Steven Ralston, CFA
This January, Dejour (DEJ) presented at the Sidoti NYC Micro-Cap Conference on the 10th and announced a joint venture concerning the exploration and development of deep oil at Woodrush on the 20th. Both events added significant information about Dejour. First, Dejour’s investment profile has become broader and deeper. At the end of 2010, the company’s outlook was dependent mainly on the expected improving production profile of the three oil wells at Woodrush. Now, the company has two projects (Woodrush shallow oil and deep oil) on the front burners, and three other projects on the come (Gibson Gulch gas in the Williams Fork structure and deep gas in the Niobrara formation, along with an oil resource at South Rangely). Secondly, the announcement of the formation of a joint venture for the exploration and production of deep oil on the Woodrush property not only opens a new avenue of exploration and development, along with its funding, but also outlines the probable structure of JVs for funding future exploration costs at Gibson Gulch.
The implementation of a waterflood program will increase oil production at Woodrush. When the water injection begins in early February, there will be an immediate increase in production since the current well production allowable scheme mandated by British Columbia will be phased out as new pool rules take effect. Production from the Halfway pool at Woodrush should increase steadily with production peaking in the third quarter of 2011. The implementation of a waterflood will increase production to 1,300 BOE/D. The waterflood will provide for sustained oil production at Woodrush for at least five to six years, allowing Dejour to fund further development of oil production with operating cash flow.
Due to the successful drilling of three shallow oil wells at Woodrush, a major U.S. oil company (yet-to-be named) has entered into a joint venture (JV) with Dejour to fund and drill two deep horizontal wells to explore and develop deep oil in the Montney oil resource at Woodrush. Up to $1 million will be paid to Dejour on Dejour’s achievement of specific objectives in the first quarter of 2011, after which the JV will fund land purchases up to $5 million on a 65/35 basis (U.S. oil company / Dejour). Afterwards, two horizontal wells will be drilled on an 80/20 funding basis (U.S. oil company / Dejour). Thereafter the JV would continue to develop the project on an ongoing 50/50 basis beyond the earning period.
At Gibson Gulch in the Piceance Basin of western Colorado, there are two structures from which to extract gas: the 7,000 feet deep Williams Fork structure and the 13,000 feet deep Niobrara formation. The Williams Fork structure is amongst the lowest quartile of supply cost natural gas basins in North America leading to upper quartile after-tax typical well returns. To access the resources in the Williams Fork structure, the company has delineated 93 PUDs (Proven Undeveloped Reserves) on 600 of the 2,200 gross acres. Each PUD is based on 10 acre spacing among the wells. Initially, management plans on drilling 16 wells between the first quarter of 2012 and the end of 2015, after receiving the necessary approvals and permits, along with securing the necessary financing, probably with a JV similar to the Woodrush deep oil arrangement.
Dejour also has exposure to a deep high-pressure gas opportunity in the Niobrara formation at Gibson Gulch. Management estimates the Niobrara gas reserves to be 215 billion cubic feet (BCF). Though the development of this unconventional resource opportunity is several years in the future, other companies have drilled five wells into the formation, and land prices are rising in the area.
For a free copy of the full research report, please email scr@zacks.com with DEJ as the subject.
DEJOUR ENTERPRS (DEJ): Free Stock Analysis Report
Zacks Investment Research
