Greka ready to cook with gas

Greka Drilling only floated on Aim in March, after being spun out of Green Dragon Gas - and the business offers investors direct exposure to a rapidly expanding segment of the unconventional energy market. Specifically, Greka provides drilling rigs and services for extracting coal bed methane (CBM) gas in China. It's a segment that has already attracted plenty of investment from such players as Santos, Royal Dutch Shell and BG but, unlike many of its rivals, Greka already boasts an established income stream.

True, CBM isn't the only Chinese energy story. The big players have already poured billions of dollars into projects designed to exploit China's growing energy deficit, with imports of both liquefied natural gas and thermal coal playing significant roles. But China also has enormous unconventional gas reserves and energy consultancy Wood Mackenzie estimates that local CBM could supply up to 14 per cent of China’s domestic gas needs by 2030. Along with the international oil & gas majors, both PetroChina and Sinopec have responded to this with hefty investment programmes which should provide significant long-term expansion opportunities for Greka.

Greka’s existing revenues come from contracts with Green Dragon - which, admittedly, does presently leave the group heavily reliant on those contracts. But, under the terms of the demerger, Green Dragon also provided Greka with $50m (£31m) - which has given it a post-period end net cash pile of about $55m. That will fund the purchase of a further 25 specialist mobile drill rigs for Greka, which will raise its year-end complement to 32. Each of these in-seam drill rigs can generate around $250,000 per vertical well sunk, or $1.2m for the more complex lateral variety. Not only will that rig expansion allow Greka to tap in into third-party drilling opportunities in China's CBM sector but, eventually, also in south east Asia more generally. Such prospects were not available prior to the spin-off because independence was a prerequisite for gaining third-party contracts.

What's more, Greka's technology could leave it with an advantage. That's because its Surface to Inseam (SIS) horizontal drill techniques operate efficiently within the seams that are typical for Chinese coal fields. Greka's SIS technology doesn't rely on conventional hydraulic fracturing, either - known as fraccing, and which involve fracturing rock with high pressure fluid. Not only is fraccing costlier and less efficient than SIS techniques, but it also poses environmental risks. That's important given that many Chinese CBM seams occur below rural areas or high-density population centres.

But the free float does look low - which could affect liquidity in the shares. That's because, following the demerger, Green Dragon was obliged to hold its 68 per cent stake in Greka for at least 12 months. Although, with Greka looking set to remain reliant on Green Dragon's restricted supply contracts for quite a while yet, then that's not so surprising.