future capital expenditure. ConocoPhillips may also choose to acquire a 50% interest in three of Greka’s six PSCs in China’s Shanxi province for an additional USD120 million and forego the entire cost recovery from the investment. This option runs until 31 December 2010. Greka will continue as the operator of the blocks. The first cash generated from the project will accrue to Greka until such point as ConocoPhillips’ total investment pre the option being exercised is recovered in full.