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Research Report Update

Dejour Energy - updates on Kokopelli and Woodrush

11/26/2012

By Steven Ralston, CFA

Dejour Energy (NYSE MKT:DEJ) reported results for the third quarter a few weeks ago. Though there was not a conference call, we have since been able to speak with management in order to get some color on the progress at Kokopelli and delve into lower-than-expected oil production at Woodrush during the quarter.

Located approximately 30 miles southwest of Glenwood Springs, the initial well at Kokopelli was drilled in September. The 8,440-foot well intersected five gas bearing zones in the Mesaverde formation. Two zones of this gas column are without groundwater and are the targets for perforation and hydraulic fracturing

Schlumberger is in charge of perforating and fracturing this initial Kokopelli well. Apparently Halliburton has a significant market share in this gas field, and Dejour Energy negotiated an attractive financial arrangement with Schlumberger that minimizes Dejour’s upfront development costs while giving Schlumberger a foothold in the gas field. Schlumberger is expected to perforate and fracture stimulate the well in the upcoming weeks.

According to management, the lease on the entire 2,200 gross acres at Kokopelli has been preserved through a two-year extension on the original 10-year lease dated November 2002. Though the lease is not yet held-by-production, the diligent drilling effort, which includes not only the drilling of the well in September but also the surface work completed in the last couple of months (the construction of a fracturing fluid management pit and the installation of separators and tanks) is sufficient for the Colorado's Bureau of Land Management to extend the lease for two years. Dejour Energy has a 71.5% working interest of 2,200 gross acres (or 1,573 net acres).

Concerning the lower-than-expected production at Woodrush, during the early part of the third quarter, it was noticed that the production from well A-1–I was not progressing as expected. Initially, it was believed that the replacement of the subsurface electrical pump with a larger model would correct the situation. However, production did not expand despite the pump replacement. Finally, it was determined that a gas cap had formed in the oil pool. A coiled-tubing workover was performed whereby a continuous steel tube was injected through the control head into the well, which ultimately allowed additional gas production from the gas zone.

As a result of the unanticipated curtailment of production during the period of time of pump replacement and the remedial oil pool operations, field oil production declined 15.8% sequentially to 181 BOPD during the third quarter. However, a positive response is now being seen after the gas cap blowdown.

Our rating on Dejour’s stock remains Outperform based upon the expectations of increased production from the company’s Woodrush property 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. New reserve valuations (NPV-10) dated December 31, 2012 are expected on both Woodrush and Kokopelli.

To access a free copy of the most recent DEJ research report, please CLICK HERE.

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