For several analysts, the record-setting test results from Chevron Corp.'s Jack #2 well at Walker Ridge Block 758 in the ultra-deepwater Gulf of Mexico have confirmed the potential productivity of many Lower Tertiary discoveries. Currently, there is no Gulf of Mexico production of that age.

"The announcement of Jack #2 is meaningful because it opens a new fairway, which could have 3- to 15 billion barrels of oil equivalent of recoverable reserves," says Merrill Lynch oil and gas analyst John Herrlin.

The well is about 270 miles southwest of New Orleans and 175 miles offshore. Chevron is the operator with a 50% working interest while Devon Energy Corp. and Statoil each own 25%.

The drilling broke Chevron's 2004 Tahiti well-test record as the deepest successful test in the Gulf, drilled to 28,175 feet. Jack #2 was designed to evaluate a portion of the total pay interval, and the well sustained a flow rate of more than 6,000 barrels of crude oil per day, representing only 40% of the total potential interval. Chevron and partners plan to drill an additional appraisal well in 2007.

Dan Pickering, principal with Houston-based Pickering Energy Partners Inc., says if Jack's pressure tests didn't find reservoir boundaries, the find could be a relatively homogenous reservoir that will need fewer wells. In the meantime, Pickering says he's been fielding more reporter inquiries than investor calls on Lower Tertiary implications.

"[I've] heard everything from Jack is the next Prudhoe Bay-it isn't-to Devon is prepping for sale to a major-anything's possible," he says. "The most common misperception? That the deepwater Gulf of Mexico discovery will have immediate impact on oil and gasoline prices-it won't."

Upon the news, Devon's stock shot up more than $10 to $74.75. At press time, shares were trading at about $66.

Herrlin says, "Overall, we think Devon presented non-proprietary information in a very balanced manner [during its conference call], but that doesn't mean that the Street didn't overreact to the news or failed to fully grasp the trend's long-term implications.

"We've believed that Devon was overlooked in terms of its 'wildcat optionality' and resource potential, but now, with the Lower Tertiary news and Jackfish-Canadian bitumen-in addition to the Barnett, the Street may have realized that it undervalued Devon."

Deutsche Bank analyst Paul Sankey has pushed up his price target on Chevron shares to $67 "to reflect the greater certainty over value."

Sankey says, "[The] announcement feels above all like yet another bearish story for the oil market, given the somewhat hyperbolic reporting of The Wall Street Journal, that the Lower Tertiary is 'another Alaska.' In fact, oil-market relevance is limited, but the mention of Prudhoe Bay is a reminder that this is a well-supplied oil market."

While the Lower Tertiary could be the next big Gulf of Mexico trend, Herrlin cautions that proving it up will be costly and the projects will have lengthy lead times.

"For Chevron or Devon, we feel what matters is that the Street will now have to recognize the potential," Herrlin says. "But, with $80- to $100 million per well and multibillion-dollar project-development costs, one will need to keep perspective. Are these endeavors value-adding? We believe so. In the case of both stocks, which are Buy-rated, we don't believe that the market has fully discounted such reserve-growth potential."

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