Greka Drilling should see earnings surge in 2012 as drilling fleet comes on-stream – Edison
Edison Investment Research expects a surge in earnings at Greka Drilling (LON:GDL) in 2012 as the China-focused gas explorer's new rig fleet comes fully on-stream.
Greka's major rig fleet expansion announced last April is now well underway, the research house said, adding that by virtue of its innovative technology and prospective rig fleet, Greka is evolving as the leading drilling contractor for the unconventional gas sector in China.
The company demerged from Green Dragon Gas (LON:GDG) this year and listed on AIM in March. Shortly afterwards it placed a US$39 million order for 25 high-performance drilling rigs from Italian producer Drillmec.
The first rig has been delivered and commissioned. The balance of the order is scheduled for delivery at the rate of four per month from November. Significantly, Greka also has an option on a further 125 Drillmec rigs. A decision on exercising the option will probably be made in early 2012, Edison said.
The research house said the company's business backdrop remains exceptionally well underpinned by Green Dragon's coal bed methane development programme and the Chinese government's plans to boost gas production.
This is independent of any conceivable Chinese economic slowdown in 2012. Earnings should surge in 2012 as the new rig fleet comes fully on-stream.
Edison also noted that Greka was solidly profitable in the first half of 2011 with EBITDA of US$2.3 million on revenues of US$17.1 million for a margin of 13.7 percent.
The report said: "We see plenty of scope for upside at Greka Drilling. The stock is low rated based on prospective EBITDA and we anticipate a very positive news flow in the coming months. Based on a peer comparison, we believe a multiple of 5x2012 EBITDA can be justified, which would imply a price of 52 pence/share."
Greka shares are currently trading at 26 pence.
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