G3 Exploration Regulatory News (G3E)

21 Sep 2009 07:00



21 September 2009

GREEN DRAGON GAS LTD.

("Green Dragon" or "the Company")

Interim Results for the six months ended 30 June 2009

Green Dragon Gas Ltd (AIM: GDG), the Chinese coal bed methane business, today announces its unaudited interim results for the six months ended 30 June 2009.

Highlights:

Commenting on the results, Randeep S. Grewal, Chairman and Chief Executive of Green Dragon, stated:

"17 August 2009 marked the third anniversary of our admission to AIM and we are delighted that the Company continues to grow at a steady pace. Our revenue has increased approximately eight-fold, demonstrative of the Company's growth which currently comes predominately from our downstream business. All business segments continue to grow organically although the downstream revenue is expected to dominate revenues for the next couple of years. As upstream CBM sales come on line in 2010, the higher profit margins generated by these sales will add further value to the Group's profitability in 2011 and beyond."

"The upstream drilling team marked its first year anniversary with productivity improvements to our seven full time drilling rigs committed for the fourth quarter. Two of the seven rigs are dedicated to drill surface-to-inseam wells that are materially more cost effective for the Company."

"Importantly, we concluded a joint venture agreement in August 2009 with ConocoPhillips ("COP") following a seven month due diligence process ("the Joint Venture"). COP is one of the largest CBM producers in the world and I have great expectations for our Joint Venture. Their hands-on knowledge of monetizing a large resource is timely and will be beneficial as we start commercial gas sales at GSS next year. The mutually developed and agreed $30 million drilling programme has commenced in our Shanxi blocks and we expect to see results prior to this year end. This Joint Venture is expected to increase shareholder value and validates of our reserve base scale and potential," concluded Mr. Grewal.

For further information on the Company and its activities, please refer to the website at www.greendragongas.com or contact:

  CHAIRMANS STATEMENT

17 August 2009 marked the third anniversary of our admission to AIM and we are delighted that the Company continues to grow at a steady pace. Our revenue has increased approximately eight-fold, demonstrative of the Company's growth which currently comes predominately from our downstream business. All business segments continue to grow organically although the downstream revenue is expected to dominate revenues for the next couple of years. As upstream CBM sales come on line in 2010, the higher profit margins generated by these sales will add further value to the Group's consolidated profitability in 2011 and beyond.

The Company continues to expand each of its focused areas:

Technical Services. Greka Technical Services (GTS) upstream drilling team marked its first year anniversary with productivity improvements and a solid drilling plan for the seven full time drilling rigs for the fourth quarter of 2009. Two of the seven rigs are dedicated to drill surface-to-inseam wells that are materially more cost effective for the Company. The percentage of productive coal seam metres drilled as compared to the total metres drilled has increased from 13% in 2008 to 48% in 2009; a 35% improvement driven by a higher surface-to-inseam drilling meters ratio as compared to vertical wells which is more efficient. The new business segment is now in a position to expand further next year. The management team is planning its next phase of hiring additional crews and providing the necessary training.

Upstream. The Company continues its 2009 drilling programme across all six blocks, encompassing 7,566 sq km, with estimates in excess of 25TCF gas in place. The Shizhuang South block ("GSS") has been the area of concentration so far this year with a significant increase in the inseam metres drilled compared with our previous management target. We have already drilled over 5,000 metres in coal, so far, and expect to exceed this number before the end of the year. The COP joint drilling programme further enhanced and expanded our objectives for this year which we anticipate being reflected in our year end reserve report. As production from the SIS wells has exceeded our expectations, our employees are focused on confirming the infrastructure requirements in order to convert gas production into sales. While 7.5 km of pipeline has been built and the power plant expanded, additional pipelines and compression will be required to monetize the forecasted production by year end.

Midstream. The Giant Power International ("GPI") acquisition strategically established us within the midstream sector in Zhengzhou, Henan ("ZPH") and Wuhu, Anhui ("APH"). Both distribution centres have long term supply contracts from the CNPC west-east pipeline and a sales market that far exceeds current supply. Both distribution centres are profitable and accretive to the Company's earnings potential, with ZPH paying cash dividends to the Group for the 2008 full year. As ZPH and APH are regulated by the Chinese government, their profitability is assured and will continue in the future. Gross gas sales from GPI was 1.15 billion cubic feet (32.6 million cubic metres). ZPH initiated its plan to expand further into the downstream Compressed Natural Gas ("CNG") retail business in order to enhance its profitability. GPI received its first cash dividend, which was successfully expatiated from China to the parent, Green Dragon Gas.

Downstream. As the second major pipeline gas distributor in the Beijing metropolitan area, Beijing Huayou continues to grow its gas sales in the Beijing Development Area. The company sold over 5 billion cubic feet (143.8 million cubic metres) in the first half of 2009, a 13.8% increase over the same period last year. Additionally, the company successfully expanded its operations into Qihe in Shandong province. The division provides the majority of our revenue and will remain the main contributor in the short to mid term.

Technology & Manufacturing. Our information systems team continues its focus on developing a proprietary Supervisory and Control Data Acquisition ("SCADA") system for the Company's substantial operations. While the upstream well head and downstream CNG retail pilot systems have been working seamlessly, the group is now focused on expanding the technology to the drilling rigs and thereafter the transportation fleet to digitize the company's entire operation. The continued expansion of the gas industry provides an ideal environment for the increase in sales of our CNG dispensers which we are currently manufacturing in Zhengzhou.

Our mission to be a vertically integrated gas supplier providing optimum shareholder returns through the execution of an environmentally progressive niche business plan in China is materialising. The significant increase in revenues from our downstream business was complemented by the Joint Venture with ConocoPhillips to expedite the monetisation of our large Upstream gas resources. Growth drivers are in place, our employees' undeterred conviction to execute the growth maintains momentum and the leadership team is committed to the Group's ongoing performance. I look forward to providing further updates to Shareholders in due course, demonstrating the rapid expansion of Green Dragon Gas in its inner China focused niche gas business.

Randeep S. Grewal

Chairman & CEO

18 September 2009

 Condensed Consolidated Statement of Comprehensive Income

Six months ended 30 June 2009

Condensed Consolidated Statement of Financial Position

At 30 June 2009

Condensed Consolidated Statement of Changes in Equity

Six months ended 30 June 2009

  Condensed Consolidated Statement of Cash Flows

Six months ended 30 June 2009

Notes to Condensed Interim Financial Statements

1  GENERAL INFORMATION

The condensed financial information for the six months ended 30 June 2009 and 30 June 2008 is unaudited and does not constitute statutory financial statements. The comparative financial information for the full year ended 31 December 2008 is not the Company's full statutory accounts for that period. The auditors' report on those accounts was unqualified and did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their report.

2 ACCOUNTING POLICIES

The annual financial statements of Green Dragon Gas Ltd. are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements has been prepared in accordance with IAS 34, "Interim Financial Reporting" as adopted by the European Union.

Basis of preparation

After making enquiries, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the half-yearly condensed financial statements. 

The same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest annual audited financial statements, except as described below.

Changes in accounting policies

In the current financial year, the Group has adopted IAS 1, "Presentation of Financial Statements" (Revised), IFRS 8, "Operating Segments" and the amendment to IFRS 2, "Share-based payments: vesting conditions and cancellations". 

IAS 1 Presentation of Financial Statements (Revised) includes the requirement to present a Statement of Changes in Equity as a primary statement and introduces the possibility of either a single Statement of Comprehensive Income (combining the Income Statement and a Statement of Comprehensive Income) or to retain the Income Statement with a supplementary Statement of Comprehensive Income. The first option has been adopted by the Group. As this standard is concerned with presentation only it does not have any impact on the results or net assets of the Group.

IFRS 8, Operating Segments requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the Chief Executive Officer ("CEO"). By contrast IAS 14, "Segmental Reporting" required business and geographical segments to be identified on a risks and rewards approach. The business segmental reporting bases used by the Company in previous years are those which are reported to the CEO, so the changes to the segmental reporting for 2009 are in respect of the additional disclosure only. Comparatives have been restated. 

Amendment to IFRS 2, "Share-based payments: vesting conditions and cancellations" results in an immediate acceleration of the IFRS 2 expense that would otherwise have been recognised in future periods should an employee decide to stop contributing to the savings plan. Management has concluded that so far there has been no impact on the results of the Group as a result of this amendment.

3 REVENUE AND SEGMENTAL INFORMATION For the six months ended 30 June 2009

For the six months ended 30 June 2008

For the year ended 31 December 2008

The Group is principally engaged in exploration, development and production of coal bed methane in the PRC, which is regarded as one geographical segment.

  4 SHARE BASED PAYMENT EXPENSES

Share based payment expenses represented the fair value of the options at the date of grant charged to the income statement over the vesting period with a corresponding increase in the "share based payment reserve" within equity. 

No share options were exercised during the 6 months ended 30 June 2009. No new share options were granted during the 6 months ended 30 June 2009.

5 FINANCE INCOME

Finance income for the period included a credit of change in fair value of derivative financial liability of US$1,500,000. (30 June 2008 - Nil, 31 December 2008 finance expenses of US$1,500,000).

6 TAX

Taxation for the Group's operations in the PRC is provided at the applicable current tax rate of 25% on the estimated assessable profits for the year. 

Pursuant to the PRC Corporate Income Tax Law passed by the Tenth National People's Congress on 16 March 2007, the Corporate Income Tax rates for almost all enterprises established in the PRC are subject to a unified rate of 25%.

7 LOSS PER SHARE

Loss per share is based on the loss attributable to ordinary equity holders of the Company of divided by the weighted average of ordinary shares in issue during the corresponding period. 

Due to the loss arising during the periods the diluted loss per share is considered to be the same as the basic loss per share.

  8 DIVIDEND

The directors do not recommend the payment of an interim dividend (2008: Nil).

9 PROPERTY, PLANT AND EQUIPMENT

 During the period, the Group incurred approximately US$586,000 on additions to plant and equipment (30 June 2008 - US$2,102,000, 31 December 2008 - US$13,486,000).

10 TRADE AND OTHER RECEIVABLES

12 CONVERTIBLE NOTES

The company repaid the remaining outstanding principal and accrued interest of the US$50 million zero coupon convertible note due in 2009, in August 2009.

13 OTHER FINANCIAL LIABILITY

The amount payable represents amount payable to China United Coalbed Methane Co., Ltd., which is a party to the production sharing contracts, in relation to exploration costs incurred on the properties. These amounts are only payable from revenue on production from the Shizhuang South Property.

14 SHARE CAPITAL

15 EVENTS AFTER BALANCE SHEET DAY (a) Farm out agreement signed with ConocoPhillips

In August 2009, a farm out agreement was entered into between the Group's wholly owned subsidiary Greka Energy (International) BV ("Greka") and ConocoPhillips (NYSE:COP). Under the terms of the farm out agreement, ConocoPhillips will make an initial payment of $20 million to Greka and will also fund up to a total of $30 million of the capital expenditures. ConocoPhillips can elect to continue with a second phase of development and pay $120 million to acquire 50% of Greka's interest in three of its six Chinese Coal Bed Methane Production Sharing Contracts ("PSC"). Under the terms of the agreement, the accrued cost recovery and Greka costs carried by ConocoPhillips will be solely for the benefit of Greka. Greka will continue to be the operator of the blocks while ConocoPhillips will appoint personnel to the projects and enhance the PSC development scale and efficiency through their extensive CBM experience.

The joint venture entails several options. In the initial phase, which will expire by year end 2010, ConocoPhillips has made an initial payment of US$20 million to Greka towards costs incurred to date and will fund up to a total of US$30 million of the capital expenditures towards the development of surface-to-inseam wells at the Shizhuang South, Shizhuang North and Qinyuan PSCs. In the event that ConocoPhillips elects not to proceed with the farm-out, all funds invested by ConocoPhillips will accrue to the benefit Greka. Upon ConocoPhillips decision to continue with acquiring 50% of Greka's interest in the three PSCs, the agreement (which will require approval from the Chinese authorities) provides for further payments of up to US$120 million, including carrying Greka's obligations under the PSCs. In addition, ConocoPhillips has an option until mid-2011 to evaluate participating in the Company's midstream and downstream businesses.

(b) Repayment of US$50 million zero coupon convertible note due 2009 The company repaid the remaining outstanding principal and accrued interest of the US$50 million zero coupon convertible note due in 2009, in August 2009.

16 RELATED PARTY TRANSACTIONS

There were no related party transactions required to be disclosed. Transactions between the company and its subsidiary undertakings, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

17 CONTINGENT LIABILITIES

The Group had no significant contingent liabilities as at 30 June 2009 (30 June 2008 - Nil, 31 December 2008 - Nil).