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BIG PICTURE - Greka Drilling drives growth and diversity plans

Greka Drilling has held its own since splitting with Green Dragon in 2011. Now, the business is diversifying away from its former owner and winning its own third party contracts, as well as new partners outside of China.
BIG PICTURE - Greka Drilling drives growth and diversity plans
Despite revenues falling to US$24.4mln and a loss of US$5.3mln, Greka's boss said he was “truly excited” about the company’s prospects.

China gas drilling company Greka Drilling (LON:GDL) is confident it can reignite its fortunes this year. 

Since splitting from former parent Green Dragon Gas (LON:GDG) four years ago, the firm has had a tough time.

Drilling activity has been hampered by a lack of available sites and a slowdown by its GDG, which remains its largest customer.

That, in part, has contributed to a 30% slide in its value over the past twelve months with shares now at 8.5p.

But in the firm’s full-year results, issued last month, Randeep Grewal, Greka’s chairman and chief executive was decidedly bullish.

Despite revenues falling to US$24.4mln (US$30.5mln in 2013), and a loss of US$5.3mln (profit US$1.1mln), Grewal said he was “truly excited” about the company’s prospects.

Importantly, drilling activity is picking up. Greka recently mobilised for a further thirty wells in China for GDG while it has a further 100 under contract for third parties.

Meanwhile, at the end of 2014, it started drilling on the first well on the US$65mln contract for Essar Oil in India.

Grewal also stressed that Greka is less exposed to oil price volatility than the wider oil field service sector as its customers operate exclusively in a regulated gas market.

“In our view, the recent slowdown in activity is an opportunity for GDL,” research firm Edison claimed last year.

It reckoned significantly improved drilling efficiencies, and hence costs,  during the time would boost the margin of residual contracts held in the group’s backlog.

It’s a view which still holds weight, according to Charles Stanley analyst Michael Donnelly.

Critically, for him, April’s update showed no apparent slippage in the main Chinese and Indian contracts.

“The momentum in the business has clearly increased materially in the latter half of 2014,” he said.

“We expect some US$40mln of revenues in 2015 on a gross margin of 26%.”

He did, however, note that the discretion of GDL’s clients to delay mobilisation of orders means there’s some degree of caution on his forecasts.

It is estimated that three-quarters of China's gas reserves base consists of unconventional gas.

According to industry predictions, by 2020, unconventional gas production may account for 30% of China's total gas output.

To maintain its competitive edge, Greka has developed the LiFaBriC (Lined Faulted Brittle Coal) methodology.

It’s a unique technique specifically designed for the complex geology experienced in China. 

The method – an adaptation of the horizontal drilling methods traditionally used for drilling in coal seam reservoirs - is not only extremely efficient but is also an environmentally friendly technique which removes the need for fracking programs.

“LiFaBriC provides a sustainable competitive advantage which, when combined with the significant drilling programs in China and India that have been announced by GDL’s clients, suggest revenue levels materially higher than those that have been delivered historically,” adds Charles Stanley’s Donnelly.

Greka, which also offers conventional drilling services, has more than held its own since the Green Dragon demerger.

It has commissioned a new state of the art rig fleet and has ensured that its senior engineers and crews are the very best in class.

Now, its vision is to be recognised globally as the market leader for the provision of drilling services for unconventional gas.

Its client base of six counterparties in China and India include; GDG, CNPC Huabei, CNPC Jincheng, Sinopec (Bofa), Guangdong Bureau of Coal Geology and Essar in India.

The Essar contract win was particular important for the business.

It forms part of Greka’s strategy of diversifying away from Green Dragon and winning its own third party contracts, as well as new partners outside of China.

At the time, Grewal said: "The contract itself is important to Greka Drilling as it cements our intention to diversify the company's client base and geographical spread into India, in addition to China."

Charles Stanley’s Donnelly is on board with the plans.

“We believe that the share price valuation is undemanding, especially against a background of increasing momentum and strong revenue growth into 2015,” he said.

“We see 27% upside to our unchanged 12.7p target price, keeping the shares in ‘buy’ territory.”

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