Green Dragon Gas (GDG), which is quoted on the main board of the London Stock exchange, is one of the largest independent companies involved in the production and sale of coal bed methane (CBM) in China. The company’s Founder and Chairman Randeep Grewal must recently have thought all his Christmases had come at once.
On September 28, the £89.5m market cap company released its interim results for the six months ending on June 30 2017. They were a positive set of results in a number of respects. More than this, overlapping (almost) with the release of the results, was the announcement that following often contentious negotiations GDG had finalised agreements with the China National Offshore Oil Corporation (CNOOC) and its subsidiary, the China United Coalbed Methane Corp (CUCBM) regarding GDG’s interest in the Shizhuang South (GSS) and Shizhuang North (GSN) blocks which historically have been drilled by CUCBM.
Commenting on the interims results Grewal said: “We are pleased to announce a positive set of results for the first half of 2017. It is the first time in almost a decade that we report as a pure upstream company”. By this he meant that GDG is abandoning its grand plan to become a fully integrated gas operation in China. It is in the process of divesting downstream activities. These had become a drag on the company’s profitability.
For example, revenue was US$29.2 million in 2016 against US$37.7m in 2015 and this was due to an approximate decrease of 23 per cent in downstream sales. The downstream division is currently up for sale.
Randeep Grewal Founder & Chairman of Green Dragon Gas
But this move was not the only positive factor affecting the financials. Becoming solely an upstream company, cutting costs and improving the infrastructure seem to have done wonders for company’s margins. Revenue for the six months was US$12.9m against US$14.6m in the comparable period of 2016. Yet gross profit was US$6.9m, a 24 per cent increase, and gross profit was 53 per cent of revenue against 38 per cent. Net profit was US$1.8m, a 161 per cent increase.
Grewal said: “A disciplined cost reduction programme is demonstrative in the material gross profit and from operations improvement…… the simplicity of being an upstream company is further compounded with the profit realisation. Gross profit margins exceeded 50 per cent, capital expenditure is negligible with 1339 equity wells on the flagship GSS block and earnings before interest, GSS sales, taxation and amortisation (EBITDA) is 50 per cent”.
Operationally, sales in H1 2017 were 8 per cent up versus H1 2016. Gross field production capacity was 5.1 billion cubic feet (bcf). Of the 200 GDG operated wells, 130 wells are online with 104 connected to sales infrastructure. Actual production from GDG operated wells in H1 2017 was 1.65bcf compared with 1.88bcf for all of 2016.
But, of course this now looks like the thin edge of the wedge. The Memorandum of Understanding (MoU) signed with CUBCM covers five Production Sharing Contracts (PSCs) and two supplementary agreements for GSS and GSN. For the moment GSS is very much the focus of attention as this block is where most of the 1139 carried legacy wells drilled by CUCBM are to be found.
Under the MoU, GDG reverts to its 70 per cent interest in all 1139 carried wells while concurrently retaining its interest and operatorship of the 200 non-carried wells. The interim report said: “Revenue from the legacy wells has not been recorded because details have yet to be ascertained.” This means the potential revenue has yet to be quantified.
What we do know is that total planned capacity for GSS is 50bcf and CNOOC currently has 322 wells producing gas for sale. Grewal, talking to Greenbarrel, said that GDG would be receiving 6 per cent of all revenue until cost recovery is complete. And this is really the point. Cost recovery is at the heart GDG’s milestone agreement with CNOOC.
The deal stated that an independent audit for CUCBM’s work programme and wells for the 2007-2014 period resulted in US$941m of cost recovery booked into a joint account. This is not money which is going to be paid over the counter immediately, but it does mean more solid cashflow going forward. Moreover, Grewal told Geenbarrel that the cost recovery programme will be replete with tax breaks for GDG. In short GDG can look forward to possible exponential growth in output and an enhanced revenue stream.
Having been at 227pence in the past year, GDG’s shares were on a 52-week low of 55p yesterday morning. On news of the CNOOC deal but before the interim results were announced broker Capital Network set a target price of 221p.
