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G3 Exploration Ltd

Green Dragon Gas – Capital Network: NDRC Approval will Shorten lead up to Commercialisation

Green Dragon Gas (GDG) announced that the China National Development and Reform Commission (NDRC) has approved a Project Code for the Overall Development Plan (ODP) on the Greka Shizhuang South Zaoyuan portion of the Main Block (GSS), concluding that the ODP does not require an approval process and only needs to be registered. Management reckon this approval will shortens the time to large-scale commercial gas production from the GSS Block. We note that this announcement follows the recent approval (18.4.17) of the ODP on the GCZ Block. Both GSS and GCZ Blocks were specifically mentioned within China's 13th Five-Year Plan as being critical to domestic production requirements, and the latest approvals demonstrate the Chinese Government commitment to fulfilling this ambition. We see the next catalyst for the stock as the probable approval of an ODP for the GGZ Block in 2017.

The development program on GSS would add 42 vertical and 47 LiFaBriC wells by 2020 for a net investment of US$49.2m by GDG which has a 60% participating interest in this block with its 40% partner, China United Coalbed Methane Corp (CUCBM), a wholly owned subsidiary of China National Offshore Oil Corporation (CNOOC). This would come in addition of the already approved and more material development program on GCZ which would add 147 wells by end 2018.

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. However, the approval of a second ODP this year should increase investors’ confidence in the quality of GDG’s assets and in the company’s ability to realise this valuation (Figure 1).

Executive summary

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.

Quick facts: G3 Exploration Ltd

Price: £0.37

Market: LSE
Market Cap: £56.97 m
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