Drilling success in the promising Cotton Valley Trend in East Texas and northern Louisiana by a handful of large and small exploration and production (E&P) companies is piquing a lot of interest — and not only because of the natural gas being discovered there.

Just a year ago, the E&Ps that had staked out leaseholds in the Cotton Valley were spending, on average, around $2.5 million on a vertical well and recovering around 3 Bcf of gas reserves. This year, a little experimentation by some of the deeper-pocket E&Ps showed Cotton Valley producers that vertical drilling was good. But horizontal drilling, even though it’s more expensive, was even better.

For example, Devon Energy Corp. estimated it has put three times its usual development costs into horizontal drilling on its Cotton Valley leasehold in the Carthage-Bethany area of East Texas. The payoff: the initial production rate has risen more than five-fold over its vertical drilling results. XTO Energy Corp. reported in its third quarter conference call that it spent about $5 million on a horizontal well in its Cotton Valley play. XTO’s payoff: the recovery rate is expected to bring about 10 Bcf of reserves.

Horizontal drilling may the key to unlocking the once overlooked Cotton Valley, said Capital One Southcoast analyst Richard Moorman.

“In our opinion, investors are captivated by the promise of a significant potential change in the productivity and reserves of the massive Cotton Valley formation,” Moorman wrote in a research report. “The horizontal play could bring substantial value…making the Cotton Valley trend even more economic and considerably more robust against periodically low natural gas prices.”

Devon and XTO are two of the Cotton Valley’s major leaseholders. But smaller producers are managing to get their foothold in as well. Small-cap producer GMX Resources Inc., headquartered in Oklahoma City, has some of the most concentrated Cotton Valley exposure of any company — and it has become one of the fastest growing E&Ps in the country.

GMX, with 28,973 gross acres (15,268 net), is currently drilling horizontal wells in the Cotton Valley’s Sabine Uplift and the North Carthage Field, and it is developing its Upper Cotton Valley tight gas sands. About 93% of its core acreage is natural gas.

In October, GMX added a second company-owned rig to its Cotton Valley development and began drilling horizontally in the Taylor sand with a third leased rig. Its record net average daily production of 14.3 MMcfe/d in the third week of September was up 40% compared with the third week of June, “partly due to continued focus on completion cycle time in our Cotton Valley development,” said CEO stated Ken L. Kenworthy Jr.

GMX’s success has not been lost on energy analysts.

“If successful, horizontal drilling could significantly enhance project economics and increase GMX’s asset value,” said First Albany analyst Eric Hagen. “Although it’s still to early to put numbers on the potential, based on initial results, we believe successful horizontal drilling could significantly improve full-cycle economics and rates of return.”

Harry Chernoff, a principal at Pathfinder Capital Advisors, wrote, “If GMX can add horizontal success to its vertical success, it will be a big winner.” For E&Ps, he said horizontal drilling techniques are a “generically suitable approach” that could pay off for “very, very large areas…that’s the real eye-popping thing.”

Goodrich Petroleum Corp., another small-cap E&P, also drills almost exclusively for gas in the Cotton Valley. Vertical wells had been its modus operandi, but noting the other drillers’ horizontal success, Goodrich recently scored two horizontal drilling permits, and it expects to drill its first by the end of the year.

Goodrich, like GMX, is extending its Cotton Valley position as well. Last month, it clinched two exploration deals in the region. One agreement expands Goodrich’s gross Cotton Valley acreage position by 11%, to 160,000 gross (103,000 net) acres. If Goodrich pursues vertical wells in the play, the acreage position could “add up to 400 additional vertical well locations on 40-acre spacing,” said President Robert C. Turnham Jr. As of July 1, Goodrich had drilled 115 wells in its Cotton Valley holdings, with 100% success.

The definitive farm-out agreement, with an undisclosed party, allows Goodrich to explore for natural gas and oil, at no upfront costs, in the Alabama Bend field of Bienville Parish, LA. The agreement covers 16,000 acres in 33 sections (21,000 gross acres). Goodrich will hold a 75% net revenue interest on its drilling program, and it will own a 100% interest in each initial well drilled in all 33 sections. It also will have the right to participate for up to 50% on subsequent wells drilled in each section. To maintain its drilling rights, Goodrich has to drill one well every 90 days from the completion date of the previous well.

In mid-November, Goodrich also purchased the remaining 14.5% working interest in 22 wells and 500 net (3,300 gross) acres in its Dirgin-Beckville field in the Cotton Valley for $6.12 million. The seller was not disclosed. The purchase, which is expected to close by the end of the year, has an effective date of Nov. 1. Goodrich owns the remaining 85.5% working interest. Goodrich’s current internal estimate of reserves net to the interest in the Dirgin-Beckville play, based on 40-acre spacing for vertical wells only, is 5.7 Bcfe of proved (61% undeveloped) and another 5.0 Bcfe of probable reserves. Net production volumes are estimated at 750 Mcfe/d.

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