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James Burgess

James Burgess

James Burgess studied Business Management at the University of Nottingham. He has worked in property development, chartered surveying, marketing, law, and accounts. He has also…

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Majors Turn Their Attention To The Rocky Mountains Again

One of North America’s older, more mature plays, the Rocky Mountain’s Piceance Basin doesn’t get the same media attention as the newcomers, but there is a beast under the boulders here—and a flurry of game-changing drilling—that will render this liquids-rich haven a major rival.

What has really got everyone’s attention here is that the Piceance Basin is prospective for the high-value oil liquids that are coming out of the deeper Niobrara and Mancos shales in this same area—unconventional sand/shale sequences that lie at depths down to 13,000 feet.

Much like the sleeping giant of the mature Permian Basin in Texas, where horizontal drilling is now outpacing vertical drilling and an old play turns into one of the biggest growth prospects in the US, the Piceance Basin is becoming a unique mix of maturation and growth.

According to independent researcher Oilshalegas.com, there is an estimated 300 trillion cubic feet of natural gas resource in Colorado’s Piceance Basin. Furthermore, heavyweight Piceance producers have recently documented an estimated 20% liquids recovery from that gas. Advanced technology has accelerated the development of this resource and as a result, expansive exploration and production projects can be found throughout the region.

The most recent news in this Basin takes us to the eastern portion, and the Kokopelli field, where Dejour Energy Inc. (NYSE MKT: DEJ / TSX: DEJ) is nicely positioned for big gains.

Kokopelli’s initial production is from the Williams Fork shale, which has long been known to contain natural gas but where low permeability had rendered drilling economically unviable—until the technology revolution that opened up the North American shale boom. This has been the primary target of gas development in this Basin, which is home to a list of supermajors that includes Chevron (NYSE:CVX), Encana (NYSE:ECA) and ExxonMobil (NYSE:XOM).

Kokopelli is the current highlight of Dejour’s portfolio, with its 25% working interest in 2,200 acres in this gas- and liquids-prone property, where production is returning 25% NGLs on a BOE basis. What makes the acreage even more valuable is that the land next to it is controlled by large-cap independent producers whose drilling continues to boost the value of Dejour’s holdings.

Two previous success stories here—Bill Barrett Corporation and WPX Energy, historically the prominent explorers in the Basin -—validate that Dejour is sitting on some of the most promising acreage. Barrett’s assets here, immediately adjacent to Dejour’s holdings, were just purchased by the giant Vanguard Natural Resources LLC for over $1 billion. But the biggest story of the year here has been WPX Energy, who has been by far the largest leaseholder, the largest producer in Williams Fork, and the most profiled Mancos/Niobrara developer in the Basin. Dejour’s land is sandwiched right between these two success stories.

This is not a speculative play by any means. Proved and probable reserves in the Williams Fork alone at Kokopelli are 11.5 million barrels of oil and NGLs along with 250 BCF natural gas having a YE 2013 PV-10 value of $260 million. And there are promising geological indications that the prolific Mancos/Niobrara shale is analogous to the Williams Fork shale, but more highly pressured and as a result, saturated.

Dejour already has four Williams Fork wells producing liquids-rich natural gas with an impressive 50 barrels / mmcf gas since 2013, and its current $16 million drilling program promises another eight wells by the end of this year.

Seven of these wells are targeting the Williams Fork formation—each of them 8,500 feet deep—but the eighth, which will be drilled deeper into the highly sought-after Mancos/Niobrara shale at 12,000 feet, could be the real game-changer. If Dejour hits success in this well, its value will shoot up exponentially. Dejour expects to see well logs by mid December 2014.

“WPX and Vanguard have hundreds and hundreds of wells right next to and surrounding us,” says Dejour CEO Robert Hodgkinson. “In addition, we’re already producing liquids, which makes the return on investment that much greater, especially as the mix exceeds 25%”.

And without even considering potential success in the Mancos/Niobrara, Dejour is looking at ending this current drill program with an additional net production  of 600 BOE/d, liquids included. It should be noted that their third party PV-10 estimate only includes reserves from the Williams Fork. The inclusion of the Mancos would turn Kokopelli into an impressive multi-zone producer.

The rig is already on site at Kokopelli with the first well spud on October 9, 2014, and we should see an update on additional well spudding and completion operations continually over the coming months. The bottom line, though, is that all these wells will be drilled, logged and cased in Q4-2014, and fracking, testing and completion operations will be well underway with production into the sales pipe shortly after. We also expect Dejour to have a lot of news flow throughout the balance of the year as the rig moves from well to well.

On June 30, 2014, Dejour closed a $20 million joint venture with a private US based E&P, retiring all US debt and funding $16 million in drilling capital, leaving the Company with a 25% WI in the ongoing project. This puts the company on a clear path to drill, drill, drill—and there are around 220 drillable well locations solely in the Williams Fork on the 2,200 acres. Success in the Mancos would add materially to that drilling inventory.

In total, the company has 45,000 net acres in the Piceance Basin and 19,000 net acres in the Peace River Arch region—with recent acquisitions and an aggressive drilling program that is nicely funded, which makes Dejour a solid growth prospect.

But while Kokopelli is the here and now—the future could be Roan Creek, near the home of “The Beast”, a massive well in the Mancos/Niobrara shale that put WPX back on the map in a very big way. While there have been a series of very successful wells in the Roan Creek area, “The Beast” has  outshined them all, producing over 16 million cubic feet per day.

For Dejour, “The Beast” is a friendly one, particularly since its Roan Creek land in the West Piceance Basin is in close proximity.

“The Mancos play has gotten a lot of people excited, particularly because of the Beast—and calling it a beast is an understatement. At our Roan Creek play, there is an estimated 67.5 billion cubic feet of P-50 prospective gas reserves with as yet an undetermined quantity of recoverable oil and NGLs here, according to our recent independent engineering report,” says Hodgkinson.

Developing the Roan Creek property is on the top of the agenda for next year, not only because of “The Beast”, but also because of Encana’s own monster well in the same area. And the highlight of this development is that Dejour owns a 100% interest in 1,960 beast-bound acres.

The small-cap company is also slated for big growth through new acquisitions and drilling this year at its Woodrush play in northern British Columbia. In July, Dejour closed an acquisition of another 24% working interest in this project, giving it 99% interest in a play that has three oil wells and six producing gas wells, with two new wells set to be drilled before the year’s end.

And while Rocky Mountain shale is turning into another Permian Basin story, we’re also looking at the company financials, with Dejour showing a strong balance sheet. Revenues are up 35%, debt has been paid down significantly, cash-flow has been positive for six months and acquisitions and drilling are planned for an upward swing.

“While everyone’s excited to see Kokopelli turn into a multi-zonal producer, we’re aggressively working to expand our property portfolio and continue to build upon our significantly improved financial performance,” says Hodgkinson.

“Woodrush growth will help improve the immediate bottom line, and we could exit the year with a combined production profile of 1,200 BOE/d. But the real near-term game-changer is the Mancos well at Kokopelli. Success here would make Dejour a key name among those developing the Piceance.”

By. James Burgess of Oilprice.com

Legal Disclaimer/Disclosure: Dejour is an Oilprice.com client. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. No information in this Report should be construed as individualized investment advice. A licensed financial advisor should be consulted prior to making any investment decision. We make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Oilprice.com only and are subject to change without notice. Oilprice.com assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.

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