BULL POINTS:
■ China's likely demand for coal-bed methane
■ Helped by government incentives
■ Large acreage and reserves
■ Growing and profitable production
BEAR POINTS:
■ Political risk
■ Difficult to deal in shares
China wants to reduce its reliance on coal - which provides 70 per cent of its energy - and increase the contribution of natural gas. In 2007, natural gas provided 23 per cent of the world's energy but just 3 per cent of China's. However, the Chinese government wants to see that proportion rise to 8 per cent by 2010. But if it were reached, it would exhaust the country's proven reserves of natural gas in little over a decade. So China will need to find "unconventional" sources of natural gas, one of which is coal-bed methane (CBM) - natural gas trapped in coal seams.
China has the world's third highest CBM reserves, estimated at 1,300 trillion cubic feet - more than 15 times its proven natural gas reserves. Yet in 2006, China's CBM production was just 46bn cubic feet, only 2 per cent of domestic gas production. Analysts at Westhall Capital estimate that this could rise to 10 per cent of gas production by 2010. True, the Chinese market for natural gas is highly regulated, but the CBM market has been given special status and preferential tax treatment to encourage development.
As a pioneer of Chinese CBM, Green Dragon Gas enjoyed a pick of licence blocks and acquired some of the most lucrative acreage near existing and planned gas pipelines, and around inland cities where it sees the most demand (coastal cities would probably use oil and liquefied natural gas).
By acreage, Green Dragon is the largest foreign CBM operator in China, with 20 per cent of the market. Its 30-year production-sharing contracts give it 49 per cent to 60 per cent interests in each development. Proven, probable and possible reserves of 2,155bn cubic feet make the company's assets among the biggest in global CBM.
| GREEN DRAGON GAS | ||||
|---|---|---|---|---|
| ORD PRICE: | 613¢ | MARKET VALUE: | £439m | |
| TOUCH: | 575-650¢ | 12M HIGH / LOW: | 950¢ | 525¢ |
| DIVIDEND YIELD: | NIL | PE RATIO: | NA | |
| NET ASSET VALUE: | 450¢ | NET DEBT: | 2% | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (p) |
|---|---|---|---|---|
| 2006* | nil | -4.22 | -4.5 | nil |
| 2007 | nil | -9.00 | -9.3 | nil |
| % change | - | - | - | - |
NMS: 500 MARKET MAKERS: 3 BETA: 0.7 * 9-month period £1=$1.485 | ||||
Click for a guide to the terms used in IC results tables.
The company should have 85 wells connected by the end of this year and began gas production from two wells in May. It targets two main markets: first, customers that are supplied via pipelines; second, compressed natural gas (CNG) as a subsitute for petrol and diesel. Pollution along China's industrial coastline has reached such levels that local governments are encouraging alternative fuels that can power existing auto engines with minimal modification. Natural gas fits the bill - per unit of energy, it produces 29 per cent fewer emissions than oil and 45 per cent fewer than coal.
What's more, Green Dragon is vertically-integrated and should have the pricing power that generates fat profit margins from retail sales. Its first retail forecourt in Zhengzhou is already demonstrating high demand: queues of taxis form at its CNG pumps, whereas there is little activity at the petrol pumps. The local government pays the $500 cost of converting a car to CNG, and the price of CNG is 40 per cent lower than the price of petrol. But that's not a problem for Green Dragon - it is still getting twice the global price for natural gas. The company plans to open three further retail forecourts in Zhengzhou during 2009.
True, operating in China comes with risks: government policies, such as tax incentives and price regulation, can change and the immature legal system doesn't provide the strongest protection for foreign companies. In addition, it is difficult to buy the shares as only 10 per cent of the issue capital is freely available. This might improve when the shares are listed on London's or Hong Kong's main market, which Green Dragon's bosses plan to arrange.
