Going back about two years, some of today’s winners were trading for pennies – some deserving, others not.
There are many oil and gas companies that fit this description, so I will focus on three – Lucas Energy (NYSEMKT:LEI), Samson Oil and Gas (NYSEMKT:SSN) and Dejour Energy (DEJ). Just 24 short months ago, Lucas Energy was trading in the fifty cent range, Samson in the twenty cent range, and Dejour between thirty and forty cents.
Where are they today?
Lucas Energy has recently been trading over two dollars a share (400% increase over that 24 month period) and well below its high of $5.25 this past spring. Samson continues to flirt with the two dollar mark (an exceptional 900%+ gain) after its impressive highs this past spring north of $4. This leaves Dejour Energy, which over the past two years has somehow managed to stay within its trading range of thirty to forty cents.
Taking nothing more than a quick glance one would argue that Lucas and Samson have had justifiable runs and Dejour deserves to be left in the dust. After all, Lucas sold Eagle Ford acreage to Hilcorp and Samson sold Niobrara acreage to Chesapeake (NYSE:CHK) and Dejour has done nothing. At first glace, that would be true, until you start comparing the ongoing important details of each company – stripping out one time events.
Lucas is sitting comfortably with no debt and in the range of 20 thousand acres in the Gonzales, Karnes, Wilson, Attascosa Counties in Texas. They are producing approximately 132 boe/day NET and as of Q3 (reported November 14, 2011) operating at a loss of $2.1M or $0.11/share. This production has been relatively consistent since early 2009.
Samson with approximately 53000 NET acres, no debt, $50M cash (balance of proceeds from land sale to CHK), is producing approximately 67 barrels oil/day and 162 Mcfd gas and is operating at a loss of $0.56M or $0.08/share. The oil production is approximately twice that of 2010 while the gas production has decreased by about two thirds.
This does not make either of these bad companies, nor does it suggest that they are not worth their current market caps. It does set the stage to show how other companies have yet to have their day in the sun. Compare the above incredible success stories to the underdog of today’s article – Dejour Energy.
Dejour is currently producing over 500 boe/d (pdf) (over 300 barrels oil per day) from just two oil wells and 8 gas wells in NorthEastern British Columbia with a third oil producing well expected to come into production by the end of this month. Dejour has debts of just under $5M and an asset base that includes over 122 000 net acres throughout the United States – both oil and gas. Current production is from less than 5% of its entire portfolio and construction has begun on the next phase of expanding the companies’ production in the Gibson Gulch (Kokapelli Field) in North Western Colorado.
One would think that in comparison to both Lucas and Samson, Dejour should be trading in the same two dollar range based on production, assets, immediate plans, etc., however, the market has not yet realized this diamond in the rough and continues to price it with a market cap of about $45M.
Initial reserve estimates at the Woodrush (BC) and Gibson Gulch (CO) fields estimate over $200M of recoverable reserves net to Dejour, or more than 4x today’s market cap. NAV value has been calculated to be well over a dollar per share (again considering only the proven/potential reserves at Woodrush and Gibson Gulch – which combined account for approximately 6% of the total land holdings or about 8000 of the total 122 000 acres). For both Q2 and Q3, DEJ operated at a net loss of a fraction of a penny per share with profits expected in Q4 that should allow Dejour to exit 2011 with an overall net profit.
Beginning in Q1 2012, Dejour plans to begin development of the Kokapelli Field in Gibson Gulch with an 8 well drill program, which is anticipated to increase daily production by over 1000 boe/d. This is by using data of surrounding drillers’ Williams Companies (NYSE:WMB) and Bill Barrett Corp (NYSE:BBG) as a guide.
Gibson Gulch – Lowest Quartile Gas Supply Cost in US
Even with natural gas prices at historic lows, operators in the Gibson Gulch - Northwest Colorado are still actively drilling and recording prices far above the Henry Hub spot price, thanks to the liquids rich content found in this area.
Not only is the breakeven price lower in the Gibson Gulch field – currently estimated to be $3/mcf compared to around $4/mcf in the Marcellus and Eagle Ford, $5/mcf at Haynesville and between $6-$8/mcf at Woodford, Fayetteville and Barnett - but in addition, operators enjoy a premium of close to $2.70/mcf due to the liquids produced.
Dejour is the latest to join the ranks of Williams, Bill Barrett Corp , EnCana (NYSE:ECA) and others, in the quest to capitalize on this liquids rich play. Even though Dejour may be small in comparison to these market giants, it's proving that you don’t have to be a billion dollar company to capitalize on the opportunity.
Unlike Bill Barrett Corp with just shy of 800 wells as of September 30 2011 (and still drilling), Dejour has a limited 2200 acres; however, it has set for itself an aggressive drill program consisting of 8 wells in 2012 followed by an additional 16 wells in 2013 and is the ONLY junior player in the Gibson Gulch area. Production from this field alone could see Dejour transform itself from a relatively unknown to an exceptional contributor to the natural gas market with estimated EURs over 1 BCF/well, based upon 10 acre spacing. This would allow Dejour the opportunity to drill up to 220 wells.
If this were not enough, plans also include completing a test well drilled in the South Rangely prospect (approx. 8000 acres) to confirm what has been estimated to hold an additional 8 MMBO net to Dejour, which would further increase PV10 proved reserves.
Will Dejour experience the 400 – 1000% gains realized by Lucas and Samson? Only time will tell but if the market is paying for production and profitability, Dejour is certainly on the right track.
Having said that, should Dejour be unable to obtain financing to begin the drilling at Kokapelli Field (Gibson Gulch), it could certainly result in Dejour continuing to trade in its year long trading range or could require management to complete a share offering in order to move ahead with the drilling plans - although that does seem rather unlikely considering the multiple financing offers received.
I personally fail to see, given its current (rising) production, vast acreage, positive cash flow and little debt, how the company could trade for less than it is today, much less how it could risk bankruptcy, but, the market can be incredibly unpredictable and I would urge you to invest accordingly.
Disclosure: I am long DEJ.