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Questor share tip: Green Dragon Gas sales up eight times

The Aim-listed and China focused gas producer has seen its sales soar as its licenses are now secure, but losses widened last year, says Questor

Revenues at the coalbed methane gas company increased by almost eight times to $62.2m (£37m) in the year ended December, up from just $8.1m in 2012.
Revenues at the coalbed methane gas company increased by almost eight times to $62.2m (£37m) in the year ended December, up from just $8.1m in 2012 Credit: Photo: Reuters

Green Dragon Gas
540p unch
Questor says BUY

AIM-listed, China-focused gas producer Green Dragon Gas [LON:GDG], announced record revenues in its annual results last week and risks have been greatly reduced now that a licence dispute is resolved.

Revenues at the coalbed methane gas company increased by almost eight times to $62.2m (£37m) in the year ended December, up from just $8.1m in 2012. This was helped by sales of gas increasing more than fourfold year-on-year to 8.01bn cubic feet in 2013.

Sales are increasing but costs are also rising. Green Dragon reported a loss before tax of $34.7m, up from a $16.8m loss a year earlier as administrative costs more than doubled and the company lost $13.3m on financial derivatives.

The long-term prospects are encouraging as Chinese demand for gas shows no signs of slowing. The country signed a 30-year $400bn gas deal with Russia for the supply of natural gas last month.

Chinese demand for natural gas is expected almost to double in the next five years as the country battles with toxic smog in its cities, according to the International Energy Agency.

Green Dragon’s future is now far more secure. All concerns over the title to the company’s assets were resolved in April 2014 when China United Coalbed Methane Corporation (CUCBM ) withdrew the termination notices that had appeared on its website in March 2011, GDG explained.

The company regained an interest in about 1,300 gas wells drilled on its land by CUCBM and agreed to share revenue with the state-owned gas company from 2013 in perpetuity.

Founder and chairman Randeep Grewal said the company was now in a position to drive its operational plans, enhancing shareholder value.

Last December, Questor said investors could “benefit from the China energy shortage with Green Dragon Gas” when we said buy at 281p, and the shares have almost doubled since then.

As part of the agreement with CUCBM, a further $250m is to be invested in new wells, and this should further boost gas reserves which doubled in value to $898m at the May reserve update.

Make no mistake, this is a risky prospect, but that risk has now been greatly reduced. The investment case remains and so does the recommendation on the shares, buy.