Devon's Cotton Candy

Devon (DVN Quote) has launched a high-stakes game of follow the leader.

Recently, the energy giant started drilling horizontal gas wells in the fertile Cotton Valley of east Texas and northern Louisiana. The company spent more money than it would on vertical wells but produced so much gas that it reaped far greater returns, too. Moreover, Devon pulled this feat off in not one but two areas of the valley, inspiring copycats to rush out and try for themselves.

"This could be a generically suitable approach for very, very large areas," says Harry Chernoff, a principal at Pathfinder Capital Advisors. "That's the real eye-popping thing."

Nearly a dozen companies plan to find out.

Indeed, Chernoff says, another giant independent -- XTO Energy (XTO Quote) -- actually drilled its first successful horizontal well in the Cotton Valley around the same time that Devon did.

Before then, A.G. Edwards had estimated that companies were spending $2.5 million to recover 3 billion cubic feet of gas reserves in the region. In its latest conference call, however, XTO reported that it spent $5 million on a horizontal well there and expects its recovery rate to surge to 10 billion cubic feet of reserves as a result.

Some major independents could look to follow suit. But smaller companies like GMX Resources (GMXR Quote) and Comstock (CRK Quote) could actually have more at stake.

Of the small-cap Cotton Valley players, says Chernoff, GMX has laid out the most aggressive horizontal drilling program. Meanwhile, he says, Comstock -- with fully half of its acreage located in the Cotton Valley -- boasts the greatest exposure to the region relative to its market value.

Chernoff believes that both companies could emerge as big-time winners in the end. He owns stock in them already.

"At this point, there is only one critical uncertainty: whether the same amount of gas is being recovered faster or whether more gas in total is being recovered," he says. If it is the latter, he says, "This will become the best gas resource play in North America -- ahead of anything else. It's a very big deal."

When questioned by TheStreet.com, Devon offered a clear response.

"We are recovering more gas," the company stated. "The initial rates are higher, and based on our production rates and early forecasting, we believe the reserves we are encountering through our horizontal well are over five times larger than the reserves we would reach with a vertical well. ... We are cautiously optimistic, but we have not drawn any firm conclusions based on the very first data point."

Devon's stock slipped 25 cents to $69.84 on Tuesday but remains near the high end of its 52-week range.