The dream 

In 2004, my brother, Robert Hodgkinson, decided it was time to start another energy company. He had started at least two energy companies before, which created significant shareholder value. Optima Petroleum became Petroquest (NYSE: PQ, Stock Forum) on the NYSE and Australian Oilfields became Resolute/Cordero Energy (TSX: T.COR, Stock Forum) on the TSX.

With no assets, I participated in the seed financing at 20 cents a share and became a director. When the company did acquire assets and started realizing its dream, I stepped down as a director to make way for experienced energy personnel. In 2007, I sold a reasonable amount of my position at approximately $3.00, as I was very happy with my return and felt it was getting ahead of itself. So, why do I review the company now?

The reality

Over the 18 months, Dejour Enterprises Ltd.’s (TSX: V.DEJ, Stock Forum) activities increased significantly, as it rolled its uranium assets into Titan Uranium (TSX: V.TUE, Stock Forum) to become its largest shareholder, acquired 150,000 net acres in the highly prospective Piceance, Uinta, and Paradox basins in Colorado and Utah as well as the Peace River Arch in northeast British Columbia, including recently purchased “Montney” lands in the same region.

Recently I have become a buyer again. Why? In my view, the company is moving from being a speculative junior exploration company to being a revenue-producing exploration and production company. Revenue – something that appeals to me at this time, given the financial market conditions. Revenue – something that should only grow with the continuing and unexpectedly high value of oil and gas energy. Revenue – something that will support the next leg up for the stock, as demand for secure energy supplies grow, regardless of any short-term economic slowdowns in North America.

With revenue ramping up to a $15 million annual rate by Q3 2008 from 10 wells and eight additional wells planned in the following two quarters, the company is expecting revenue of $30 million annually by Q3 2009 from 18 wells, with lots of property left for drilling, joint ventures, and sales. The company has EBITDA per share expectations of 24-38 cents for 2009 and NAV estimates of $2.53–$3.33 per share.

The outlook

Energy demand will grow, especially for clean natural gas. The company’s projects are primarily in existing areas with infrastructure and pipeline availability. The amount of property the company controls allows for significantly more wells on existing property. EBITDA per share expectations justify a much higher stock price. NAV estimates per share justify a much higher stock price. It is reasonable to expect a 10 multiple on EBITDA per share and a NAV equal to share price. And this is all based on conventional development in the Peace Arch Area, where its new “Montney” lands could add a disproportionately high resource growth and revenue expectation over the next 36 months. Now the 130,000 net acre Piceance property platform is beginning to show promise and should at least in part get drilled and should not only show initial production over the next 12 months, but could support a surprisingly sharply upward NAV per share. With the stock trading between $1.15 and $1.50 recently I consider this a buy and that is what I have been judiciously doing. 

Acorns to Mighty Oaks – You be the judge. 

Charles Hodgkinson owns this stock. He is President of Hodgkinson Ventures Inc., a private Venture Capital Investing company with over 30 years investing and media experience, and can be found at www.acornstomightyoaks.com.