By Steven Ralston, CFA
Today, Dejour Energy (NYSE MKT:DEJ) reported results for the second quarter ending June 30, 2013. Gross revenues increased 42.7% to $2.53 million, primarily due to higher oil production (+31.0%) and higher oil price realizations (+9.9%). Despite lower natural gas production (-26.4%), gross revenues were well above expectations due to higher oil production from the Drake/Woodrush, which averaged 422 BOEPD, an 11.3% sequential improvement over the first quarter’s 379 BOEPD. Also contributing to the strong top-line was higher than expected oil price realizations of $86.66 per barrel. Operating & transportation expenses decreased 9.1% and G&A expenses were reduced by 0.3%. Quarterly earnings were a loss of CAD $0.007 per diluted share versus a loss of $0.004 in the comparable quarter last year. Importantly, Dejour generated positive cash flow from operating activities (+$522,000) during the quarter.
Subsequent to end of the quarter, the four Kokopelli wells were completed. Initial production (IP) rates are not yet available as at least two of the wells are still in the clean-up phase. The process of defining initial production usually takes a little over a month. For some perspective, the Williams’ Niobrara well was completed in December 2012 and the IP announcement was issued on January 22, 2013. Dejour’s management expects that the four wells should produce a combined 5.0 MMCF/D during the initial production phase, which would further validate the estimated asset values in the 53-101 compliant reports on Dejour’s William Fork acreage. Dejour indicated that the company’s financial interest will be approximately equivalent to a working interests of around 20% BPO (Before Pay Out), which is in line with the prior stated 10%-14% working interest equivalent plus an infrastructure usage fee of $0.20 per MCF of gas produced.
Management also implied that Dejour’s next production project will be a deep well into the Niobrara/Mancos shale formation on the Kokopelli property (probably in the north to preserve the lease). Dejour has added additional geophysical and geological staff to further study the Mancos/Niobrara. Not only is the capital cost higher ($7-$8 million per well versus $2 million for a Williams Fork well), but also a much higher level of expertise is necessary to develop a deep Niobrara well with a horizontal lateral. For example, the challenges incurred by Williams (WPX:NYSE) for its 10,200-foot vertical depth well with a 4,600-foot horizontal lateral included locating an area where the structural dip of the 50-foot thick formation was gentle, the use of tools and equipment that tolerate the 300 °F temperature and the need for engineered proppant to handle the highly over-pressurized formation (10,000 pounds per square inch). Also, completion operations of the Williams well involved 17 stages of hydraulic fracturing. Management has begun plans to construct a drilling pad at Kokopelli that can accommodate a Mancos/Niobrara well and is actively looking for a partner to financially assist in the well’s drilling and completion.
Our rating on Dejour’s stock remains Neutral. Despite the expected validation of the Williams Fork reserves, Dejour requires financial assistance to develop its next project, a Niobrara/Mancos well at Kokopelli. We look forward to the announcement of the initial production profile from the first four Kokopelli wells.a
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