Analysis of Company's Performance of Green Dragon Gas - Term Paper Example

GREEN DRAGON GAS Introduction Green Dragon Gas (GDG) Ltd. is the holding and indirect parent company of Greka China Ltd. It was incorporated in March2006 and was listed on AIM exchange in August 2006. GDG is a vertically integrated company with principal activities comprising of exploration, development, production, distribution and sale of gas with an exclusive focus on China. The company is headed by Randeep S. Garewal who holds a vast amount of experience in the related field. Green Dragon gas is considered to be a unique gas play as its power is reflected in its focus on Coal bed methane (CBM) and vertically integrated operations carried out in China. The company operates in the following segments: Upstream: In the upstream segment, GDG is involved in the exploration, development and production of coal bed methane (CBM) gas in collaboration with two other companies. GDG has secured six production sharing contracts of CBM blocks in the four provinces of China which covers an area of 7,566 square km with an estimated capacity of 25 trillion cubic feet of gas. GDG was able to increase its drilling productivity ratio from 17% in 2008 to 43% in 2009 by adopting proprietary surface-to inseam (SIS) drilling technology in its Shizhuang South project (Pipal Research, 2010). Technical Services: GDG’s Technical Services segment is responsible for drilling natural gas from the CBM blocks. Midstream: The midstream segment is supported by two commercial CNG stations located near the national gas pipeline network in Zhengzhou and Anhui. These distribution centers have received long term supply contracts from the China National Petroleum Company. Downstream: GDG is a strategic partner of Beijing Huayou (BHY), a leading gas distributor in Beijing and holds a 28.9% stake in their business. In addition to that, GDG also owns and operates two retail CNG stations and a vehicle fleet for CNG distribution in Henan. Technology and manufacturing: GDG is the pioneer of skid mounted gas refilling equipment in China and it owns a unit producing CNG dispensers in Henan. They are also in the phase of developing a pioneering proprietary Software and Control Data Acquisition systems for 24/7 monitoring of the entire process from Coal Seam drilling through production, transportation and retail gas sales. Ratio Analysis Profitability Ratios Gross Profit Margin = (Sales – Cost of Goods Sold) / Sales Gross Profit Margin (2008) = (24,649 – 21,073) / 24,649 = 14.51% Gross Profit Margin (2009) = (46,906 – 37,059) / 46,906 = 20.99% Return on Assets = Net Income / Total Assets Return on Assets (2008) = -29,957/ 758,977 = -3.95% Return on Assets (2009) = -23,859/ 763,949 = -3.12% Return on Equity = Net Income / Total Equity Return on Equity (2008) = -29,957/519,738 = -5.76% Return on Equity (2009) = -23,859/576,582 = -4.14% Short Term Liquidity Ratios Current Ratio = Current Assets / Current Liabilities Current Ratio (2008) = 18,404 / 74,724 = 0.25 Current Ratio (2009) = 48,230 / 22,428 = 2.15 Quick Ratio = Current Assets – Inventory / Current Liabilities Quick Ratio (2008) = 18,404 - 2,378 / 74,724 = 0.21 Quick Ratio (2009) = 48,230 – 2,370 / 22,428 = 2.04 Working Capital Working Capital = Current Assets – Current Liabilities Working Capital (2008) = 18,404 - 74,724 = -56,320 Working Capital (2009) = 48,230 - 22,428 = 25,802 Long Term Solvency Ratios Debt Ratio = Total Debt / Total Assets Debt Ratio (2008) = 239,239 / 758,977 = 0.32 Debt Ratio (2009) = 187,367 / 763,949 = 0.25 Analysis of Company’s Performance GDG recorded net revenue of $46.9 million in 2009 which shows a tremendous increase of 90.3% from the previous year. The profit margin also improved from 14.51% to 20.99% which upholds the growing strength of the company. The company attributed a financial loss in both the years 2008 and 2009 and is yet to make a financial profit. Being a young company and operating in an industry where fixed costs are prohibitive, it is expected that the company will report a profit by year 2013. The general and administrative expenses amounted to US$18.5 million in 2009 whereas they stood at $13.8 million in 2008. In the year 2009, the net loss incurred by GDG was $23.8 million which is a decrease of 20.56% from the year 2008. It is expected as the company matures and sets its foothold in the market with growing revenues, it will make substantial profits. The GDG had total assets of $763.9 million in 2009 with liabilities of $187.37 million. Total shareholder’s equity remained at $576.58 million. The company has a strong policy to remain debt free as it is evident from its declining debt ratio from 0.32 to 0.25 in year 2009. It raised $75 million by placement of 12 million shares at $6.25 to an Investment Fund, BGF World Energy Fund in December 2009. The company redeemed $55 million in outstanding convertible note by using the proceeds. Breakdown of Revenue FY09 FY08 Sale of CBM gas 0.230 0.033 Well drilling 14.337 2.856 Pipelined gas distribution 36.693 19.188 Gas station sales 8.362 4.059 Gas filling equipment sales 1.849 1.369 Eliminations (well drilling) intra-group (14.565) (2.856) Total 46.909 24.649 Source: Evolution Securities Revenue growth mainly stemmed from pipelined gas distribution and gas station sales. The successful application of surface in seam drilling technology has allowed GDG to capture substantial revenues. The sale of CBM gas accounted for a small value but it is expected as the organization grows the sale of CBM gas will bring the major chunk of revenues and GDG will be able to report huge profits. In 2009, the capital expenditure was at $13.8m and the cash inflows to cover this expenditure came from the payment from ConocoPhillips amounting to $20m and the fund raising of $75m from equity which were somehow offset by the $55m used to repay the outstanding convertible bond. As a result of this, the company ended with a net cash of $34.7 million in 2009. The company is also aiming for an ambitious $250m discretionary capital investment program for 2010/11. The future prospects of the company are attractive since it has been reported that China holds nearly 30 trillion cubic meters of methane gas (Merrill Lynch Research report, 2007). In addition to that, there is a growing demand for gas in China which is fueled by strong growth of Chinese economy and it is expected that GDG will utilize this fact to a great extent. Despite making any profits since its inception, GDG remains in excellent financial condition with cash on hand and backed by adequate funding from the partners. The CBM upstream gas business remains critical to the company’s success over the coming period. The company has also made a starting point in the development of the infrastructure needed to support the business. Green Dragon Gas holds a unique position within the Chinese energy market and one that in the contemporary environment will be difficult to imitate by the competitors. It has six huge CBM blocks located in areas of significant gas demand and a close proximity to the national pipelines. This provides a first mover advantage to GDG and gives it an upper hand over its competitors in the upcoming years. The company is currently valued at $6.15 per share by the market. With access to visionary leadership, sophisticated technology and equipment, technical expertise, and vertically integrated infrastructure for sale of gas and a $250 million capital investment program, GDG can lead the way in the market. Currently, the market has not recognized the true enterprise value and it has an upside potential (Evolution Securities, 2010). Therefore, I recommend a strong buy for Green Dragon Gas Limited. Mission Statement Analysis “To be a vertically integrated gas supplier providing optimum shareholder returns through the execution of an environmentally progressive niche business plan in China” Green Dragon Gas limited aims to be a leading vertically integrated gas supplier and its massive infrastructure buttresses its ability to be a strong vertically integrated gas supplier. The company has formed strategic alliances with its partners at every segment of the supply chain to utilize the advantages of synergy. The company’s business plan focuses on these key aspects To expand its resources through continuous drilling activities, utilizing the modern technology and taking advantage of the technical expertise of the workforce in interpreting exploration data. To built in house technical expertise by providing proper accommodations to the workforce. This will help in retaining the key figures and leveraging the core skills. Logistics operations will play a pivotal role in the whole supply chain therefore the company expects to capitalize on its infrastructure to meet its goals. To pursue strategic partnerships with companies to broaden sales and distribution channels and to construct CNG filling stations. Although the company is aiming for optimum shareholder returns but yet they are not evident in financial books. Since the company is operating in an industry where fixed costs are relatively high, it will take time for GDG to book profits as it explores and understands the dynamics of market. The exclusive focus on China is evident in its distribution infrastructure and meticulous planning as it has placed its units in close proximity with strategic locations. In addition to that, the growing Chinese energy market also offers bright prospects for the company. Environmental Policies Green Dragon Gas is heavily involved in exploration, development and distribution of Gas in China. Coal Bed Methane (CBM) unit serves as its strategic segment from where major chunk of the revenue will be generated in the future. As we know that Methane gas from an environmental perspective is a noxious gas and if it is released into the atmosphere, it is considered to be 21 times more damaging than Carbon dioxide. But if it is properly trapped and piped for domestic and industrial use, it can provide substantial benefits to the consumers. In addition to that, CBM produces less carbon dioxide when it is burnt as a fuel. Thus “Green Dragon” as the name suggests is promoting a Green Environment where it safely using its infrastructure to protect the environment and make it greener. Green Dragon Gas Limited actively participates in CSR (Corporate Social Responsibility) initiatives. It has developed a program through which it aims to generously contribute to the local community. The major goals of community contribution program are to improve Quality of Life Environment and safety Education Road and Infrastructure GDG took over the Operatorship of Shizuang South Block located at Zaoyuan Village of Shizhuang Town. Green Dragon’s management and field supervisors were extended a warm welcome by the Village Committee of Zaoyuan and local Government of Shizhuang Township providing them full support within their means. Green Dragon promised to offer job opportunities, local contracts and upgrading the leased properties to the owners without any expense. Such initiatives have dramatically improved the quality of life at the local communities. In addition to that, GDG has made substantial donations for the construction of local roads. Funds were also provided to the local schools to help the poor students pursue quality education within the local community. To improve the infrastructure, GDG has funded in the construction of a bridge at Guxian River. The new bridge has helped in linking the communities living on both sides of Guxian River. Competitors Analysis PetroChina PetroChina Company Limited (PetroChina) is engaged in the production, refininf, transportation, storage and marketing of crude oil and natural gas. It is controlled by China National Petroleum Corporation (CNPC) an integrated energy company. In terms of sales volume, the PetroChina is the largest natural gas transporter and seller in China. The company generated revenues of $149,435.9 million in FY 2009 which was a decrease of 5% from the last year. It also made a net profit of $15,157.6 million in year 2009. Strengths: Integrated oil & gas operations Global business operations Strong influences on the government Dominant position in the domestic upstream sector. Weaknesses: Lack of operations in eastern & southern china Lack of offshore oil development expertise Operating loss of refining & marketing segment Declining output at the large oilfields Sinopec China Petroleum & Chemical Corporation (Sinopec) is a vertically integrated energy and chemical company. It is controlled by the state owned, China Petrochemical Corporation with a stake of 75.8% in the company. Sinopec is engaged in the business of exploration, production, refining, marketing, and distribution of oil and natural gas. It holds the record of being Chinas largest producer and supplier of refined oil products and major petrochemical products. The company generated revenues of $204,739 million in the FY 2008 which was an increase of 21% over the last year. The net profit was $4,291.2 million in FY 2008. Strengths: Largest shares in domestic oil refining & sales Extensive expertise in the downstream segment Strong influences on the government Weaknesses: Large gap between crude oil output & refining capacity Lack of upstream segment expertise Relatively weaker financial profile Declining output at the large oilfields Self Analysis Strengths Largest independent (non state-owned) gas player in China Improved drilling productivity from SIS technology Operational efficiency through vertical integration Debt-free company Weaknesses Green Dragon Gas has PSCs for six CBM blocks in the four provinces in China. Out of these six blocks, only the GSS block is currently producing gas while the others are in the middle to late phase of exploration and development. The proprietary SIS Technology of GDG’s was a great success which led to an improved drilling productivity at the GSS block but it has yet to be tested on other blocks. References Annual Report 2009, Green Dragon Gas Limited, Available from site: http://www.greendragongas.com/doc/2009_ar.pdf Evolution Securities 2010, Green Dragon Gas Limited, Available from site: http://www.greendragongas.com/doc/research_report_180210.pdf Merrill Lynch Research Report, 2007, Green Dragon Gas: A green giant awakens in China http://www.greendragongas.com/doc/ML_Nov_2007.pdf Pipal Research 2010, PSQ Analytics, Available from site: http://www.greendragongas.com/doc/research_report_100308.pdf Read More