Green Dragon Gas raises funding for 25 new drills

Green Dragon Gas, a China-based producer of coal bed methane gas, has raised $102.7 million from a placement of new shares as it continues its aggressive expansion, which has led to a near doubling of its share price in the past three months.

While currently listed on London’s Alternative Investments Market (AIM), Green Dragon confirmed last month that it intends to move its primary listing to Hong Kong next year to take advantage of “the greater institutional appreciation of the value of the company's unconventional gas assets and understanding of the China country risk”. Green Dragon also noted the success of other recent moves from AIM to the Hong Kong main board as key for its decision.

Rather than wait for those plans to materialise, however, the company chose to take advantage of the positive sentiment surrounding its stock to raise funds needed to pay for the acquisition of 25 new drills, which it announced in November. The acquisition will more than triple its existing fleet of seven drills and will support its aggressive drilling programme in the Shizhuang South area (referred to as GSS).

The company didn’t announce the approximate cost of the new drills but said it expects to select a supplier out of a list of five selective rig manufacturers before year-end. Ten of the drills will be delivered in 2011 with the rest following in 2012 and 2013.

The placement was launched after the London market closed last Thursday at a size of 7 million new shares with an option to upsize to 8.8 million shares. The price was fixed at $11.68, or at a 1.4 % discount versus the closing price of $11.85.

The deal was targeted at a small group of high-quality investors, including global funds and natural resources specialists, as well as one undisclosed anchor investor. The latter helped create momentum in the bookbuilding and enabled Green Dragon to exercise the upsize option in full. At the final size the deal accounted for 7.3% of the existing share capital and hundreds of trading days – even with the sharp increase in the share price in recent months, the stock often sees less than 10,000 shares change hands during an entire trading day as most of the stock is closely held by a handful of large institutions.

The illiquid nature of the stock, together with the fact that the placement was launched on the back of a record high share price, may explain why the placement didn’t appeal to a larger group of investors. In all, the new shares were bought by less than 20 accounts.

The deal was completed before the market opened on Friday, but the share price stayed unchanged throughout that day. Yesterday, it moved up to a high of $12.20, but returned to $11.85 by the close. The trading volume was just over 6,300 shares.

The deal was arranged by CLSA on a best effort basis. The Hong Kong-based brokerage and investment bank has also been hired by Green Dragon as an adviser with regard to its capital markets strategies in Asia, including the Hong Kong listing.

Green Dragon’s gas business was set up from scratch by its current chairman and CEO, Randeep Grewal, in 2007 and has grown to a fully integrated gas company with upstream exploration assets, as well as its own pipeline, retail CNG filling stations and a trucking distribution business.

In a recent statement, Grewal noted that the company is well positioned to “maintain its growth trajectory into 2011 and the years beyond, while enhancing shareholder value with a unique and low carbon business plan, which is consistent with China’s new five year economic plan on increasing domestic production and use of gas”.