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Dejour Energy drills and cases first well at Kokopelli

By Steven Ralston, CFA

Dejour Energy ((DEJ)) announced today that its first well at Kokopelli has been drilled and cased to a depth of 8,440 feet. Dubbed Federal 6/7, the well targets the liquids-rich gas stacked discontinuous sands in the Lower Mesaverde formation, which is part of the Mesaverde Total Petroleum System designated by the U.S. Geological Survey (USGS). Management expects to perforate, fracture stimulate and complete the well in the fourth quarter. It is critical for Dejour to begin production at Kokopelli in order to preserve the lease on the entire 2,200 gross acres (by changing its status to a held-by-production lease). Dejour’s stock rallied over 16% on the news.

The well bore encountered strata consistent with the Mesaverde formation and a gas column thickness comparable to nearby wells drilled by Williams Companies and Bill Barrett Corporation. The acreage of Dejour’s Kokopelli project is proximate to the Douglas Creek Arch, where the depth of the Mesaverde formation moderates to less than 500 feet. However, the well bore intersected multiple formations of potentially gas-producing zones that total 2,500 feet. The zone targeted in the Lower Mesaverde formation is comprised of sands, silts, coals and shale, which are typical of the Mesaverde Group in the Kokopelli Field. The source rocks for the Mesaverde formation include coals and carbonaceous shales from which gas has been expelled and subsequently has migrated into the sandstone beds.

Dejour Energy has a 71.5% working interest of 2,200 gross acres (or 1,573 net acres) in the Kokopelli area of the Williams Fork sandstone formation located in the Piceance Basin of Colorado. The acreage is immediately adjacent to the producing leaseholds in the Kokopelli Field, owned by Williams Companies ((WMB - Analyst Report)) and Bill Barrett Corporation ((BBG - Snapshot Report)).

As previously indicated by the company, management decided to reduce the number of wells in the initial development of the Kokopelli field from four wells to one well due to weak NGL prices. The successful completion of this single well, including the attainment of a certain minimum quantity of paying gas, will require only the minimum required capital investment to maintain the lease on the 2,200 gross acres. Additional drilling has been deferred until 2013, and the number of wells will be dependent on NGL prices.

Also, late last week, Dejour announced the addition of approximately 31,000 net acres in northwestern Colorado to the company’s exploration portfolio. The acquisition of the acreage is a result of a restructuring of an exploration joint venture (JV) with Brownstone Energy, which has been in place since 2008.

Our rating on Dejour’s stock remains Outperform based upon the expectations of increased production from the company’s Woodrush property in the second half and the successful completion of the company’s first gas-producing well at Kokopelli, along with the stock’s continued attractive valuation level of the stock relative to its reserve valuation.

Please visit Steven Ralston's coverage page at scr.zacks.com to access a free copy of the full research report.

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