Investor Relations

Demerger Announcement

16 February 2011

28th Jun 2011, 10:14 am by Jamie Ashcroft

The Board of Green Dragon Gas Ltd. (AIM:GDG), one of the largest independent companies involved in the production of CBM gas and the distribution and sale of wholesale gas in China, is pleased to announce the proposed demerger of its drilling services business by means of a dividend in specie of shares in Greka Drilling Limited (“Greka Drilling”) to Green Dragon Shareholders. The Demerger is conditional upon the approval of Green Dragon Shareholders in general meeting and admission of the Greka Drilling Shares to trading on AIM. It is expected that dealings in Greka Drilling Shares on AIM will commence on 8 March 2011.

Highlights

Separation to be effected by a demerger of Greka Drilling, the holding company of Green Dragon’s Chinese drilling business

Demerger is subject to the approval of Green Dragon Shareholders which will be sought at an EGM to be held on 7 March 2011

Admission of Greka Drilling Shares to trading on AIM expected 8 March 2011

The Board believes that Greka Drilling will complete the drilling of in excess of 100 wells in China in 2011

Greka Drilling to undertake a 25 rig expansion programme to be part funded by:

• US$50 million of additional equity capital provided by way of a pre-Demerger cash investment by Greka China, a wholly-owned subsidiary of Green Dragon; and
   
• A two-year revolver facility of US$12.5 million provided by Greka China for working capital purposes

Green Dragon intending to proceed with a main board listing on the Hong Kong Stock Exchange in 2011

A circular containing notice of the Green Dragon EGM and a Greka Drilling admission document containing further information relating to the Demerger and Greka Drilling will be sent to Green Dragon Shareholders shortly.

Randeep S. Grewal, CEO and Founder of Green Dragon, commented:

“Greka Drilling will be able to build on the early mover advantage enjoyed by GTS Zhengzhou and its relationship with Green Dragon to deliver drilling services initially in China, with further growth targeted in India, Indonesia, Thailand and Australia in the longer term. We have built a standalone drilling business within Green Dragon since 2007 with a management team that has a combined 150 years experience of drilling. Upon admission to the AIM market of the London Stock Exchange, Greka Drilling will have a shareholder list that mirrors that of Green Dragon Gas. The Board believes that the separate entities will provide shareholders and the investment community with greater clarity resulting in improved access to the capital markets.”

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

GREEN DRAGON GAS LTD

Proposed demerger of Greka Drilling Limited

1. Introduction to the Demerger

Greka Drilling is a newly-incorporated subsidiary of Green Dragon and is the holding company for a group of companies including GTS. Greka Drilling was established to hold Green Dragon’s drilling businesses and, subject to the approval of Green Dragon Shareholders, will be demerged from Green Dragon by means of a distribution in specie of Greka Drilling Shares to Green Dragon Shareholders.

The Board believes that the Demerger of Greka Drilling from Green Dragon will enhance shareholder value in both companies. Greka Drilling’s management team will focus on a separate strategy and business development plan from Green Dragon with enhanced growth prospects as an independent company servicing both Green Dragon and third party drilling contracts. The Board believes that the Greka Drilling Group will complete the drilling of in excess of 100 wells in China in 2011

The Board also believes that the separate entities will provide shareholders and the investment community with greater clarity resulting in improved access to the capital markets.

2. Greka Drilling business activities

GTS Zhengzhou and GMD operate a total of eight truck-mounted specialised CBM drilling rigs (including one workover rig) supported by approximately 220 technical and field personnel and are capable of drilling both horizontal and vertical CBM wells.

Of these rigs, five drilling rigs and the one workover rig were purchased in November 2007 by GTS Zhengzhou from Schramm and two drilling rigs (manufactured in Australia by Air-Drill Pty Ltd to a Schramm design) were acquired by GMD which became part of the Greka Drilling Group through the Pace Drilling Acquisition. Two different drilling rig specifications have been acquired, being the T130 model (3 rigs) and the T685 model (4 rigs). All seven drilling rigs are capable of drilling horizontal and vertical wells. The average age of the drilling rigs is currently three years and the drilling rigs are depreciated over ten years.

GTS now has seven fully trained drilling teams, comprising 25 employees per team, working two shifts per day of 12 hours each working on a 21 day onsite, 21 day rest cycle. Each shift is led by a rig manager and includes a tool pusher, an engineer, a driller and a roustabout. Each rig manager reports on a daily basis to a project manager, who is based at the GTS head office in Zhengzhou. GTS Zhengzhou has been awarded Chinese ISO 9001 Certification and has been granted a work safety license for CBM drilling.

Greka Drilling is negotiating the purchase of a further 25 drilling rigs at a total estimated cost (including ancillary equipment) of up to approximately US$95 million. It is expected that the order will be placed shortly. The purchase of the rigs will be funded from Greka Drilling’s existing cash resources and cash flow from operations. The acquisition of these rigs will result in the recruitment of approximately an additional 900 technical drilling staff.

Baozhuang Zhang is the Chief Operating Officer of GTS which is organised into a number of key departments including technical, data review (geologists), health & safety, purchasing & logistics and accounting/HR.

3. Current trading and prospects

Greka Drilling expects to order of 25 drilling rigs for work programmes in China and to increase the Greka Drilling Group workforce by approximately 900 employees. The Board believes that assuming the timely delivery of the new rigs, the Greka Drilling Group should complete the drilling of in excess of 100 wells in China in 2011. Greka Drilling’s intention over time is to build the order book of contracts with third party oil and gas companies. Greka Drilling intends to continue to increase the number of rigs owned and operated by the Greka Drilling Group in order to meet market demand.

As the business of the Greka Drilling Group grows, it is expected that the mix of its drilling operations will continue to move from exploration (R&D) to production, leading to an increase in profitability as a result of the lower average drilling and mobilisation/demobilisation times per well involved in production drilling.

4. Relationship between Green Dragon and Greka Drilling following the Demerger

Since incorporation, GTS Zhengzhou has operated as a stand-alone entity and trades on an arm’s length basis with the Group. Accordingly, it is not expected that the day-to-day trading relationship between the Group and GTS Zhengzhou will be affected by the Demerger.

The Group has continuing contracts for drilling services with GTS Zhengzhou which provide a framework under which it can place purchase orders with GTS Zhengzhou based on certain pricing assumptions. In return, the Greka Drilling Group will provide Green Dragon with the use of its SIS drilling expertise, sufficient rigs for Green Dragon’s present drilling programme, and a reliable drilling service.

In order to provide the Greka Drilling Group with part of the funding for the capital expenditure involved in the previously announced plan to acquire 25 specialised CBM drilling rigs, Greka China has provided US$50 million in cash by way of equity investment in GTS and made available to Greka Drilling a two-year revolving working capital facility of US$12.5 million. The facility has not yet been drawn. The facility will bear interest at 8 per cent. on the amount drawn.

5. Greka Drilling board

Randeep Grewal will become the Chairman and Chief Executive Officer of Greka Drilling and will be joined on the Greka Drilling board by, amongst others, existing Green Dragon non-executive directors, Stewart John and David Turnbull. Randeep Grewal, Stewart John and David Turnbull will each maintain their existing roles with Green Dragon and Baozhuang Zhang will continue to be responsible for the operational management of Greka Drilling as Chief Operating Officer, as he has been since February 2008.

6. Impact of the Demerger on Green Dragon Shareholders and holders of Convertible Bonds

The Directors believe that the value of Greka Drilling is not fully reflected in the stock market valuation of Green Dragon itself and that the Demerger will enhance total shareholder value by, amongst other things, improving the recognition and valuation of the two resulting businesses, allowing Green Dragon to focus on the exploration and development of its gas assets and allowing Greka Drilling to focus on providing unconventional gas drilling services to both the Group and third parties.

It will be the intention of Greka Drilling to establish a new share option scheme and current holders of vested Green Dragon share options will be awarded vested Greka Drilling share options on the basis of 3 Greka Drilling options (exercisable at the closing price of Greka Drilling Shares at the close of business on Greka Drilling’s first day of trading on AIM) for every one Green Dragon vested option held. The exercise price and number of Green Dragon options will be unaffected by the Demerger Dividend.

Under the terms and conditions of the Convertible Bonds issued by the Company in 2010, the Demerger Dividend will trigger an adjustment to the conversion price of the bonds. The adjustment to the conversion price in respect of the Demerger Dividend will be calculated by multiplying the current conversion price under the Convertible Bonds by a fraction which reflects the fair market value of the Greka Drilling Shares to be distributed to the holder of one Ordinary Share relative to the current market price of one Ordinary Share. The fair market value of the Greka Drilling Shares may be determined by an independent financial adviser appointed by the Company and shall be equal to the arithmetic mean of the daily volume weighted average prices of the Greka Drilling Shares during the first five dealing days commencing on the day the Greka Drilling Shares are admitted to trading on AIM. For these purposes, the current market price of an Ordinary Share is equal to the average of the daily volume weighted average price of an ordinary share in the Company during each of the five consecutive dealing days ending on the dealing day immediately preceding the relevant valuation date. Therefore, following the Demerger Dividend and consequential adjustment to the conversion price under the Convertible Bonds, the number of Ordinary Shares to be issued on conversion of the Convertible Bonds may be increased.

7. Summary financial information on Greka Drilling

Following a post 31 December 2010 equity investment in GTS of US$50.0 million in cash by Greka China together with the capitalisation of US$26.6 million of inter-group balances owing by the Greka Drilling Group to the Group, the pro forma combined net assets of the Greka Drilling Group at 31 December 2010 are US$72.9million, including US$56.4 million in net cash. In addition, Greka China has made available to Greka Drilling a two-year revolving working capital facility of US$12.5 million. The facility has not yet been drawn.

8. The Demerger Dividend

Provided the Demerger Dividend is approved at the EGM and subject to Admission by 8 March 2011, or such later date, being not later than 18 March 2011 as may be agreed pursuant to the Introduction Agreement, the Demerger Dividend will be paid to Green Dragon Shareholders who are on the Green Dragon Register of Members at the Record Time on the following basis:

Three Greka Drilling Shares for every one Green Dragon Share held, and so in proportion for any other number of Green Dragon Shares held at the Record Time.

The Greka Drilling Shares issued to Green Dragon Shareholders by way of the Demerger Dividend will be in addition to their existing Green Dragon Shares, which will continue to be traded on AIM following the Demerger. It is expected that, subject to the approval of Green Dragon Shareholders at the EGM, the Demerger Dividend will be paid, the Green Dragon Shares will be marked “ex-div” and that trading in the Greka Drilling Shares on AIM will commence, on 8 March 2011.

9. Orderly market arrangements

The Directors and persons connected with them have each undertaken that they will not (and will use their reasonable endeavour to procure that any persons with whom they are connected will not) dispose of any interest in Greka Drilling Shares held by them for a period of one year from Admission, save in limited circumstances, without the prior written consent of Smith & Williamson and Greka Drilling.

10. Extraordinary General Meeting

The Demerger is conditional, inter alia, on the approval of the Demerger Dividend by Green Dragon Shareholders at the EGM which is to be held on 7 March 2011 at 9.30 a.m.

Irrevocable undertakings to vote in favour of the Resolution at the EGM have been obtained from Green Dragon Shareholders holding approximately 73.2 per cent. of the issued Green Dragon Shares.

11. Further information

Further information on the Demerger and on the business of Greka Drilling will be set out in a shareholder circular and a Greka Drilling admission document will be sent shortly to Green

Dragon Shareholders and will be available on the Company’s website: www.greendragongas.com

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