DXIEF DXI Capital Corporation (CE)

Dejour to drill Kokopelli property in 3Q 2012

Steven Ralston, CFA

Dejour (DEJ) reported results for the fourth quarter and full year of 2011 ending December 31, 2011. Quarterly earnings were a loss of CAD $0.07 per diluted share. Reported earnings were below our estimate, primarily due to a non-cash impairment charge and lower-than-expected production from the new third well at Woodrush. Gross oil and gas revenues for the quarter increased 62.1% year-over-year to $2.48 million as operating & transportation expenses increased 53.4% and G&A expenses increased 37.8%.

For the year, earnings were a loss of CAD $0.09 per diluted share. Gross oil and gas revenues increased 9.1% to $8.82 million, primarily due to the increase of realized oil prices from $69 to $89 per barrel, which was offset by a 13.0% decline in realized natural gas prices and a 4.9% decline in oil production. Though operating & transportation expenses declined 4.0%, G&A expenses increased 18.1% and amortization and depletion allowances increased 64.8%. However, a one-time $5.2 million non-cash impairment charge on non-core leases was included the amortization and depletion allowances total. Operating netbacks increased 9.1% to $4.70 million from $4.16 million in 2010 due to higher revenues and lower operating and transportation expenses (-4.2%), partly offset by increased royalties (+24.1). As mentioned above, Dejour recorded a $5.2 impairment of oil and gas properties in 2011; however, it was reported above rather than below the operating income line as in previous years.

During the first quarter of 2011, Dejour implemented a waterflood on the Woodrush property. There was an early and strong response to the waterflood with the wells producing over 600 BOE/D; however, production peaked in the third quarter. Dejour drilled a third production well during the fourth quarter, but gross production was less than expectations at only 45 BOE/D. Currently, a workover of the third well is being performed with six of the eight planned horizontal laterals having been completed.

In 2011, the company also completed an evaluation well into the Mancos B sand at South Rangely. Having been drilled, fractured and stimulated, the well flowed commercial quantities of rich gas with a high natural gas liquid (NGL) yield. Dejour also received permits for the construction of its first drilling pad in the Kokopelli property, from which production is now expected to begin in the second half of 2012. The delay in drilling the initial four wells at Kokopelli is due to a confluence of several factors, including low gas prices and the economic benefits of waiting for the Williams pipeline to be completed in the area and the terms of the financing, which would require interest accrual upon closing. Importantly, Dejour began operating with positive cash flow during the latter half of 2011.

In 2012, management is focused on increasing oil production from the Halfway oil pool at Woodrush in British Columbia and initiating the drilling program at the Kokopelli project in Colorado, for which the company will utilize debt financing. Management does not expect 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 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.

To view a free copy of our most recent research report on DEJ or subscribe to our daily morning email alert, visit Steven Ralston's coverage page at http://scr.zacks.com/.
 

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