ConocoPhillips (COP), Ultra Petroleum Corp. (UPL): Will the Niobrara Be a Boom or a Bust for Oil Companies?

The Niobrara Formation, which is found mainly in Colorado and Wyoming, has been touted by some companies as potentially having more oil than the Bakken, while others have found it to be a complete bust. This presents a problem to the many natural gas producers that are turning to the play in hopes of diversifying their revenue into more lucrative oil and natural gas liquids. Listen to these emerging players talk about the potential of the play and you’ll hear some very mixed signals. Why is the play a bust for some and a boom for others?

The big busts
First, let’s take a look at some of the big busts. Ultra Petroleum Corp. (NYSE:UPL) was really hoping that the Niobrara would add some liquids production growth to the company’s natural-gas-heavy portfolio. Unfortunately, the Niobrara isn’t turning out to be the solution. On the company’s last earnings call, CEO Michael Watford said:

In Colorado’s DJ Basin, our results in the Niobrara have been disappointing. Although our core and log data indicate the presence of oil in the rocks, the petroleum system is immature, under-pressured and not commercial. This has been verified by completion of test results from both a vertical and a horizontal well. Ultra Petroleum Corp. (NYSE:UPL) assembled 139,000 low-cost acres and deployed it over the past two years and has no significant lease expirations until 2014. We’ll continue to monitor industry activity in the region but have no immediate plans for additional exploration in the area.

It turns out that it’s not the only company having trouble in the Niobrara. Rex Energy Corporation (NASDAQ:REXX) , a driller focused on the Marcellus and Utica, had also built up a position in the region only to drill a couple of duds. The company entered the DJ Basin in 2010 and was optimistic when giving the initial results of wells in close proximity to the acreage it was building up. Unfortunately, two years later it had written down most of the value of its acquired acreage and was looking to unload it. What happened is that it drilled two non-commercial wells and saw better opportunities to deploy capital within its current portfolio. Such are the risks of energy exploration.