Dejour reports 1Q and provides update on Woodrush

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Dejour reports 1Q and provides update on Woodrush

Steven Ralston, CFA

Late yesterday, Dejour (DEJ) provided an update on the oil production from the Halfway E Pool on its Woodrush property in northeastern British Columbia. Production from the new third well (AB-1) at Woodrush continued to be lower-than-expectations during the first quarter. In addition, Well D-91-H (drilled in 2008) experienced higher-than-expected water production. Under the Voidage Replacement Scheme approved by the British Columbia Oil and Gas Commission in October 2011, Dejour drilled a third producing well (AB-1) late in 2011 and increased the water injection rate into the Halfway oil pool. Through the first quarter, the two producing wells (A-1–I and D-91-H) have not yet positively responded to the water injection. However, management expects a full production response to occur in the second half of 2012.

Importantly, production has begun to increase during the initial weeks of the second quarter. Specifically, gross oil production in the month of April increased 6% sequentially versus March, and during the first 15 days of May, the gross oil production rate increased 15% versus the month of March to an average of 254 Barrels of Oil per Day (:BOPD). Currently, production from well A-1–I is being restricted to about 10% of its oil flow potential. Well A-1–I was completed in second quarter of 2010 and initially tested at rates in excess of 500 BOPD. Production levels of well A-1–I had to be curtailed by at least 250 BOPD in mid-2010 to conform to British Columbia’s allowable quota regime. If well A-1–I can attain company-targeted production levels, management expects the gross oil rate at Woodrush to increase to approximately 1,000 Barrels Oil Equivalent per Day (:BOEPD) by the end of 2012.

Last week, on May 15th Dejour reported financial results for the first quarter ending March 31, 2012. The quarter was impacted by lower natural gas prices, which fell 36.5% year-over-year and 23.5% sequentially. Therefore, management did not attempt to maximize gas production, and as a result, gas production declined by 21.2% versus the first quarter of 2011. While higher oil prices (up 7.2% year-over-year) offset the impact of lower gas production, oil prices were down 4.9% sequentially and total revenue of $1,551,000 was below our forecast. G&A expenses decreased 32.6% sequentially and 3.4% year-over-year. However, operating & transportation expenses increased 11.0% sequentially and 87.7% year-over-year. Operating netback fell 23.2% to $645,000 from $840,000 in the comparable quarter last year, respectively, primarily due to the higher operating & transportation expenses. Including a non-cash $1,110,000 positive change in the value of warrant liability (related to the adoption of IFRS), Dejour reported a loss of $514,000 or $0.003 per diluted share, in-line with expectations. However, without the warrant liability, the loss was $1.624 million or $0.01 per diluted share.

Subsequent to the quarter close on May 7, 2012, Dejour secured a binding commitment for a $14 million revolving credit facility. Management expects to close on this facility during the second quarter ending June 30, 2012 and intends to use the financing to begin developing Kokopelli with the drilling of the initial four wells in the third quarter of 2012. We are optimistic that this credit facility will obviate the need for Dejour to raise additional equity financing in 2012.

We reiterate our Outperform rating and maintain our $1.00 price target based upon the expectations of increased production from the company’s Woodrush property, along with an attractive valuation level of the stock relative to its reserve valuation.

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