Steven Ralston, CFA
Dejour’s strong second quarter indicates profitable third quarter
Dejour (DEJ) reported above expectation results for the second quarter ending June 30, 2011. The quarter benefited from both higher oil prices and a 37% sequential quarterly gain in oil production from the Woodrush field. Despite unanticipated shutdowns of the McMahon gas processing plant for seven weeks and a 12 day pipeline shutdown on the Peace River due to flooding, both of which hampered gas production, total revenues increased 7.5% sequentially to $1.46 million. Sequential operating & transportation expenses declined 7.1%; however, G&A expenses increased 3.2%. Operating netbacks increased 18.7% on a sequential basis to $997,000 from $840,000 in the first quarter due to the higher revenues. Sequential analysis is being employed since oil production in the year-ago quarter was unusually high since production was not restricted by the British Columbia Oil and Gas Conservation Commission (OGC). Importantly, an updated mid-year reserve evaluation report of the Woodrush field valued PV-10 proved reserves at $25 million, reducing depletion by 31% sequentially. Therefore, Dejour reported a loss of only $255,000 or $0.002 per diluted share versus expectations of a $1.0 million loss. Due to the success of the Woodrush field, management now expects the company be profitable in the third and fourth quarters of 2011.
Unrestricted gross production capacity from the Woodrush field is approximately 1,260 BOE/D (net 945 BOE/D to Dejour), consisting of 800 BOP/D (oil) and 2.8 MMcf/D (gas). However, in the near-term, oil production is not expected to exceed 500 BOP/D due to continued OGC restrictions. Gross oil production averaged 430 BOP/D in June 2011. Over time, management expects to achieve gross 1,260 BOE/D.
On the earnings conference call, management expanded upon exploration and development plans for 2011. The company is prepared to begin drilling for natural gas in the Piceance Basin at Gibson Gulch, Colorado, pending regulatory approvals. The Master Development Plan has been filed with the Bureau of Land Management. Having chosen eight PUD (Proved UnDeveloped reserves) sites in close proximity to proven wells drilled by Barrett Corp. (BBG) or Williams Companies (WMB), the first eight wells should be drilled during the fourth quarter this year and the first quarter 2012, after which all eight well will be fracked. Management plans on drilling 16 wells annually, with the drilling program becoming self-funding in 2014. A $7 million revolving line of credit has been secured from a Canadian bank at Prime +1% (currently 3%+1%), which will save the company $600,000 per year in interest expense.
We reiterate our Outperform rating and price target of $1.00.
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