On Jun 26, 2013, we retained our Neutral recommendation on
natural gas producer
Ultra Petroleum Corp.
). Our investment thesis is supported by a Zacks Rank #3 (Hold).
Why the Reiteration?
Taking a cautious view of gas prices, Ultra Petroleum has focused
its capital program on the promising liquids-rich plays, which is
a major shift away from dry natural gas development. The company
has trimmed its current year capex by 50% from last year's level,
while still looking for robust production.
While subscribing to management's outlook, we believe the
realignment of Ultra Petroleum's portfolio will take some time to
bear results. The company also lacks geographic diversification,
which somewhat hampers its competitive positioning.
Ultra Petroleum controls substantial acreage in and around the
prolific Jonah natural gas field and the Pinedale Anticline area
in the Green River Basin. Both of these areas are endowed with
rich natural gas reserves, which have remained largely untapped
to date. Ultra Petroleum's production growth over the last few
years highlights its attractive asset base. Last year, the
company achieved record production of 257.0 billion cubic feet
equivalent (Bcfe), representing a 5% year-over-year increase.
ltra Petroleum maintains a very competitive cost structure, which
contributes to the consistency of its growth and returns
throughout the business cycle. During 2012, the company reported
all-in operating costs of $3.00 per million cubic feet equivalent
(Mcfe) - one of the best in its peer group. As a result of Ultra
Petroleum's low cost base, it was able to achieve a 64% cash flow
margin and a 29% net income margin amid low natural gas prices.
Concerned by the continuing volatility in gas prices, Houston,
TX-based Ultra Petroleum's capital program now focuses on the
promising liquids-rich Niobrara Formation in Colorado in a major
shift away from dry natural gas development. The company expects
exploration and development expenditure to be around $415
million, roughly half of that expended in 2012.
However, we think that these factors are adequately reflected in
the present valuation, leaving little room for meaningful upside
from current levels.
Finally, Ultra Petroleum currently generates substantially all of
its revenue, earnings and cash flow from the production and sale
of natural gas and oil from its Pinedale and Jonah fields in
Wyoming. Consequently, any significant downtime related to
pipelines or processing plants in the region could adversely
affect the company's results.
Stocks That Warrant a Look
While we expect Ultra Petroleum to perform in line with its peers
and industry levels in the coming months and advice investors to
wait for a better entry point before accumulating shares, one can
Oasis Petroleum Inc.
Sanchez Energy Corp.
PetroQuest Energy Inc.
) as good buying opportunities. These domestic upstream energy
operators - sporting a Zacks Rank #1 (Strong Buy) - have solid
secular growth stories with potential to rise significantly from
OASIS PETROLEUM (OAS): Free Stock Analysis
PETROQUEST ENGY (PQ): Free Stock Analysis
SANCHEZ ENERGY (SN): Free Stock Analysis
ULTRA PETRO CP (UPL): Free Stock Analysis
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