On Feb 5, 2013, we downgraded natural gas producer
Ultra Petroleum Corporation
) to Underperform from Neutral, concerned by the current weak
sentiment for the commodity.
BREITBURN EGY (BBEP): Free Stock Analysis
CABOT OIL & GAS (COG): Free Stock Analysis
MEMORIAL PRODUC (MEMP): Free Stock Analysis
ULTRA PETRO CP (UPL): Free Stock Analysis
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Why the Downgrade?
The glut in domestic gas supplies continues to weigh on the
fundamentals, and storage levels remain well above their
benchmarks. This translates into a bearish near- to medium-term
outlook for natural gas-weighted companies like Ultra Petroleum.
Causes for Concern
Ultra Petroleum's high natural gas exposure raises its
sensitivity to gas price fluctuations, compared to its
more-diversified independent peers with higher oil production.
The company, which derives more than 95% of its
reserves/production from natural gas, has seen its sales and
income fall drastically in the recent quarters on the back of a
sharp drop in gas prices.
The grossly oversupplied market continues to pressure commodity
prices in the backdrop of sustained strong production, forcing
Ultra Petroleum to announce drilling curtailments and drastically
slash development drilling investment. While subscribing to
management's outlook, we believe the realignment of Ultra
Petroleum's strategy will take some time to bear results and we
expect the company to continue to struggle unless the outlook for
natural gas prices improves.
Ultra Petroleum currently generates substantially all of its
revenue, earnings and cash flow from activities in its Pinedale
and Jonah fields in Wyoming. Consequently, any significant
downtime related to pipelines or processing plants in the region
could affect the company's results.
Stocks That Warrant a Look
While we expect Ultra Petroleum to perform below its peers and
industry levels in the coming months and see little reason for
investors to own the stock, one can look at
Breitburn Energy Partners L.P.
Cabot Oil & Gas Corporation
Memorial Production Partners L.P.
) as excellent buying opportunities. These domestic energy
explorers - sporting a Zacks Rank #1 (Strong Buy) - have solid
secular growth stories with potential to rise significantly from