Dejour farms out development of West Grand Valley
By Steven Ralston, CFA
Dejour Energy (DEJ) announced the execution of an agreement to sell and farm-out approximately 7,450 acres (gross and net) to an unnamed large-cap NYSE-listed exploration & production (E&P) company. The transaction includes a commitment to carry Dejour through the drilling and completion of three earning wells, along with Dejour being able to retain a 20% working interest in over 5,100 acres of the project. As a result, Dejour can participate in the advancement of this natural gas resource in a capital-efficient manner as well as benefit from a well-capitalized operating partner continuing to secure the leases through the development of the project.
Though it is difficult to speculate on the identity of the purchaser, several large-cap E&P companies are active in the area, including Occidental Petroleum (OXY), Chevron (CVX), Encana (ECA) and ConocoPhillips (COP) while ExxonMobil (XOM), Marathon Oil (MRO), Anadarko (APC) and Newfield Exploration (NFX) also have interests in the Piceance Basin. The declines in prices of natural gas and NGLs have pressured drilling activity in the Piceance Basin over the past three years, but especially recently. However, some companies, like Encana with its recently announced joint drilling program with the Nucor (NUE), are intensifying their efforts in the region.
Part of the 7,450 acres is the 5,100+ acres in which Dejour is retaining a 20% working interest, which dovetails perfectly with the description of Dejour’s 5,180-acre West Grand Valley prospect, which is located at the southwestern edge of the Piceance Basin in the western half of Garfield County. The West Grand Valley property includes the 1,440-acre Roan Creek project, which is known to be part of the anticipated farm-out. Adjacent acreage has been successfully developed for natural gas from thick shale intervals with pervasive gas saturation in the Niobrara formation of the Lower Mancos Shale and the shallower Williams Fork formation where Dejour has estimated there are cumulatively 200-to-250 feet of potentially productive zones of gas sand on the West Grand Valley prospect. Though the Dejour will not confirm or deny the precise properties involved in the agreement due to a confidentiality clause, we strongly believe that the retained 20% working interest in over 5,100 acres pertains to the West Grand Valley prospect, which is very positive attribute of the deal in that Dejour will participate in the development of this attractive prospect.
Dejour's working interest in the properties sold and farmed-out recently increased from 72% to 100% when it had been announced that the company had added approximately 31,000 net acres to its portfolio of exploration landholdings in northwestern Colorado. The incremental gain in net acreage was a result of the restructuring of the joint venture arrangement with Brownstone Energy. In the third quarter, management at Brownstone decided to focus on Brownstone’s core assets, namely fields in Colombia (Llanos Basin) and Israel (Levant Basin), and divest its minority 28.5% in the West Grand Valley property and some other properties under the JV. However, Brownstone retained its 28.5% interest in the 2,200-acre Kokopelli project and its attendant requirement to fund a proportionate share of developmental costs.
Our rating on Dejour’s stock remains Outperform based upon the expectations of increased production from the company’s Woodrush property and the successful completion of the company’s first gas-producing well at Kokopelli, along with the stock’s continued attractive valuation level of the stock relative to its reserve valuation. New reserve valuations (NPV-10) dated December 31, 2012 are expected on both Woodrush and Kokopelli.
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