By Steven Ralston, CFA
Today, Dejour Energy (NYSE MKT:DEJ) announced that the current production rate from the four wells at Kokopelli is at least 4,500 MCF/D into the sales pipe. In addition, 4-hour tests of each of the four wells this week yielded flow rates between 1,300 MCF/D and of 2,100 MCF/D with an average rate of 1,700 MCF/D per well or a total of 6,800 MCF/D for all four wells. Production from the last two wells that were stimulated by hydraulic fracturing is still ramping up, since the recovery of fracture fluid is restricting the production rate. It is safe to say that management’s expectations of 5.0 MMCF/D (i.e. 5,000 MCF/D) during the initial production phase will be achieved.
Until the drilling fund receives its return of investment of $8.125 million, Dejour’s share of net revenues is approximately equivalent to 25%, which is a combination of an amount roughly corresponding to a 14% working interest plus a $0.20 per MCF infrastructure usage fee. We expect Kokopelli to add approximately $250,000 to revenues in the fourth quarter of 2013 based on the anticipated production stream determined from decline-curve analysis and estimated higher-priced liquids production. Typically a gas well produces increasing amounts of gas for the 12-to-15 days, after which production tails off to a level that will decline very slowly over the next two months. We still look forward to additional initial production rates to definitively determine the production profile, and to better estimate the financial benefit to Dejour from Kokopelli gas production.
More importantly, the on-target production profile should be incorporated in the updated NI 51-101 reserve estimates expected to be completed at year-end. Also, natural gas prices are well above the prior report’s estimate of $2.33 per MCF for 2013. Thus far in 2013, natural gas has traded between $3.05 and $4.44 and is currently $3.53. The report’s estimate should aid us in better evaluating Dejour’s assets in the ground at Kokopelli.
Now, management is contemplating the drilling and completion of a well into the Niobrara/Mancos formation in the northern lease of Kokopelli.
Our rating on Dejour’s stock remains Neutral. Despite the progress at Kokopelli, Dejour has been hampered by a lack of sufficient working capital to independently develop production from its oil & gas leases. The value of the resources has been confirmed by the successful completion of four wells at Kokopelli. We look forward to the updated NI 51-101 reserve estimates.
A copy of the full research report can be downloaded here >> Dejour Energy Report
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