US Edition Green Dragon Gas
281p+3.5
Questor says BUY
CHINA is suffering from a growing shortage of gas and investors could benefit from this problem by taking a look at London-listed Green Dragon Gas. The company is a China-focused gas producer that has just raised cash so it can develop its proven energy reserves.
During the first nine months of this year natural gas demand in China increased by 13.5pc year on year, well ahead of the 9.2pc increase in gas production, according to the National Development and Reform Commission.
Imports of natural gas in China jumped by 25pc to 12.9m tonnes over the same period as the country tried to make up the difference. This energy crunch comes just as the mercury plummets in Beijing – the city recorded temperatures of -18C last Christmas eve.
The shortage of gas in China has been exacerbated by government intervention to reduce pollution levels, with the authorities encouraging local governments to switch to gas for domestic heating and public transport.
Aim-listed Green Dragon has just increased its reserves of gas following an extensive testing programme. The company said proven reserves had increased by 400pc at the end of October to 300bn cubic feet (bcf). It has also signed production-sharing agreements with state-owned organisations for the supply of gas.
Often in the energy production business, companies fail not because of the size of their reserves, but because they run out of cash with which to realise them.
Green Dragon Gas has just raised $35m through the issue of a convertible bond. The cash will be spent tapping the company’s reserves of so-called “coal- bed methane”. This is gas trapped in coal seams that used to be vented off during the mining process. Nowadays it is drilled for and harnessed as a source of energy.
There are two issues of concern for investors in Green Dragon.
One is an ongoing court case with Conoco Philips China (COPC) over a disputed production-sharing agreement. A further hearing date has not been fixed but is expected in the first three months of 2014.
The second problem is a lack of liquidity in the shares, with 64pc owned by the Green Dragon Gas Holdings, a company that is ultimately controlled by chief executive Randeep Greawl, and 18pc owned by a company linked to New Zealand billionaire Richard Chandler. Retail investors are largely at the mercy of their long-term interest.
That said, for those with a healthy appetite for risk, the shares are a buy.