Steven Ralston, CFA
Dejour (DEJ) announced today that it has received approval from the British Columbia Oil and Gas Commission (OGC) for the implementation of a waterflood program at its Woodrush oil and gas project in northeast British Columbia. In preparation for the approval, the project design has already been completed and now construction can begin in early January. The scope of the waterflood project includes the drilling of a water supply well and converting one producing well to an injection well. Also, a second injector well will be drilled; the power generation capacity will be upgraded; pumps will be installed; and the necessary water treatment facilities constructed. The gross cost of the project is C$3.2 million.
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 throughout the year with production peaking in the third quarter of 2011, when management intends to drill a third producing well.
Dejour has sufficient funding for the project. Last week, the company announced that it is in the process of completing a private placement of up to C$1,500,000 in common shares to be issued as a flow-through financing. The proceeds will be spent primarily on the Woodrush. The flow-through shares in this private placement are only available to Canadian investors.
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. In addition, the incremental oil production increases Dejour’s ability to accelerate repayment of existing credit lines and enhances the company’s ability to access more attractive longer-term funding from conventional banking facilities.
We reiterate our Outperform rating based upon the attractive valuation level of the stock and the company’s improving production profile. Also, it should be added that management has consistently achieved its planned development goals for Woodrush.
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