DXIEF DXI Capital Corporation (CE)

Zacks increases price target of Dejour Energy to $1.05

Steven Ralston, CFA

Today, Dejour Energy (DEJ) announced that Gustavson & Associates LLC (independent reservoir engineering consultants) updated the NI 51-101 compliant reserve report on the company’s Kokopelli Project. The PV-10 of Proved Undeveloped reserves increased 11% from C$83 million to C$92 million.

Dejour Energy’s NAV is now estimated to be $134 million ($1.06 per share) as of December 31, 2011. The $133 million is attained by adding the company’s assets of $20 million of land (at cost), $117 million of PV-10 Proved Reserves and net cash of $3 million and deducting $6 million in debt, which listed as a current liability (bank line of credit and bridge loan) on the company’s balance sheet. The $117 million is composed of $92 million for the Proved Undeveloped reserves at Kokopelli and the $25 million of Proved Reserves. Therefore, our target price is being increased to $1.05 per share.

Our valuation process for small and mid-cap E&P oil & gas companies is based upon Net Asset Value (NAV), which involves evaluating a company’s assets and reserves. The NAV calculation entails applying several subjective inputs, such as land valuation (cost or market), a predicted oil price, oil versus gas mix, predicted gas price, drilling costs deep offshore wells versus, drilling success rate, mix of development and exploratory wells, etc.

Also, we are cognizant that there are nuances concerning the quality of reserves that are not captured in our valuation model. One such feature is that by treating PDs and PUDs similarly, our model does not capture some of the inherent risks of PUDs. Since uncertainties exist about the ultimate conversion of PUDs to PDs, there is an inherent discount valuation related to PUDs that must be considered.

In the case of Dejour, the majority of proven reserves are undeveloped ($92 million of the $117 million). However, these PUDs are within or adjacent to a known producing gas field. In addition, Williams Companies is extending a pipeline from its Grand Valley gathering system to the Kokopelli Field, where Dejour’s PUDs are located. This both reduces most of the uncertainties related to the PUDs and also provides an efficient method to transport Dejour’s natural gas into a large-scale, high-volume distribution system.

As gas wells begin to produce (eight wells are expected to be drilled in 2012), 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 at Kokopelli become PDs. When the uncertainties associated with PUDs abate, the discount to NAV that pertains to the PUDs at Kokopelli should be reduced or entirely eliminated. As the PUDs become producing wells in the first half 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 93 PUDs identified by Gustavson & Associates at Kokopelli. Gustavson also categorized an additional 127 locations as Probable Undeveloped under the NI 51-101. 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 raise our price target to $1.05.

To view a free copy of our most recent research report on DEJ or subscribe to our daily morning email alert, visit http://scr.zacks.com/.
 

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