DXIEF DXI Capital Corporation (CE)

Dejour to begin drilling in the Piceance Basin

Steven Ralston, CFA

Dejour (DEJ) announced after the close yesterday that the company has received approval from the Bureau of Land Management to begin development of its federal leases located Colorado. The initial permits allow Dejour to construct a drilling pad and drill the first four wells into the Williams Fork structure at Gibson Gulch, a liquid rich gas area in the Piceance Basin. The site is in close proximity to proven wells drilled by Barrett Corp. (BBG) and Williams Companies (WMB).

The approval is the first step in the planned development of Dejour’s 72% working interest of 2,200 gross acres (or 1,585 net acres) at Gibson Gulch. Pending further approvals, management plans on drilling 16 wells annually, with the drilling program becoming self-funding in 2014. These initial permits allow four of the eight wells requested in phase one of the Master Development Plan filed by Dejour. Also, Williams Companies is extending a pipeline from its Grand Valley gathering system to the Kokopelli Field, where Dejour’s wells will be located, providing an efficient method to transport Dejour’s natural gas into a large-scale, high-volume distribution system.

As mentioned in a previous blog in early August, as the wells begin to produce, the natural gas reserves associated with the wells become proved developed producing reserves (PDs or PDPs) instead of proven undeveloped reserves (PUDs). We expect a positive valuation increment in the marketplace as PUDs become PDs. When the uncertainties associated with PUDs abate, the discount to NAV that pertains to the PUDs at Gibson Gulch should be reduced or entirely eliminated. As the PUDs become producing wells in the first quarter of 2012, the marketplace may not only eliminate the discount to NAV of the producing wells, but also reduce or eliminate the discount related to a portion or all of the other 212 PUDs located at Gibson Gulch. As the certainty of the value of the PUDs increases, we expect the valuation of Dejour’s stock to migrate towards Net Asset Value.

We reiterate our Outperform rating and price target of $1.00.
 

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