Half Yearly Report

RNS Number : 2465P

Green Dragon Gas Ltd

30 September 2011

 



30 September 2011

GREEN DRAGON GAS LTD

("Green Dragon Gas" or "the Company")

Interim Results to 30 June 2011 - 68% Increase in Revenues

Green Dragon Gas Ltd (AIM: GDG), one of the largest independent companies involved in the production of coal bed methane gas and the distribution and sale of gas in China, is pleased to announce its interim results for the six months ended 30 June 2011.

HIGHLIGHTS

Financials:

·     Revenues increased by 68% to US$36.2 million over same period in 2010

·     Gross profit increased by 41% to US$5.3 million over the same period in 2010

·     Current assets of US$214.6 million with US$156.8 million in cash

·     Total equity of US$670.1 million

·     US$50 million raised at US$14.88 per share

·     Sinoenergy stake sold for US$25 million

·     Successful demerger via a dividend in specie of AIM listed Greka Drilling

·     Increase in G&A expense due to non-cash share option charge of US$8.7 million

Upstream - Coal Bed Methane:

·     CBM gas production annual rate increased 32% to 1.66 Bcf from rate at year end and about 200% year on year - in line with targets set

·     20 additional wells drilled across all six blocks taking the total well count to 258 wells

·     Infrastructure capacity, including power generation, compression and pipeline, in construction to meet gas production increases

·     Power output ratio improves from 39.7 kWh/Mcf to 104.9 kWh/Mcf

·     Gas in place of 25.5 Tcf, 3P of 2.6 Tcf with a NPV10 of US$12.3 billion (at year end) 

Midstream Wholesale Gas:

·     Gas sales volume increased 12% to 1.39 Bcf over the same period in 2010 and sales value increased 28% to US$13.5 million

·     Cost of transportation of CNG using Greka Transportation and Infrastructure fleet fell from US$0.46 to US$0.13 per 100 km, a 72% improvement in efficiency

·     First foreign company in China to have been awarded a CNG gas transportation licence

Downstream Sales of Gas:

·     Gas sales increased to 6.67 Bcf representing a 32% increase over the same period last year

·     2 additional refueling stations added in Henan province resulting in 6 fully operational CNG retail stations

·     10 km of additional pipeline added to the Beijing Huayou (BHY) distribution network bringing total to 294 km

Technology and Manufacturing:

·     Well-head compressors added to dispensers and SCADA as the main production and business lines

Commenting, Randeep S. Grewal, Chairman and CEO of Green Dragon Gas said:

"Following a diligent and structured process and careful consideration, we concluded that our drilling services division would be better served as an independent business; while such services were required, ownership was not essential to a gas producer.  Hence, we successfully created a separate listing for the Company's drilling division, which resulted in a dividend of shares in the now independently operated Greka Drilling, the demerged entity. The demerger has created clear operational advantages for both companies and concurrently provided our shareholders with an investment in the booming services industry in China.

Whilst our results are driven by current end user sales, the expected evolution is taking place in our upstream business. Coal bed methane is an annuity model and one that produces significant stable cash returns once the repeatability of the drilling process and resulting well production profile is understood. Now that we have reached this point, our aggressive production forecasts based on our US$250 million discretionary capital expenditure plan reflect our confidence in the repeatability of each new SIS well drilled.

The principal reason for the Company to engage in the initial acquisitions of mid and downstream assets was to put the necessary infrastructure in place to meet the expected uplift in our gas production. During the period under review, the Company also added senior staff and engineers that help ensure that our facilities are able to cope with these significant capacity increases. The level of certainty associated with each SIS well drilled allows us to match the integrated gas production facilities to fit the predictable output profile and knowing our customers in the last mile component through our mid and downstream assets will become increasingly important to the vertically integrated model.

Multiple options for selling gas are a vital component that will maximise the net profit at the well-head. Gas sales options have been expanded from purely selling gas through our wholly-owned retail gas outlets to one of building a pipeline to connect into the West-East pipeline and constructing a 10 MW powerplant that establishes the optionality of considering "gas-by-wire" or peak load powerplant sales of electricity generated by our produced CBM. The GSS-Integrated Production Facility (IPF) now demonstrates our vertically integrated strategy founded on creating the maximum options to capture the highest possible net margin per Mcf. The GSS-IPF shows how we could sell our gas as power, CNG or through the pipeline. Simply, the options provide us pricing leverage to achieve the highest margins. We intend to build several larger IPF's concurrent with the increasing gas production in the near future."

For further information on the Company and its activities, please refer to the website at www.greendragongas.com or contact:

Stephen Hill, VP Corporate Communications Green Dragon	[phone]
Dr Azhic Basirov / David Jones Smith & Williamson - Nomad & Broker	[phone]
Tim Redfern / Anu Tayal / Adam James Evolution Securities - Broker	[phone]
Paul Connolly / Steve Baldwin Macquarie Capital (Europe) - Broker	[phone]
James Henderson / Phillip Dennis Pelham Bell Pottinger - Investor Relations	[phone]
Robyn Joseph Kreab Gavin Anderson - Public Relations	[phone]

The information relating to gas reserves contained in this announcement has been prepared in accordance with guidelines approved by the Society of Petroleum Engineers and has been reviewed by Elton Dong, Chief Engineer and Vice General Manager Production, Bachelor of Science at Xi'an Petroleum Institute.

Definitions

1P	Proved reserves
2P	Proved plus probable reserves
3P	Proved plus probable plus possible reserves
Bcf	billions of cubic feet
cf	cubic feet
CBM	Coal bed methane
CNG GSS	compressed natural gas Shizhuang South
kWh Mcf Mcfpd MW	kilowatt-hour thousands of cubic feet thousands of cubic feet per day Megawatts
NPV 10	net present value calculated using a 10% discount rate
PSC	production sharing contract
Reserves	reserves are those quantities of hydrocarbons anticipated to be commercially recoverable by application of development projects to known accumulations from a given date forward under defined conditions
SIS	surface-to-inseam
Tcf SCADA	trillions of cubic feet Supervisory Control and Data Acquisition

CHAIRMAN'S STATEMENT

Successive 5-year plans by China's central planning authorities have contained targets for the production of CBM as a component part of the nation's energy supply. These targets have been repeatedly missed largely due to the lack of available technologies to monetise the vast CBM resource trapped in extremely complex coal seams. The original task set by the central Government and the aim of those original contracts awarded to the foreign companies was to provide capital and technology to unlock the potential reserves. The current 5-year plan contains another forward look at output. Green Dragon Gas has pioneered the "cracking of the code" which will enable the potential to be realised. This time the 5-year plan objectives are within reach. I certainly would not bet against them.

Upstream - CBM Production

Production of gas increased to an exit annual rate of 1.66 Bcf in June in spite of some delays resulting from the conversion of our drilling contractor's rig fleet to being capable of drilling SIS wells. Nonetheless we drilled 20 new wells in the first half across all our six blocks, bringing the total wells drilled to 258. However, the real growth in our discretionary well drilling schedule was always expected to begin ramping up in the latter half of 2011 and into 2012, once Greka Drilling had expanded its capacity with the addition of 25 new rigs.

Importantly the predictability of the gas output from our SIS wells ensures that the associated infrastructure is concurrently optimized to match the forecasted gas production profile. The successful implementation of our Technology and Manufacturing division's proprietary designed and purpose built and installed boosters (well-head gas compressors) which regulate and manage gas pressures has led to improvements in the gas produced and further complemented the drilling program. The GSS-IPF will have a processing capacity of 10,594 Mcfpd by the year end. Our infrastructure division successfully concluded significant upgrades to the GSS-IPF with substantially more advanced equipment. This resulted in efficiency improvements demonstrated by the power output ratio at GSS increasing from 39.7kWh/Mcf to 104.9 kWh/Mcf.

Midstream - Wholesale Gas Distribution

The Company implemented a successful strategy across its fleet of trucks to reduce the cost of transportation, which now stands at RMB 0.13 per 100 km compared to RMB 0.46 previously (6 months ended June 2010). The efficiency improvements were driven by an increase in the wholly owned CBM fueled transportation fleet and return of the leased diesel fueled vehicles. Concurrent with such economic efficiency improvements, a significant reduction in carbon pollutants was achieved.

Gas sales volume increased 12% to 1.39 Bcf over the same period in 2010 and sales value increased 28% to US$13.5 million. Wholesale gas sales recovered from the resistance seen in 2010 as end customers absorbed the price increases implemented by the Government.

In addition, Green Dragon became the first foreign company in China to have been awarded a gas transportation licence.

Downstream - Retail Gas Sales

BHY, the pipeline gas distribution joint venture located around Beijing's outer ring road, increased its installed pipeline infrastructure from 284 km to 294 km. Increased demand helped gas sales climb by 32% to 6.67 Bcf. The Company's strategy remains the organic expansion of this network through cash generated from sales.

Our wholly owned Compressed Natural Gas ("CNG") retail stations for fueling the exponentially expanding number of vehicles within Central China increased from 4 to 6. Our current expectation is to have an additional 10 CNG stations completed by yearend with an additional 15 new stations in commercial operation by early 2012. We are currently selling gas at these retail stations for in excess of US$16 per Mcf, which is required by regulation to be at a discount to the regulated prices of gasoline, the alternative transportation fuel. We expect such prices to be sustainable in the future.

Technology and Manufacturing

During the period, the focus was on developing well-head compressors which are expected to become a vital component part of our integrated solution in gas production. These proprietary designed and purpose built compressors facilitate the flow of variable pressured gas from different producing wells consistently enhancing the overall gas production materially. Currently, we are manufacturing compressors in two configurations of 50 MW and 75 MW. The division continues to demonstrate its unique value within the Group.

Financials

In the first half of the year, revenue increased 68% to US$36.2 million which reflects the growth in the midstream and downstream business. Gross profits increased by 41% to US$5.3 million.

The Company ended the period with a very strong balance sheet with over US$156 million in cash on hand. In these uncertain financial markets, the deliberate attempt to build up a strong balance sheet has been quite timely. We have a mandatory capital expenditure requirement of approximately US$11.75 million per year within our Upstream division which provides the Company substantial head room and flexibility. Our balance sheet strength demonstrates the disciplined approach we have maintained through our period of exponential growth and which we are committed to follow into the future.

Outlook

During the first half of the year, the Company continued its steady growth trajectory within all divisions, provided a dividend in specie to our shareholders, strengthened the balance sheet with the divestment of SInoenergy and concluded significant plans to expand the infrastructure with a focused expansion at the GSS gas processing facilities.

In our Upstream division, in the second half of this year we expect to more than double the number of contracted rigs from 8 to 17 by yearend with an additional 16 scheduled for early in 2012. This exponential increase in contracted drilling capacity will see us maintain at least 33 rigs running at the Company's six blocks for most of next year, an increase of over 300% in capacity over this year. We expect materially increased production from the SIS wells drilled in the GSS block and enhanced exploration activities in the other five blocks. We expect such activities to increase our reserve valuations.

The Midstream division expects to complete its GSS-IPF upgrade by yearend, adding a 10 MW CBM-fueled powerplant and a 17,644 Mcfpd compression facility connected to the West-East pipeline. This will provide for a 7,058 Mcfpd of initial sales capability. Concurrently the division is expected to increase its CBM-fueled transportation fleet to 20 trailers and 10 trucks. In addition, the division is concluding the design for a new IPF and pipeline to be built in 2012.

The Downstream division continues its focused task of developing 25 Greka branded CNG stations within the trucking radius of GSS, predominately in Henan and Shanxi. We expect these stations to be operational in the first half of 2012. Our joint-venture company BHY, is forecasted to maintain its steady distribution expansion along the Beijing outer ring road, focusing on the higher margin industrial users.

Our Technology and Manufacturing division will focus its efforts on meeting the significant demand from each of our operating divisions. The Upstream facilities and wells are being fitted with the proprietary SCADA systems and well-head compressors. Midstream requires each of the trucks to be monitored through a GPS system with video to enhance vigilance and safety. The Downstream division is installing our patented dispensers and SCADA systems in each of the new retail stations being built.

The Company has a strong balance sheet, a proven technology to extract our proven reserves of CBM, and an integrated business model to ensure maximum achievable margins for the ever increasing gas volumes being produced by us. We look forward to realising the potential from our long tenure in developing Green Dragon Gas into a unique integrated gas company in China's fast growing clean energy market.

I would like to thank my fellow shareholders and partners for their continued support, as well as our dedicated employees, whose relentless hard work enables Green Dragon Gas to continue its exponential growth in the world's largest growing economy.

Randeep S. Grewal

Founder & Chairman

29 September 2011

Condensed Consolidated Statement of Comprehensive Income

Six months ended 30 June 2011

		Six months  ended 30 June 2011	Six months  ended 30  June 2010	Year ended  31 December  2010
	Notes	US$'000	US$'000	US$'000
		unaudited	unaudited	audited
Continuing operations
Revenue	3	36,162	21,463	49,725
Cost of sales		(30,846)	(17,692)	(41,280)
Gross profit		5,316	3,771	8,445
Selling and distribution costs		(717)	(613)	(1,450)
Administrative expenses	4	(16,559)	(7,685)	(13,880)
Loss from operations		(11,960)	(4,527)	(6,885)
Finance income		3,044	87	488
Finance costs		(4,065)	(343)	(3,987)
Loss before income tax		(12,981)	(4,783)	(10,384)
Tax (charge)/credit	5	(513)	25	191
Loss for the period from continuing   operations		(13,494)	(4,758)	(10,193)
Discontinued operations
Loss for the period from   discontinued operations		(676)	(1,511)	(3,340)
Loss for the period		(14,170)	(6,269)	(13,533)
Other comprehensive income
Exchange differences arising on   translation of foreign operations		2,652	595	(497)
Total comprehensive income for the period		(11,518)	(5,674)	(14,030)
Loss for the period attributable to:
Equity holders of the parent		(14,598)	(5,467)	(13,231)
Non-controlling interests		428	(802)	(302)
		(14,170)	(6,269)	(13,533)
Total comprehensive income
attributable to:
Equity holders of the parent		(12,085)	(5,185)	(13,679)
Non-controlling interests		567	(489)	(351)
		(11,518)	(5,674)	(14,030)
Basic and diluted loss per share (US$)	6	(0.110)	(0.045)	(0.109)
From continuing operations		(0.105)	(0.034)	(0.079)
From discontinued operations		(0.005)	(0.011)	(0.030)

Condensed Consolidated Statement of Financial Position

At 30 June 2011

		As at  30 June 2011	As at  30 June 2010	As at 31 December 2010
	Notes	US$'000	US$'000	US$'000
		unaudited	unaudited	audited
Assets
Non-current assets
Property, plant and equipment	8	54,646	65,446	68,399
Gas exploration and appraisal assets		664,196	628,524	641,508
Other intangible assets		17,966	20,915	19,332
Payment for leasehold land held for   own use under operating leases		842	327	264
Deferred tax assets		1,651	914	1,367
Loan receivables		-	-	15,000
		739,301	716,126	745,870
Current assets
Inventories		1,419	4,622	4,795
Trade and other receivables	9	31,315	10,099	19,610
Other financial assets		25,096	-	44,497
Cash and cash equivalents		156,772	77,566	148,317
		214,602	92,287	217,219
Total assets		953,903	808,413	963,089
Liabilities
Current liabilities
Trade and other payables	10	37,814	20,672	30,695
Loans and borrowings		6,064	4,064	4,051
Current tax liabilities		434	519	1,131
		44,312	25,255	35,877
Non-current liabilities
Convertible notes		75,050	43,371	88,699
Deferred tax liability		151,454	150,608	151,327
Other financial liability	12	13,000	13,000	13,000
		239,504	206,979	253,026
Total liabilities		283,816	232,234	288,903
Net Assets		670,087	576,179	674,186

		As at  30 June 2011	As at  30 June 2010	As at 31 December 2010
	Notes	US$'000	US$'000	US$'000
		unaudited	unaudited	audited
Capital and reserves
Share capital	13	14	12	13
Share premium	13	705,195	604,701	705,410
Convertible note equity reserve	13	9,198	5,271	10,924
Share based payments reserve	13	12,743	4,010	4,010
Capital reserve	13	820	570	895
Foreign exchange reserve	13	1,436	(347)	(1,077)
Retained deficit	13	(79,089)	(56,376)	(64,465)
Total equity attributable to   equity holders of the Parent		650,317	557,841	655,710
Non-controlling interests		19,770	18,338	18,476
Total Equity		670,087	576,179	674,186

Condensed Consolidated Statement of Changes in Equity

Six month ended 30 June 2011

	Share capital	Share premium	Convertible note equity reserve	Share based payment reserve	Capital reserve	Foreign exchange reserve	Retained deficit	Equity attributable to equity holders of the Company	Non- controlling interests	Total
	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000
At 1 January 2010	12	604,701	-	4,010	570	(629)	(50,909)	557,755	18,827	576,582
Total comprehensive income for the period	-	-	-	-	-	282	(5,467)	(5,185)	(489)	(5,674)
Issue of US$50 million convertible notes	-	-	5,271	-	-	-	-	5,271	-	5,271
At 30 June 2010	12	604,701	5,271	4,010	570	(347)	(56,376)	557,841	18,338	576,179
Total comprehensive income for the period	-	-	-	-	-	(730)	(7,764)	(8,494)	138	(8,356)
Issue of US$50 million convertible notes	-	-	5,653	-	-	-	-	5,653	-	5,653
Placement of new shares	1	100,213	-	-	-	-	-	100,214	-	100,214
Exercise of employee share options	-	496	-	-	-	-	-	496	-	496
Transfer to capital reserve	-	-	-	-	325	-	(325)	-	-	-
At 31 December 2010	13	705,410	10,924	4,010	895	(1,077)	(64,465)	655,710	18,476	674,186
Total comprehensive income for the Period						2,513	(14,598)	(12,085)	567	(11,518)
Placement of new shares	1	49,246	-	-	-	-	-	49,247	-	49,247
Issue of new shares by conversion of convertible note	-	15,788	(1,726)	-	-	-	-	14,062	-	14,062
Share-based payments	-	-	-	8,733	-	-	-	8,733	-	8,733
Exercise of employee share options	-	12,695	-	-	-	-	-	12,695	-	12,695
Transfer to capital reserve	-	-	-	-	26	-	(26)	-	-	-
Demerger of well drilling services by means of dividend	-	(77,944)	-	-	(101)	-	-	(78,045)	727	(77,318)
At 30 June 2011 (unaudited)	14	705,195	9,198	12,743	820	1,436	(79,089)	650,317	19,770	670,087

Condensed Consolidated Statement of Cash Flows

Six months ended 30 June 2011

		Six months ended 30 June 2011	Six months ended 30 June 2010	Year ended 31 December  2010
		US$'000	US$'000	US$'000
	Notes	unaudited	unaudited	audited
Operating activities
Loss before income tax		(13,657)	(6,294)	(13,078)
Adjustments for:
Depreciation		1,807	3,275	5,653
Amortisation of leasehold land held   for own use under operating leases		25	14	25
Amortisation for intangible assets		1,236	1,204	2,479
Share based payment expenses		8,733	-	-
Gain on disposal of property, plant   and equipment		36	-	1,345
Finance income		(3,044)	(89)	(488)
Finance costs		4,103	507	4,068
Foreign exchange differences		(268)	-	(155)
Cash flows before changes in working   capital		(1,029)	(1,383)	(151)
Increase in inventory		(1,056)	(2,252)	(2,425)
Increase in trade and other receivables		(15,406)	(2,993)	(12,504)
Decrease in trade and   other payables		10,801	1,500	13,168
Net cash used in operations		(6,690)	(5,128)	(1,912)
Income tax paid		(859)	(1,720)	(1,316)
Net cash used in operating activities		(7,549)	(6,848)	(3,228)

		Six months ended 30 June 2011	Six months ended 30 June 2010	Year ended 31 December  2010
		US$'000	US$'000	US$'000
	Notes	unaudited	unaudited	audited
Investing activities
Interest received		3,044	89	488
Payments for exploration activities		(19,878)	(11,367)	(26,857)
Purchases of property, plant   and equipment		(1,526)	(1,098)	(6,967)
Payments for leasehold land held for   own use under operating leases		(596)	(59)	-
Purchase of held-to-maturity investment		(25,096)	-	(25,007)
Proceeds from disposal of   held-to-maturity investment		25,007	-	-
Purchases of fair value through   profit or loss financial asset		-	-	(19,490)
Proceeds from sale of fair value through   profit or loss financial asset		19,490	-	-
Loans issued		15,000	-	-
Repayment of loans issued		-	-	(15,000)
Payments for other intangible assets		(27)	(376)	(39)
Demerger of well drilling business	11	(56,300)	-	-
Cash paid on acquisition of subsidiary   companies		(4,234)	-	-
Net cash used in investing activities		(45,116)	(12,811)	(92,872)
Financing activities
Proceeds from bank borrowings		4,419	10	1,473
Repayment of loans and borrowings		(1,062)	-	(1,542)
Proceeds from issue of share capital		61,943	-	100,710
Proceeds from issue of convertible   notes		-	50,000	96,957
Other interest paid		(3,690)	(220)	(1,402)
Proceeds from strategic farm-out		-	8,087	12,625
Net cash from financing activities		61,610	57,877	208,821
Net increase/(decrease) in cash   and cash equivalents		8,945	38,218	112,721
Cash and cash equivalents   at beginning of period		148,317	38,753	38,753
		157,262	76,971	151,474
Effect of foreign exchange rate changes		(490)	595	(3,157)
Cash and cash equivalents   at the end of period		156,772	77,566	148,317

Notes to Condensed Interim Financial Statements

1       GENERAL INFORMATION

The condensed financial information for the six months ended 30 June 2011 and 30 June 2010 is unaudited and unreviewed and does not constitute statutory financial statements. The consolidated unaudited interim financial information set out in this report is based on the consolidated financial statements of Green Dragon Gas Ltd. and its subsidiary companies (together referred to as the 'Group'). The condensed consolidated financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2010, which have been prepared in accordance with IFRSs as adopted by the European Union. The comparative financial information for the full year ended 31 December 2010 is not the Group's full annual accounts for that period but has been derived from the annual financial statements for that period.  The auditors' report on those accounts was unqualified and did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their report.

2     ACCOUNTING POLICIES

The condensed set of financial statements has been prepared in accordance with IAS 34, "Interim Financial Reporting". These accounts have been prepared in accordance with the accounting policies that are expected to be applied in the Report and Accounts of Green Dragon Gas Ltd. for the year ending 31 December 2011 and are consistent with International Financial Reporting Standards adopted for use in the European Union. The annual financial statements of Green Dragon Gas Ltd. are prepared in accordance with IFRSs as adopted by the European Union.

Basis of preparation

After making enquiries, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the half-yearly condensed financial statements.

The financial statements are presented in United States Dollars and all values are rounded to the nearest thousand dollars (US$'000) except when otherwise indicated.

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an invested entity so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.

3     REVENUE AND SEGMENTAL INFORMATION

For the six months ended 30 June 2011

The Group has six reportable segments as set out below.  The operating results of each of these segments are regularly reviewed by the Group's chief operating decision makers in order to make decisions about the allocation of resources and assess their performance.

During the period revenue of US$28,037,000 (30 June 2010 - US$16,252,000) was recognised by the Pipelined Gas Distribution segment in respect of customers representing 10% or more of the Group's total revenue for the period.

For the six months ended 30 June 2011

	Continuing operations							Discontinued operations
	Sales of  CBM gas	Pipelined  gas distribution	Gas station sales	Gas filling   equipment sales	Transportation	Corporate	Sub-total	Well drilling	Eliminations	Consolidated
	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000
	unaudited	unaudited	unaudited	unaudited	unaudited	unaudited	unaudited	unaudited	unaudited	unaudited
Sale to external   customers	-	28,037	7,738	387	-	-	36,162	-	-	36,162
Inter-segment sales	823	-	-	114	2,499	-	3,436	4,872	(8,308)	-
	823	28,037	7,738	501	2,499	-	39,598	4,872	(8,308)	36,162
Depreciation and   amortisation	21	1,452	1,061	252	206	49	3,041	27	-	3,068
Profit/(Loss) from   operations	(910)	2,915	889	(37)	7	(12,200)	(9,336)	(954)	(2,308)	(12,598)
Assets	672,957	59,776	23,986	6,625	7,177	632,742	1,403,263	-	(449,360)	953,903
Liabilities	188,251	15,052	1,150	653	980	334,076	540,162	37,843	(294,189)	283,816

For the six months ended 30 June 2010

	Continuing operations						Discontinued operations
	Sales of CBM gas	Pipelined gas distribution	Gas station sales	Gas filling equipment sales	Corporate	Sub-total	Well drilling	Eliminations	Consolidated
	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000
	unaudited	unaudited	unaudited	unaudited	unaudited	unaudited	unaudited	unaudited	unaudited
Sale to external   customers	-	16,265	4,738	460	-	21,463	-	-	21,463
Inter-segment sales	117	-	-	-	-	117	13,343	(13,460)	-
	117	16,265	4,738	460	-	21,580	13,343	(13,460)	21,463
Depreciation and   amortisation	5	1,950	1,056	255	46	3,312	1,181	-	4,493
Profit/(Loss) from   operations	(329)	1,051	1,024	(96)	(3,916)	(2,266)	(1,848)	(1,762)	(5,876)
Assets	637,905	20,051	4,707	1,162	335,451	999,276	28,826	(219,688)	808,414
Liabilities	161,442	14,737	1,962	824	186,680	365,645	19,119	(152,530)	232,234

For the year ended 31 December 2010

	Continuing operations							Discontinued operations
	Sales of CBM gas	Pipelined gas distribution	Gas station sales	Gas filling equipment sales	Transportation	Corporate	Sub-total	Well drilling	Eliminations	Consolidated
	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000
	audited	audited	audited	audited	audited	audited	audited	audited	audited	audited
Sale to external   customers	-	38,304	10,054	1,279	88	-	49,725	-	-	49,725
Inter-segment sales	474	-	-	-	952	-	1,426	37,436	(38,862)	-
	474	38,304	10,054	1,279	1,040	-	51,151	37,436	(38,862)	49,725
Depreciation and   amortisation	39	3,002	2,126	510	211	109	5,997	2,160	-	8,157
Profit/(Loss) from   operations	(1,931)	1,956	(1,014)	(562)	(367)	(5,916)	(7,834)	4,775	(6,439)	(9,498)
Assets	650,240	63,578	19,135	5,281	2,609	639,815	1,380,658	25,553	(443,122)	963,089
Liabilities	170,692	19,770	897	1,114	1,150	348,133	541,756	23,036	(275,889)	288,903

4     ADMINISTRATIVE EXPENSES

Administrative expenses for the period included an equity settled share based payment charge of US$8,733,000 (30 June 2010 - Nil, 31 December 2010 - Nil).

5     TAX

Taxation for the Group's operations in the PRC is provided at the applicable current tax rate of 25% on the estimated assessable profits for the period.

6     LOSS PER SHARE

	Six months ended  30 June 2011	Six months ended  30 June 2010	Year ended 31 December 2010
	US$'000	US$'000	US$'000
	unaudited	unaudited	audited
Loss attributable to owners of the   Company arising from continuing   operations	(13,922)	(4,157)	(9,604)
Loss attributable to owners of the   Company arising from   discontinued operations	(676)	(1,310)	(3,627)
Loss attributable to owners of the   Company for the purpose of basic   and diluted loss per share	(14,598)	(5,467)	(13,231)
Weighted average number   of ordinary shares	132,493,117	120,512,336	121,048,178

Loss per share is based on the loss attributable to ordinary equity holders of the Company of divided by the weighted average of ordinary shares in issue during the corresponding period.

Due to the loss arising during the periods the diluted loss per share is considered to be the same as the basic loss per share. 11,904,375 potential ordinary shares (30 June 2010 - 7,405,005 shares, 31 December 2010 - 12,823,261 shares) have therefore been excluded from the above calculations.

7     DIVIDEND

The directors do not recommend the payment of an interim dividend (2010: Nil).

8     PROPERTY, PLANT AND EQUIPMENT

During the period, the Group incurred approximately US$1,526,000 on additions to property, plant and equipment (30 June 2010 - US$1,098,000, 31 December 2010 - US$6,967,000).

9     TRADE AND OTHER RECEIVABLES

		As at  30 June 2011	As at  30 June 2010	As at  31 December 2010
		US$'000	US$'000	US$'000
		unaudited	unaudited	audited
Trade receivables		12,869	4,038	13,506
Other receivables		18,434	6,061	6,104
Amount due from related parties		12	-	-
		31,315	10,099	19,610

10   TRADE AND OTHER PAYABLES

		As at  30 June 2011	As at  30 June 2010	As at  31 December 2010
		US$'000	US$'000	US$'000
		unaudited	unaudited	audited
Trade payables		8,113	6,221	18,137
Other payables		10,729	12,347	12,062
Amounts due to related parties		18,972	2,104	496
		37,814	20,672	30,695

The amounts due to related parties included an amount payable to the demerged well drilling services business for drilling services performed of US$14,604,000 (30 June 2010 - Nil, 31 December 2010 - Nil).

11  DEMERGER OF WELL DRILLING SERVICESBUSINESS

On 7 March 2011, the shareholders approved the demerger of its well drilling services business by means of a dividend in specie of shares in Greka Drilling Ltd. to shareholders of the Company.

A summary of the assets and liabilities of well drilling division distributed by the Company as a result of the demerger is as follows:

						US$'000
Net assets distributed:
Property, plant and equipment						16,976
Other intangible assets						178
Inventories						4,447
Trade and other receivables						5,283
Cash and cash equivalents						56,300
Trade and other payables						(3,798)
Loans and borrowings						(1,490)
Current tax liabilities						(578)
Non-controlling interests						727
Special dividend						78,045

Net cash outflow in respect of the demerger:
Cash and cash equivalents distributed and net outflow of cash and cash equivalents in respect of the demerger of well drilling services business						56,300

12   OTHER FINANCIAL LIABILITY

The amount payable represents amount payable to China United Coalbed Methane Co., Ltd., which is a party to the production sharing contracts, in relation to exploration costs incurred on the properties. These amounts are only payable from revenue on production from the Shizhuang South Property.

13   SHARE CAPITAL AND RESERVES

	Authorised		Issued and fully paid
	Number		Number
	of shares	US$	of shares	US$
At 1 January 2010 and   30 June 2010 ordinary shares   of US$0.0001 each	500,000,000	50,000	120,512,336	12,051
Placement of 8,800,000 shares	-	-	8,800,000	880
Employee share options exercised	-	-	76,250	8
At 31 December 2010, ordinary   shares of US$0.0001 each	500,000,000	50,000	129,388,586	12,939
Placement of 3,360,000 shares	-	-	3,360,000	336
Employee share options exercised	-	-	1,953,125	195
Issue of shares by conversion of   convertible notes	-	-	1,975,000	198
At 30 June 2011, ordinary shares   of US$0.0001 each	500,000,000	50,000	136,676,711	13,668

Nature and purposes of reserves

(i)     Share premium

The amount relates to subscription for or issue of shares in excess of nominal value. The application of the share premium account is governed by the Companies Law of the Cayman Islands. The articles of association of the Company prohibit distribution to equity holders of the Company through the share premium.

(ii)    Convertible note equity reserve

The amount represents the value of the unexercised equity component of the convertible note issued by the Company recognised in accordance with the Group's accounting policy.

(iii)   Share based payment reserve

The amount relates to the fair value of the share options that have been expensed through the income statement less amounts, if any, that have been transferred to the retained earnings/deficit upon exercise.

(iv)   Capital reserve

The amount represents the Group's share of subsidiaries and JCEs statutory capital reserve. PRC rules and regulations require that 10 per cent of profits in each period be reserved for future capital expenditure. The amount is non-distributable.

(v)    Foreign exchange reserve

The amount represents gains/losses arising from the translation of the financial statements of foreign operation the functional currency of which is different from the presentation currency of the Group.

(vi)   Retained deficit

The amount represents cumulative net gains and losses recognised in consolidated profit or loss less any amounts reflected directly in other reserves.

14   EVENTS AFTER REPORTING DATE

There were no significant events that happened after 30 June 2011 up to the date of approval of these condensed financial statements.

15   RELATED PARTY TRANSACTIONS

Saved as disclosed in notes 9 and 10, there were no other related party transactions that are required to be disclosed. Transactions between the Company and its subsidiary undertakings, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

16   CONTINGENT LIABILITIES

During the year ended 31 December 2009 the Group entered into a joint venture arrangement with ConocoPhillips China Inc ("COPC").  Under the terms of the farm-out agreement, COPC made an initial payment of US$20 million to the Group towards exploration costs incurred to date and would also fund up to a total of US$30 million of the future surface-to-inseam wells at the Shizhuang South, Shizhuang North and Qinyuan PSCs. COPC could elect to continue with a second phase of development and pay US$120 million to acquire 50% of Group's interest in these three Chinese coal bed methane PSCs. In the event that COPC elected not to proceed with the farm-out, all funds invested by COPC accrued to the benefit the Group.

On 8 November 2010 the Group terminated the farm-out agreement as COPC had not made the required payments under the funding arrangements. COPC have made total payments of US$42.6m to the Group since inception of the agreement and have demanded full reimbursement of this amount. After taking legal advice the Board have refuted this claim and are strongly of the opinion that no amounts are repayable under the terms of the farm-out agreement. In the event of a dispute the agreement is subject to arbitration. The Board welcome an arbitration hearing and are confident of a positive outcome for the Group.

The Directors' current treatment of the total US$42.6m that has been received from COPC is to allocate the amount against additions to the gas exploration cost pool.

Saved as disclosed above, the Group had no other significant contingent liabilities as at 30 June 2011.

 

END

 

 

IR PGUMABUPGGMB