* Green Dragon plans to turn engineering unit into new AIMfirm
* Greka Engineering to be worth not less than $43 mln
By Sarah Young
LONDON, April 30 (Reuters) - Green Dragon Gas, aChina-based gas firm, is spinning off its engineering businessinto a new company that it believes is well-placed to benefitfrom Beijing's push to exploit its shale gas reserves.
Green Dragon produces and sells gas which it extracts fromcoal seams - a resource called coal-bed methane. Like shale gas,it comes under the unconventional gas umbrella and similartechniques are used in its extraction.
China, the world's biggest energy consumer, is pressing tounlock what could be the world's biggest shale gas reserves asit attempts to replicate the U.S. shale boom which hastransformed that country's energy market.
Green Dragon said it believes the spin-off will createshareholder value by providing investors with exposure toChinese shale, as well as simplifying the activities of theparent company.
It plans to list the new company, Greka Engineering &Technology, on London's junior market AIM, also home of theparent company, and reward shareholders with shares in the newfirm. Green Dragon's founder and chief executive Randeep Grewalsaid the new company would have a value of at least as much asits $43 million asset base.
The divestment, which is subject to shareholder approval ata meeting scheduled for June, is Green Dragon's second spin-offin as many years. It listed its drilling arm, Greka Drilling on AIM in 2011.
Greka Drilling's exposure to Chinese unconventional gas isalready starting to reap rewards.
Shares in the company have almost tripled in value sincelate December when it announced a drilling contract with a unitof China National Petroleum Corporation (CNPC), China's largestoil and gas company by production.
Shares in its former parent company, however, have slumped,down 63 percent versus a year ago, as investors fret about itsability to meet its production targets.
Grewal said Green Dragon is on track to be producing at arate of 18 billion cubic feet (bcf) of gas per year by the endof 2014, a jump from the 2.6 bcf it produced last year.
"They've got to motor to get to 18 bcf by the end of 2014.It's a fairly challenging target," Edison analyst Peter Dupontsaid.
At that rate of production, Green Dragon which currently hasa market value of 267 million pounds ($413.68 million), would beposting annual core earnings of $160 million, said Grewal. Thecompany trades at a discount to its net asset value, he added.
Should Green Dragon's share price be unresponsive to anyrises in output over the next 18 months, Grewal, who owns a 64.7percent stake in the firm, said he wouldn't rule out a takeover.
"Depending on how the market responds, we will execute somegame plan. We are actively looking at all options, going privatehappens to be one of many options," he said in an interview onTuesday.