Dejour to complete 4 Kokopelli wells in early 2013

Zacks Small Cap Research

By Steven Ralston, CFA

Dejour Energy (NYSE MKT:DEJ) announced that a private Denver-based drilling fund has agreed to finance the drilling of three additional wells from the existing pad at Kokopelli and the completion (perforation and hydraulic fracturing) of all four wells into the Williams Fork sandstone formation. A completion schedule for the wells is expected in the near future; however, management has indicated that the four-well project is expected to be completed in early 2013.

The drilling fund is providing $6.5 million of capital for the multi-well project in return for priority payout from initial production until 125% of the capital contribution (or $8.2 million) is received and for permanent ownership of a 46.5% working interest in the four-well project. Also, until the $8.2 million is collected, the drilling fund will hold ownership of Dejour's 71.5% working interest in the four-well project. During the production phase, Dejour will receive an infrastructure usage fee of $0.20 per MCF of gas produced. The fund also has the right of first refusal on the next multi-well project at Kokopelli.

The terms of the financing do NOT pertain to Dejour's 71.5% working interest in the deeper Mancos shale gas play over the entire 2,200 gross acres of the lease and Dejour's 71.5% working interest in the gas sands of the Williams Fork formation over the remaining 2,120 gross acres.

The access to $6.5 million in funding allows Dejour to fully develop four wells on the first drilling pad site without issuing debt or having to further access the company's bank line of credit. Also, Dejour will achieve economies of scale by consecutively drilling multiple wells from a single pad and by progressively perforating and fracturing all four well bores during a single developmental time period. Lastly, and according to management, most importantly, this process of developing the first four wells at Kokopelli minimizes Dejour’s risk exposure to potentially lower natural gas and NGL prices while ostensibly demonstrating the potential value of the Kokopelli lease.

Our rating on Dejour’s stock remains Outperform based upon the expectations of increased production from the company’s Woodrush property and the completion of the company’s first gas-producing wells at Kokopelli. New reserve valuations (NPV-10) dated December 31, 2012 are expected on both Woodrush and Kokopelli.

 

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