Who Wants to Be a Haynesville Heavyweight?

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On Monday, a Colorado-based exploration and production outfit named Ellora Energy announced that it has retained Bank of America to help shop the company around. While the company has toyed with the idea of coming public for years now, Ellora is privately held. So why am I bothering to tell you about this development?

Simple: Ellora has a sweet-looking position in the Haynesville shale. We could have a serious bidding war on our hands.

Ellora, alongside St. Mary Land & Exploration (NYSE: SM) and Marathon Oil (NYSE: MRO), was one of the early entrants into the James Lime horizontal play in East Texas. This was years before Chesapeake Energy (NYSE: CHK) broke news of its Haynesville shale discovery in early 2008. Lying several thousand feet deeper than the James Lime, the Haynesville similarly runs from East Texas up through Northern Louisiana. Ellora has thus found itself sitting on top of one of the biggest gas plays in North America.

Until recently, Haynesville wells on the Texas side of the play were looking pretty poor in comparison to the gushers being unleashed by the likes of Petrohawk (NYSE: HK) across the border in Louisiana. This all changed with Devon Energy's (NYSE: DVN) Kardell well in San Augustine county, which tested at a 24-hour rate of 30.7 million cubic feet per day.

Some competitors publicly chided Devon for using a wide choke to generate flashy results, but this well certainly makes a case for the Haynesville core area extending to the southwest, into Texas counties like San Augustine and Shelby. Ellora's got 53,000 acres in what it describes as "the heart of the fairway in Shelby County."

That may not sound like a lot, but Devon's position in this southern portion of the Haynesville play is comparable. Ditto for XTO Energy (NYSE: XTO). EOG Resources' (NYSE: EOG) position across the entire Haynesville is 153,000 acres. Ellora's position thus looks very material to just about any potential acquirer you could name.

For Chesapeake Energy, this could prove to be "the one that got away." The company had agreed to buy 65% of Ellora's deep rights (inclusive of the Haynesville formation) last year. Chesapeake withdrew its offer last October, around the time of Aubrey's margin call.

It's tough to handicap the likely high bidder for this Haynesville player, but if Devon's extreme makeover generates some near-term cash proceeds, I would not at all be surprised to see the firm move to increase its foothold in this play.