We have retained our Neutral recommendation on natural gas producer Ultra Petroleum Corp. (UPL).
Houston, Texas-based Ultra Petroleum is an independent energy firm engaged in the acquisition, development, exploration and production of oil and gas properties. The company’s operations are focused on the Green River Basin in southwest Wyoming, mainly covering the Pinedale and the Jonah fields. Ultra also holds an impressive acreage in the north-central Pennsylvania area of the Appalachian Basin.
The company’s reserve and production growth over the last few years is one of the best in its peer group. During the last 5 years, the company has increased its production at a compounded annual growth rate of approximately 24%. During the same time period, Ultra Petroleum posted a 17% compound annual growth rate in proved reserves. The company’s 2010 production of 213.6 Bcfe represented a 19% year-over-year increase, while year-end 2010 proved reserves were 13% above the prior-year level.
Importantly, Ultra Petroleum seems well positioned to sustain strong growth momentum for quite some time, based on its impressive exposure to the high-return Marcellus Shale play, where it has amassed a large acreage position – 260,000 net acres – translating into a multi-year inventory of low-risk development drilling opportunities.
However, 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 approximately 95% of its reserves/production from natural gas, has seen its sales and income fall drastically in recent quarters on the back of a sharp drop in gas prices.
Additionally, 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.
As of now, we don't see any obvious catalyst in its business that would significantly push the stock price higher. Consequently, we see Ultra Petroleum shares performing in line with the broader market.
Ultra Petroleum – which competes with other established onshore natural gas-focused firms like Devon Energy Corp. (DVN), Anadarko Petroleum Corp. (APC) and Chesapeake Energy Corp. (CHK), currently retains a Zacks #3 Rank (short-term Hold rating).
ANADARKO PETROL (APC): Free Stock Analysis Report
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ULTRA PETRO CP (UPL): Free Stock Analysis Report
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