Dejour secures financing to drill Kokopelli
Steven Ralston, CFA
Late yesterday, Dejour (DEJ) announced the signing of a binding commitment for a $14 million revolving credit facility. We believe the financing has been available to the company for at least a couple of months, but was not consummated until the management was ready to begin the development of the Kokopelli field. Once drawn upon, the company would incur interest expense, which was prudently delayed. Management expects to close on the credit facility during the second quarter.
The announcement of the credit facility is a clear sign that work will soon begin towards the drilling of the first four wells at Kokopelli in the second half of 2012. Initially, access roads to the drill pads will need to be completed.
As mentioned in the company’s press release, the company has received regulatory approval to expand into the Garfield Creek State Wildlife Area, the final and critical step in the regulatory approval process. Also, management stated that the company is working with WPX Energy (WPX: NYSE) to secure access to the Williams gas distribution network on a cost-effective basis. The cost of the required infrastructure to tap into the pipeline could be up to 25% less than management originally expected.
Importantly, once the drilling has been completed and the wells are in production, the status of the lease on the entire 2,200 gross acres will change from a primary-term to a held-by-production lease, perpetuating Dejour’s right to operate at Kokopelli as long as the wells produce the minimum paying quantity of gas.
With the revolving credit facility commitment announced, we do not expect the company to require equity financing to further its exploration and production activities in 2012. Generally, this financing stage for a small-cap company is a major milestone towards the realization asset value in the company’s stock.
We reiterate our Outperform rating and price target of $1.00 based upon the attractive valuation level of the stock relative to its reserve valuation, along with the company’s improving production profile from Woodrush in northeast British Columbia and expected production in 2012 from Kokopelli in Colorado.
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