Outlook improves for Dejour's Gibson Gulch property - Analyst Blog

Steven Ralston, CFA

Outlook improves for Dejour’s Gibson Gulch property

Dejour (DEJ) has a 72% working interest of 2,200 gross acres (or 1,585 net acres) in the Gibson Gulch area of the Williams Fork sandstone formation located in Colorado. The acreage is immediately adjacent to the producing properties in the Kokopelli Field, owned by Williams Companies (WMB) and Bill Barrett Corporation (BBG).

The value of Dejour’s Gibson Gulch property in the Piceance Basin gained further credibility Friday when Bill Barrett Corp. increased 2011 natural gas production, primarily due to an accelerated drilling program at Gibson Gulch motivated by the higher natural gas liquids price environment. Dejour’s property is contiguous to the northeast of Barrett’s 17,615 acre property. Barrett also cited the faster drilling times and higher liquids content as economic motivators. Barrett plans to run two rigs in Gibson Gulch from April through year-end, adding over 100 wells which are expected to add three BCFE (billions of cubic feet equivalent) to Barrett’s 2011 production.

Gas from the Piceance Basin is in the lowest quartile of supply cost of major North American gas areas, with typical after-tax well returns among the highest of all North American operating areas. Barrett’s average well depth at Gibson Gulch is 7,400 feet and spacing is only 10 acres. Well life is estimated to be 30 years. Barrett’s management cites the Gibson Gulch area as a “lower risk development asset.”

Dejour’s management plans to ultimately drill 220 wells (158 wells net to Dejour) in Gibson Gulch, based on spacing of 10 acres. Management projects drilling 16 gas wells per year from 2012 to 2015, when financing is secured and/or a joint venture partner is found.

We reiterate our Outperform rating based upon the attractive valuation level of the stock and the company’s improving production profile from the company’s Woodrush producing property in northeast British Columbia.

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