The troubled coal seam methane producer was responding to a report in today's Sydney Morning Herald, which claimed it was considering handing over management control to AJ Lucas, a drilling and exploration company.

According to the newspaper, the proposal was understood to include some form of equity injection into Sydney Gas and had received strong support from key shareholders.

Sydney Gas did not give details about the talks, but said it could confirm that it was "carrying on discussions" with that group (AJ Lucas) on a confidential basis.

"There is no certainty that any transaction will result from these or any other discussions," the company said in the statement.

The talks follow last month's announcement by Sydney Gas that it had appointed advisers to conduct a review of the company.

Just three days after the review was announced, Blue Energy reported that it had held preliminary discussions with Sydney Gas about a potential merger or joint venture.

Sydney Gas, which has a $122 million market capitalisation, closed yesterday on the ASX at 35c per share - well down on its peak of $1.09 three years ago.

With a market capitalisation of $212.5 million, AJ Lucas is primarily a drilling company but also extracts CSM from the Gloucester basin in the Hunter Valley in a joint venture with Molopo.

Sydney Gas is also still without a permanent leader, following Bob Neil's resignation as chief executive after just two weeks in the job.

The company's previous CEO was Philip Moore, who lasted eight months as managing director before standing down on medical advice.

Prior to Moore's appointment, the company had a history of conflict and upheaval at board level.