After a couple of difficult years, 2014 was an important transition year for Green Dragon Gas. The London-listed group used the year to finalise the legal, operational and financial foundations for its coal bed methane business in China, including key partnerships with powerful state-owned partners, which means 2015 will be all about building production and revenues.
The company’s results, which came out last week, are the first real quantification of the substance of these changes, company founder and CEO Randeep S Grewal told oilbarrel.com. “With our partners, there is now US$1.3 billion of deployed capital spread across the wells drilled and close to 60 BCF of processing capacity coming on stream in the next few years,” said Grewal, who first spotted the CBM opportunity in China in the early 1990s.
The company has posted revenues of US$33.8 million in 2014, up 13 per cent year on year, largely due to higher commodity prices. Importantly, the Hong Kong-based company, which last year migrated from AIM to the Main Market, is well funded for the year ahead, having raised US$138 million last year through two corporate bonds to end 2014 with U$80 million of cash. Gas production from its two most advanced blocks, GSS and GCZ, was 8.2 BCF, a tally that is set to surge 50 per cent this year to 12 BCF as the cash on the balance sheet is deployed to step up the pace of drilling to deliver 30 LiFaBriC (Green Dragon’s proprietary technology developed to release the gas from the faulted coal seams) wells in 2015.
This is a target that Grewal and his team are comfortable they can meet. The 30 wells are fully funded by last year’s bond issues and the breakthrough LiFaBriC drilling technology means the company can deliver repeatable results with every well; this is when the R&D cycle of CBM projects gives way to the manufacturing phase, with repeatable results and annuity like revenue streams.
The early mover company is resource rich, with vast reserves across its blocks, but monetising this will require a drilling programme many times the scale of the 30 wells booked for 2015 plus an extensive infrastructure build-out. Even with partner companies funding infrastructure capacity additions, Green Dragon will need to tap further funding to monetise its resources – whether that’s this year or in the years to come.
For 2015, a decision to increase production beyond the announced 12 BCF exit rate would need more wells and further funding. “If we do decide to enhance that target we would make a decision in the Fall,” said Grewal.
The balance sheet is strong, with the earliest maturity on this debt coming due in summer 2017. This is a good position compared to many debt-squeezed peers. “That lack of pressure on the balance sheet is allowing us to monetise our gas,” explained Grewal.
Even so, a number of analysts are concerned about the cost of debt. “GDG has been funded with expensive debt and instruments to date and will need to secure more affordable debt to truly exploit its vast CBM resources across China,” said Ian McLelland, analyst at Edison Investment Research, who estimates an additional 150-200 wells will be required on its flagship GSS block alone to exploit the 400 BCF of booked reserves.
There is some comfort for those anxious about future funding and revenue streams to cover debt obligations. Green Dragon’s business model is underpinned by strong gas prices that are decoupled from oil pricing. The regulated gas price is stable, at around US$10-12 per MCF, with an additional US$2 per MCF subsidy on top of that, said Grewal. “This is a cornerstone of our strategy,” he said.
2015 will also see the company resume exploration, with plans for 16 exploration wells across its six exploration blocks to migrate that acreage into production. This is low risk exploration – Green Dragon has been carefully exploring this blocks for many years and understands the geology. “The gas content is very well known,” says Grewal.
For investors, however, 2015 will be about ramping production and ensuring that 12 BCF target is met.