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Green Dragon Gas - Capital Network: Alignment of Interests between Partners in GSS and GSN

Green Dragon Gas Ltd (LON:GDG) announced that it has finalised agreements with CUCBM, a subsidiary of CNOOC and Green Dragon Gas Ltd (LON:GDG) partner in the GSS and GSN Blocks, which conclude eight years of discussions regarding Green Dragon Gas Ltd (LON:GDG) interest in the wells historically drilled by CUCBM in the two Blocks. These agreements confirm the respective interests of the partners as well as the amount of costs recovery resulting from CUCBM’s work programme for the period 2007-2014. Although we welcome this announcement, it is unclear from the RNS whether these agreements have an immediate impact on either GDG’s gas reserves or on future production, revenue and cash flows. We suspect most of the positive impact to be expressed in a closer future cooperation between the two partners focussed on the monetisation of gas resources, which should be positive for investors’ sentiment and have a positive impact on the share price. However, we keep our 221p valuation unchanged.
Green Dragon Gas - Capital Network: Alignment of Interests between Partners in GSS and GSN

This announcement follows an earlier announcement by GDG (15/09/17) of the approval of a Project Code for the Overall Development Plan (ODP) on the GCZ block by the China National Development and Reform Commission (NDRC), confirming its final approval. The Block is jointly operated by CNPC and GDG through a joint management team based in Jincheng, Shanxi. The development cost for GCZ will be c.US$53.8m over 2017 and 2018. CNPC will invest US$28.5m according to its 53% participating interest and GDG US$25.3m based on its 47% participating interest in the Block.

 

Our valuation of GDG at 221p per share, based on a risked valuation of 2P reserves and adjusted for Net debt/cash and capitalised corporate costs, is unchanged. These two recent announcements should increase investors’ confidence in GDG’s ability to realise this valuation, although we recognise, from the stock’s performance in recent months, that the perception gap has grown wider. We reckon that management should take the publication of 1H17 results later this month as an opportunity to inject more clarity in its communication in order to narrow the gap (Figure 1).

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