By Steven Ralston, CFA

After the close on Wednesday, Dejour Energy (NYSE MKT:DEJ) reported results for the first quarter ending March 31, 2013. Quarterly earnings were a loss of CAD $0.008 per diluted share versus a loss of $0.003 in the comparable quarter last year. Gross oil and gas revenues (before royalties) for the quarter increased 5.7% year-over-year to $2.04 million. Although operating & transportation expenses declined 4.3%, G&A expenses increased by 6.1%. During the first quarter, working interests in certain oil and gas leases located in Colorado and Utah were sold for gross proceeds of $96,000 and resulted in the recognition of a loss on disposal of Exploration and Evaluation (E&E) assets of $216,000.

On a sequential quarter basis, oil production improved 12.4% due to reduced operating downtime and the successful maintenance of sustained pressure through the implementation of the waterflood at Woodrush. In addition, the average oil price received sequentially increased 5.7% to $82.94 per barrel. However, natural gas production sequentially declined 31.1% as the waterflood encroached upon the natural gas in the Halfway reservoir. Also, the decline in natural gas production occurred despite the new gas producing well (Federal 36-24A) at South Rangely contributing to production for the first time. Nevertheless, natural gas revenues sequentially increased 40.2% since the average price received for natural gas increased 22.2% to $3.85 per MCF, which, by the way, is meaningfully above the assumption for an average of $2.33 per MCF for 2013 provided by Gustavson in the independent report of estimated reserves and economic evaluation, which was effective as of December 31, 2012.

At Woodrush, Dejour operates eight producing wells (three oil and six gas). Gross oil equivalent (includes gas) production at Woodrush averaged 421 BOEPD (barrels of oil equivalent per day) during the first quarter. Production has continued to improve to a level of approximately 600 BOEPD thus far during the second quarter. Results indicate that progress is being made toward management’s expectation of achieving production of 700 BOEPD at Woodrush sometime in 2013.

In 2013, management is focused on a four-well completion program at the Kokopelli project in Colorado, along with increasing oil production from the Halfway oil pool at Woodrush in British Columbia. As of mid-May, all four wells have been drilled and cased to a depth below 8,000 feet. Ample gas shows were observed during the drilling process. Halliburton has been contracted to fracture stimulate and complete all four wells, and production is expected by the end of June. Management expects the four-well project (aka Tranche 1) to contribute 150-to-200 BOEPD, of which Dejour will earn a working interest of 10% to 14% (the specific percentage will be determined by the actual cash invested in the drilling program, which can be calculated only after the wells have been completed).

Our rating on Dejour’s stock remains Neutral. Despite the positive drilling progress at Kokopelli and the ample gas shows detected during the drilling process, Dejour has been hampered by a lack of sufficient working capital to independently develop production from its oil & gas leases. The company relied on capital from a drilling fund to finance the drilling of three additional wells and the completion of all four wells at Kokopelli. In addition, Dejour utilizes a bank credit facility as an operating loan, which requires Dejour to maintain a working capital ratio of 1:1. However, as of March 31st, the company’s working capital ratio was 0.93:1.00. We look forward to production from Kokopelli being the catalyst for providing cash flow that will result in bolstering the company’s balance sheet and enhancing the company’s working capital ratio.

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