Most energy investors have probably heard of North Dakota's Bakken shale and South Texas' Eagle Ford shale, two of the fastest-growing oil plays in the country. But probably fewer have heard of the Niobrara formation, a relatively undeveloped oil-rich play in Colorado that has rapidly emerged as one of the hottest new liquids plays in the country.
The Niobrara formation is located primarily in northeastern Colorado's Denver-Julesburg, or DJ, Basin and parts of Wyoming, Nebraska, and Kansas, though parts of the play stretch as far north as the Montana-Canada border. Though the Niobrara is still in its early stages of development, some commentators have compared it to the Bakken because of its vast resource potential and high oil content.
While a number of new companies are rushing in to exploit the Niobrara's potential, such as Bakken-focused Whiting Petroleum (NYSE: WLL ) , which sold its properties in Texas for $816 million last year to ramp up activity in the Niobrara, two companies currently dominate the play.
First up is Noble Energy (NYSE: NBL ) , an early entrant into the Niobrara and currently the largest producer in the play. The company commands some 609,000 net acres in the DJ Basin, of which 87% is located in the play's oil window, where it is primarily targeting the Niobrara and Codell formations. Noble's strong performance last year resulted in 45% year-over-year oil growth from the DJ Basin.
One of the biggest catalysts to improve the company's performance in the DJ Basin even further is its Integrated Development Plan approach, or IDP, which should lead to substantial cost savings. Already, the company's development costs at its East Pony IDP have fallen by about $0.4 million to $0.8 million per well, while operating costs are down by roughly $0.1 million to $0.3 million per well, thanks to efficiency gains from pad drilling and less water trucking.
As Noble implements IDPs across more of its acreage, it expects the net present value of its DJ Basin wells to rise by roughly $1 million per well. Considering that the company has identified thousands of potential well locations across its acreage, this could boost the value of its assets by more than $1 billion -- hardly a drop in the bucket even for a company with an enterprise value of $28 billion.
Next up is Anadarko (NYSE: APC ) , which commands 350,000 net acres in the DJ Basin's Wattenberg field. The company's Wattenberg production surged to an average of more than 56,000 boe/d last year, up by almost 34,000 boe/d over 2012 levels, and continues to grow rapidly thanks to improved takeaway capacity provided by the addition of the Plains Rail Terminal in November.
This year, Anadarko's takeaway capacity from the play will increase even further, as Western Gas Partners' 300 million-cubic-foot-per-day Lancaster cryogenic plant and the 150,000-barrels-per-day Front Range NGL pipeline -- owned jointly by Enterprise Products Partners (NYSE: EPD ) , Anadarko, and DCP Midstream Partners (NYSE: DPM ) -- go into service shortly.
This is great news, because Anadarko's Wattenberg horizontal program generates a rate of return in excess of 100% at current prices and is the company's highest rate-of-return asset within its onshore U.S. portfolio. As the company further improves its operations in the play by optimizing lateral lengths, spacing, and completions and realizes additional benefits from its recent acreage exchange with Noble Energy, its returns should improve even further.
Will the good times keep rolling?
Thanks to the Niobrara's relatively high percentage of liquids and low development costs of roughly $4 million per well, Noble and Anadarko's drilling programs in the play are generating solid returns. And with takeaway capacity from the play expected to increase significantly, both companies are planning to accelerate development activity this year.
Anadarko plans to drill more than 360 Wattenberg wells with a 13-rig program this year, while Noble plans to drill approximately 320 operated horizontal wells in the DJ Basin. And with both companies having already identified thousands of drilling sites across their respective positions, double-digit production growth is likely to continue for several years.
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