Niobrara's true potential will take time to evaluate

The Niobrara formation, sometimes called the Niobrara Chalk, has emerged as the second-hottest liquids-rich play in the Rockies after the Bakken Shale of North Dakota, Montana, and parts of several Canadian provinces. Although the Niobrara is not a shale play, operators are using similar techniques (horizontal drilling, multi-stage hydraulic fracturing, etc.) as are used in shale resources to optimize production in the formation.

Most of the Niobrara can be found in Colorado, Wyoming, and western Nebraska. However, portions of it extend as far south as the Raton Basin of northern New Mexico and as far north as north-central Montana.

The Niobrara is an oil-rich formation, and companies large and small have been flocking to it. However, global information company IHS points out that while there is growing optimism about the potential offered by the Rockies oil play, the Niobrara's true potential will take time to evaluate.

"While our recent assessment clearly shows that more time and data are needed to better understand the potential of the Niobrara, Asian buyers are keeping the Niobrara deal values at roughly $5,000 per acre, which we believe is lofty relative to risked intrinsic value," said IHS's Sven Del Pozzo, a senior principal energy equity analyst. For that reason, noted Del Pozzo, "We believe private E&Ps may consider selling their Niobrara assets" in the current heated market.

Anadarko plans for Niobrara

Houston-based Anadarko Petroleum is the largest net producer in the liquids-rich Denver-Julesburg (DJ) Basin (where part of the Niobrara can be accessed) at greater than 70,000 boepd. The company holds interests in more than 350,000 net acres in the Wattenberg field, and operates more than 5,200 existing wells with an average working interest of approximately 96%, and an average net revenue interest of about 88%.

As part of its ongoing program, Anadarko will be conducting extensive tests to define the optimum spacing and lateral lengths for the Niobrara and Codell formations. The company also plans to increase the Wattenberg HZ drilling program to seven rigs by the end of 2012, while increasing the number of horizontal wells drilled during the year to approximately 160 from about 40 in 2011. Thereafter a 200-well program is envisioned. The Niobrara horizontals are already producing 6,000 boepd, or almost 10% of the 70,000 boepd produced from the field.

"The results to date demonstrate the Wattenberg HZ program is among the most cost-efficient development projects in our US onshore portfolio, and with initial wells averaging payouts of 10 months, we expect it to quickly become a self-funding, significant cash-flow generator," said Chuck Meloy, senior vice president, worldwide operations, for Anadarko.

"With our extensive land position and the drilling results to date, we envision drilling another 1,200 to 2,700 horizontal wells in the core Wattenberg field acreage," he added.

Based on these 1,200 drilling locations and an estimated pv10 per location of $5 million for a 400,000 boe well, the Wattenberg resource could be worth over $6 billion to Anadarko, noted Jefferies & Co. Inc. analysts. A joint venture on a third of the acreage could raise at least $2 billion, or $4 per share with an implied value per acre of $20,000, the analysts continued.

Results outside the Wattenberg field–where the company holds another 550,000 net acres in the greater DJ basin and 360,000 net acres in the Powder River Basin–are "less exciting, with average IPs of 350 boe/d from 15 operated wells (13 in Greater DJ)," noted Jefferies. The company is planning roughly 30 wells in these areas in 2012 in addition to evaluating a potential JV partner.

Recent M&A update

Looking for Niobrara acreage, ConocoPhillips has acquired approximately 46,000 net acres of leasehold from Lario Oil & Gas Co. in the Colorado counties of Arapahoe, Adams, Elbert, and Douglas. Terms of the deal were not disclosed. Conoco will serve as operator of the leases and expects to begin exploration efforts as soon as possible with the acquisition of a 3D seismic survey and drilling of test wells.

Previously, Denver-based Bill Barrett Corp. signed an agreement with a Texas American Resources Co. affiliate to acquire Denver-Julesburg (DJ) Basin properties targeting Niobrara oil for $150 million. The acquired properties are located within and near the Wattenberg Field and near the Hereford area, close to the Colorado-Wyoming border, and include a preliminary estimate of 7 million barrels of oil equivalent (MMboe) net proved reserves, roughly 650 boe/d net production and approximately 28,000 net acres of mineral leasehold, primarily on fee lands. The production and reserves largely are comprised of 55% oil and 45% of high Btu liquids-rich natural gas. Current production is predominantly from the Codell and Niobrara formations.

Purchase price for the acreage in Laramie and Weld counties works out to roughly $5,357 per acre. If $50 million is allocated to production and reserves, unproven acreage would be valued at $3,571 per acre, noted Global Hunter Securities in a note to investors.