Oil-industry players are seemingly uncharacteristically chatty following a late-2009 discovery well in the oil-prone Niobrara play in the Denver-Julesburg Basin, according to Wells Fargo Securities E&P analysts. Thanks to the formation’s production elsewhere in the Rockies, E&P companies believe horizontal technology has made oil recovery likely.

The D-J Basin is a legacy Top 10 U.S. field, spanning a huge swath of land in northeastern Colorado that spills into southeastern Wyoming and western Nebraska. Most industry pundits think “Wattenberg” when they hear “D-J Basin,” as the Wattenberg Field is a huge basin-centered gas play just north of Denver that has produced more than 4 trillion cubic feet of gas.

However, that has changed since EOG Resources Inc. (NYSE: EOG) reported a discovery well in the fall of 2009. Since then, industry activity has been heating up as companies chase the oil-prone Niobrara, report senior analysts David Tameron and Michael Hall and associate analyst Gordon Douthat.

This formation has produced elsewhere in the Rockies, and now the E&P sector is applying technology developed elsewhere––for example, the Bakken––and drilling horizontally with the hopes of finding oil. The majority of activity appears to be in Weld County, Colorado, and Laramie County, Wyoming, in what appears to be areas where there has not been significant activity previously.

“We note that it is extremely early in the play, with only a few substantiated well results,” Tameron says. “Therefore, at this time we do not feel comfortable assigning any share value to the companies mentioned within, but will rather focus on the play and which companies have potential exposure. The Niobrara is present and has been productive across New Mexico, Wyoming and Colorado.”

Within the D-J Basin, the Niobrara is 200 to 300 feet thick and consists of the Fort Hayes limestone and Smoky Hill shale. The primary trapping mechanisms are assumed primarily stratigraphic. “We have heard from a few management teams, including Noble Energy Inc. (NYSE: NBL), which indicated the focus of the play was the northern portion, which is believed to be more liquids-rich. This incidentally squares with Noble’s recent acquisition (in the play).”

Based on the analysts’ research, there were a number of companies that have permitted, are drilling or have drilled wells targeting the Niobrara chalk or Niobrara shale in the D-J Basin. Some of the companies there and that the analysts rate are EOG (Market Perform), Noble (Market Perform), Anadarko Petroleum Corp. ((NYSE: APC) (Outperform), St. Mary Land & Exploration Co. (NYSE: SM) (Market Perform) and Petroleum Development Corp. (Nasdaq: PETD) (Market Perform).

Rosetta Resources Inc. (Nasdaq: ROSE) (Outperform) and Delta Petroleum Corp. (Nasdaq: DPTR) (Underperform) also have acreage in the D-J Basin, but their positions are in Yuma County, where Rosetta reportedly is drilling Niobrara chalk, and in Washington County, where Delta is and not near the areas most actively pursued.

Not surprising, EOG’s Jake #2-01H discovery well—drilled with a 4,000-foot lateral in the northern portion of Weld County just west of Grover in northeastern Colorado—generated the most attention. “Our sources indicate the well is producing from the Niobrara at approximately 7,280 feet. Field information pegged this well at IP rates of 1,700 BOE (barrels of oil equivalent) per day, and according to our sources, this well produced 34,600 BOE and 17.8 million cubic feet over the first 38 days.”

Based on the analysts’ calculations, EOG’s well produced an average of nearly 1,000 BOE per day during the first 40 days––in other words, a very economic well. “We understand that EOG has or is drilling the #8-31 Elmer well, which is roughly one mile from the Jake #2-01H well. EOG has also permitted at least another six wells, which we believe are all in Weld County.”

However, Jake #2-01H is in an area that has not seen significant drilling activity, according to Tameron. The big, legacy Silo Field that has produced more than 10 million barrels of oil and 8.7 billion cubic feet of gas in the past 30 years has Niobrara production, but this field is 25 miles north of Jake #2-01H.

As for Noble, it has significant Niobrara potential. The company has reportedly spud two horizontal Niobrara wildcat tests. “Combined with its current assets in the basin, Noble now has a dominant footprint in the D-J of 530,000 net acres. We also have heard that Noble recently picked up another 225,000 to 250,000 acres from a private Denver-based company in northern Weld County and extending into Laramie County in Wyoming,” Tameron says.

Although Noble has not confirmed the rumored acreage acquisition, Tameron and his colleagues expect additional details and discussion surrounding the play with the company’s fourth-quarter 2009 conference call scheduled for February 18.

“We will look to quantify the potential impact to Noble shares following additional information from the company,” he adds.

Petroleum Development Corp., “pound for pound, may have the most exposure,” Tameron adds. “Petroleum Development has a total of 67,400 net acres in Wattenberg, with the majority of the acreage located in Weld County. Of this acreage, the company says it has developed 43,400 of the acres, with another 24,000 net acres classified as undeveloped.”

Petroleum Development drilled a horizontal Niobrara test in 2006, but the results were somewhat disappointing. However, given the new technological applications and crude prices, the analysts expect the company will again revisit and test its potential. Moreover, if the play works, the company’s shares could benefit since the analysts note that share prices have been outperforming in a down tape, indicating the trade may have already begun.

Other large-cap name with significant exposure is Anadarko, primarily from acreage it acquired from Union Pacific Resources Group Inc. in the 1990s and Kerr-McGee Corp. a few years ago.

Union Pacific was instrumental in developing Silo Field and Kerr-McGee was one of the primary operators in the D-J Basin. In addition, through the legacy Union Pacific Railroad land grant, Anadarko likely owns the royalty interest on a large portion of its acreage.

“Hard to say how much acreage is “prospective” for the Niobrara, and we recognize that Anadarko has farmed out some of this acreage through various agreements over the years. Regardless, if horizontal Niobrara becomes a play, Anadarko has meaningful exposure.”

Chesapeake Energy Corp. (NYSE: CHK) apparently drilled a successful Frontier test, Wagonhound #23-1H, in November 2008, although it is in Converse County in the Powder River Basin. Last year, it was producing less than 500 BOE a day, but recent indications are that the rate is now closer to 800 or 900 a day.

“At a recent conference, Chesapeake cited a 1,000-BOE-per-day well, and this may be the well to which it was referring. Chesapeak also spud a 17,000-foot Upper Cretaceous Niobrara/Frontier test in Converse County (spud in August/September), although results from that well have been tight-holed,” Tameron says.

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