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By Steven Ralston, CFA After the close on Thursday, Dejour Energy ( NYSE MKT:DEJ) reported results for the fourth quarter and full year of 2012 ending December 31, 2012. Quarterly earnings were a loss of CAD $0.063 per diluted share versus a loss of $0.069 in the comparable quarter last year. Reported earnings were below our estimate, primarily due to a $6.4 million non-cash impairment charge but also due slightly lower-than-expected oil & gas production at Woodrush. Gross oil and gas revenues for the quarter declined 34.2% year-over-year to $1.63 million as operating & transportation expenses decreased 7.6% and G&A expenses were reduced by 31.8%. However, on a sequential quarter basis, oil production improved 6.7% though natural gas production sequentially declined 23.9% due to one of the producing gas wells being shut-in for a workover and management of the waterflood as it encroached upon the Halfway reservoir.
For the year, earnings were a loss of CAD $0.083 per diluted share versus a loss of $0.092 in 2011. Gross oil and gas revenues decreased 22.0% to $6.88 million, primarily due to lower oil and gas production (down 11.9% and 10.9%, respectively) but also because of lower price realizations (realized oil prices declined 8.5% while realized natural gas prices fell 30.1%). Though G&A expenses declined 15.1% and amortization & depletion allowances significantly contracted by 68.0%, operating & transportation expenses increased 51.8% to $3.79 million due to a major $564,000 workover on well A-1–I, along with increased repairs and maintenance and higher waterflood expenses. An unexpected $6.4 impairment of Property & Equipment (D&P assets) was recorded in the fourth quarter. Of the total, $4.9 million was attributable to the Canadian assets and $1.5 million to the company’s interests in the U.S. The impairments were recognized since the carrying value of certain oil & gas assets were determined to exceed the expected recoverable amount based on observable market prices. Operating netbacks decreased 58.0% to $1.97 million from $4.70 million in 2011 due to lower revenues and higher operating and transportation expenses (+51.8%), partly offset by a 31.4% decline in royalties.

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. Having executed a $6.5 million financial contract with a private oil and gas drilling fund to help finance the $8.2 million Kokopelli project, spudding the second well just occurred at the end of March. All four wells are expected to be completed and producing by mid-year. Thereafter, during the second half of 2013, management plans to conduct a geological and operational review of Drake/Woodrush project in Canada for the purpose of improving operating efficiencies and defining additional drilling targets.

Our rating on Dejour’s stock is being lowered to Neutral due to larger-than-expected 52% decline in value of the annual reserve assessments by AJM Deloitte for Woodrush and Kokopelli. Despite an 11.4% increase in proved natural gas reserves, weak gas pricing and a 26.7% decline in proved oil reserves (primarily due to production) drove the decline in the annual reserve assessments. Since these evaluations directly drive our valuation model, our price target is being lowered from $0.80 to $0.47, despite the positive spudding news at Kokopelli.

A copy of the full research report can be downloaded here >> Dejour Energy Report

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