by Steven Ralston, CFA
Dejour (DEJ) reported results for the third quarter of 2010 ending September 30, 2010. Quarterly earnings were a loss of CAD $0.01 per diluted share. Total revenues increased 141% year-over-year to $2.54 million attributable to two new wells (one gas and one oil) coming on line in May with unlimited production for 90 days, of which a portion was recorded in the third quarter. Sequentially, average production increased to 610 BOE/D from 599 BOE/D in the second quarter. Cost-cutting continued to be implemented: operating & transportation expenses declined 17% and G&A expenses fell 38%. In addition, amortization and depletion allowances declined 11%, since the reserves at Woodrush increased based on the latest reserve study as of June 30, 2010. Operating netback increased to $1.63 million from $382,000 in the comparable year-ago quarter due to higher revenues and lower operating & transportation expenses, partially offset by increased royalties. In the third quarter, Dejour achieved positive operating cash flow of $687,000 for the second consecutive quarter, up from $559,000 in the second quarter. Management was again successful in accessing the capital markets during the quarter, arranging a CAD $2.0 million stock and warrant sale to an institutional investor. The proceeds are expected to help fund the waterflood project, retire some debt obligations, and supplement working capital.
During the fourth quarter, gross production is expected to average 650 BOE/D, down from prior expectations of 940 BOE/D due to the OGC’s production restrictions. However, gross production should increase to 1,400 BOE/D by the end of June 2011 with the expected implementation of a waterflood project.
Significant fundamental events can considerably increase the company’s valuation parameter in a step-fashion. One such event would be the Dejour’s achievement of positive profitability, in which case the stock could experience rapid price appreciation. Dejour should become profitable in the second half of 2011.
Recent reserve studies (Gibson Gulch by Gustavson Associates released in March 2010 and Woodrush by GLJ Petroleum Consultants released in August 2010) have increased Proved and Probable reserves.
Our rating on Dejour’s stock remain Outperform based upon strong confidence in higher production levels due to successful drilling at the Halfway formation at Woodrush and the anticipation of the implementation of a waterflood project early in 2011. The company’s production profile should dramatically improve after the removal of the British Columbia Oil and Gas Commission’s allowable well production limits. Our price target is $1.10 based on NAV analysis.
For a copy of the full research report, please email scr@zacks.com with the ticker DEJ as the title.
DEJOUR ENTERPRS (DEJ): Free Stock Analysis Report
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