Dejour Provides Production Update for Woodrush and South Rangely

By Steven Ralston, CFA

Earlier this week, Dejour Energy (NYSE MKT: ( DEJ ) ) provided an update on the current levels of production at the Woodrush property in British Columbia and the South Rangely well in Colorado. February gross oil production at Woodrush is averaging 350 BOPD (barrels of oil per day) and gross oil equivalent (includes gas) production is averaging 500 BOEPD (barrels of oil equivalent per day). Obviously, the coiled-tubing workover and other remediation work were successful, increasing the effectiveness of the water flooding. Gross production has substantially increased over the 181 BOPD average during the third quarter of 2012 when the remedial work hampered production. With 75% ownership, Dejour’s current average net production is 262 BOE and 375 BOEPD. Management expects to achieve gross production of 700 BOEPD sometime in 2013.

Production from the South Rangely discovery well (Federal 36-24) is currently 250 MCF per day, which is a restricted rate mandated in order to minimize an adverse reservoir response. When initially completed, the well flow-tested rich gas at a rate of 315 MCF per day for more than 10 days with no decline in production or pressure. This production well now places the entire 6,300-acre unitized leasehold in the status of Held by Production (HBP). Management is contemplating the drilling of a horizontal production well next year.

On another note, the company outlined a timetable for the development of initial production at the Kokopelli project. A drilling rig has been contracted to arrive on site on March 18th and will begin drilling (spudding) on March 22nd. After the three incremental wells are drilled and cased, all four wells will be hydraulic fractured (fracked) and perforated, which is expected to commence during the first week in May. Management expects production to begin by June 1st. The project is fully permitted and funded.

Our rating on Dejour’s stock remains Outperform due to expected higher oil and gas production levels at Woodrush and new gas production from both South Rangely and Kokopelli. In addition, we look forward to the annual reserve assessments by Gustavson & Associates for Kokopelli and by AJM Deloitte for Woodrush. These evaluations directly drive our valuation model. A critical factor in the methodology used to derive the net present value (discounted at 10%) for Kokopelli will be the pricing assumptions for Natural Gas Liquids, especially ethane, propane and butane. A final draft of the reserve evaluation from Gustavson & Associates LLC is expected in the next two weeks.

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