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Green Dragon Gas - Plans to List Production Subsidiary

Writen by Lionel Therond

Plans to List Production Subsidiary

Green Dragon Gas Ltd (LON:GDG) announced its plans to list its production subsidiary on the Hong Kong Stock Exchange as a dividend in specie. This operation requires shareholders’ approval and a vote will take place at the AGM to be held on 20/12/17 at 11:00 am. We expect the details of the listing, in particular the shareholding structure of the listed entity as well as the amount of capital increase, to be released on this occasion. However, the intention is for the company to be debt free as a result which we take as a positive; we keep our 221p valuation unchanged.

The listed entity shall include its producing assets, within the GSS Production Sharing Contracts (60% interest in GSS Block, and 47% interest in GCZ Block) and GDG’s remaining exploration and appraisal assets will continue to be listed on the London Stock Exchange under a new name (G3 Exploration Limited) and as an exploration and development focused company.

The producing blocks contain 114 wells across the GCZ Block and 1,339 wells across the GSS Block. GDG anticipates drilling an additional 56 LiFaBriC wells by the end of 2018 at GSS Main Block. GDG expect revenue to materially increase, as 65% of the additional drilled wells come on stream in both Blocks as only 514 of the 1453 wells are currently connected to gas sales infrastructure and selling gas. The recent finalisation of Supplementary Agreements with China United Coalbed Methane Corporation (CUCBM), a subsidiary of China National Offshore Oil Corporation (CNOOC), paves the pathway to future monetisation and commercialisation of the Company’s lucrative asset base.

The proposed equity structure of the HK-listed company will comprise of GDG, GDG shareholders and new Hong Kong listed shareholders. The specific equity between shareholders and the record date of such dividend shall be determined by the Board in due course. GDG is expected to be debt free as capital raised from the Hong Kong listing is expected to settle all its existing debt obligations. Furthermore, additional equity raised in the Hong Kong listing will contribute to the continued development of the Company’s remaining five exploration blocks, with the aim of continuing to develop the Company’s large acreage position.
We illustrate below the valuation multiples of GDG’s peers listed in Hong Kong and also on the ASX, and conclude that the GDG production company should attract similar or slightly higher multiples as a HK-listed company (Figure 1).


Figure 1: Peer group comparison

Source: AAG Energy, Sino Gas & Energy, Sino Oil & Gas, China Energy Development, Green Dragon Gas, Financial Times, Capital Network estimates

We keep our 221p valuation of GDG unchanged and might revisit it when the details of the listing and capital raising operations become clearer (Figure 2).

Source: Green Dragon Gas, Capital Network estimates
 
Note: Our valuation uses a discount rate of 12% and a 2017 real gas price of $7/mscf and a 2% p.a. inflation thereafter.

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