By Steven Ralston, CFA
Dejour Energy (NYSE MKT:DEJ) completed an equity financing for 18,130,305 units at a price of US$0.26 per unit in June. Each unit in the offering consists of one common share and 3/4 of a warrant, one of which entitles the holder to purchase one common share at an exercise price of US$0.40 between December 4, 2012 and June 4, 2017. The net proceeds will be used towards the development of Dejour’s oil and NGL projects.
The stock reacted negatively to the announcement of the equity offering, declining 29% from $0.31 to $0.21. Though the completion of the offering was a required provision for the closing of the $14 million debt facility (which is needed to develop Kokopelli), the price level of the offering and its dilutive effect were recognized by investors. In addition, there were no investor expectations for equity offerings this year.
Dejour’s NAV is now estimated to be $132.4 million ($0.80 per diluted share). The $132.4 million is attained by adding the company’s assets of $20 million of land (at cost), $112.9 million of PV-10 Proved Reserves and net cash of $5.6 million and then deducting $6.1 million in debt (listed as a current liability on the company’s balance sheet). Therefore, our target price has been adjusted to $0.80, primarily due to the dilutive equity offering. Our NAV model is exhibited in our research report that is available at scr.zacks.com.
Production levels at Woodrush are improving sequentially due to the increased effectiveness of the waterflood and reworking the third well which was drilled late last year. In early June, Dejour provided an update on the oil production from Halfway E Pool on its Woodrush property in northeastern British Columbia. Production continues to increase from the level reported for the first quarter. Gross oil production in the month of May increased 15.0% sequentially from an average of 234 Barrels of Oil per Day (BOPD) in April to 269 BOPD. Also, the company reported that gross production during the first six days of June increased to an average of 319 BOPD. Total gross field production, which includes gas production, averaged 630 Barrels Oil Equivalent per Day (BOEPD) during the first six days in June, up from 556 BOEPD in 2011.
If wells A-1–I and AB-1-I can attain company-targeted production levels, management expects the gross oil rate at Woodrush to increase to approximately 1,000 Barrels Oil Equivalent per Day (70% oil and 30% gas) by the end of 2012. Currently, production from well A-1–I is being restricted to about 25% of its oil flow potential due to reservoir management constraints. Well A-1–I was completed in second quarter of 2010 and initially tested at rates in excess of 500 BOPD. Production levels of well A-1–I had to be curtailed by at least 250 BOPD in mid-2010 to conform to British Columbia’s allowable quota regime.
Drilling the company’s initial four wells into the liquid-rich gas Kokopelli field acreage is slated for the third quarter when the Williams pipeline should be available in the area. Importantly, once the drilling has been completed and the wells are in production, the status of the lease on the entire 2,200 gross acres will change from a primary term to a held-by-production lease, perpetuating Dejour’s right to operate at Kokopelli as long as the wells produce the minimum paying quantity of gas.
Our rating on Dejour’s stock remains Outperform despite the recent dilutive equity offering. The Outperform rating is based upon the expectations of increased production from the company’s Woodrush property and the anticipated drilling at Kokopelli in the third quarter, along with the stock’s continued attractive valuation level of the stock relative to its reserve valuation.
Please visit scr.zacks.com to access a free copy of the DEJ research report.