Bearish on Ultra Petroleum's Future - Analyst Blog
March 27 2012 - 10:45AM
Zacks
Shares of Ultra Petroleum Corp. (UPL) are
currently trading close to its 52-week low of $22.51. The natural
gas producer has seen its share price fall more than 30% since the
beginning of December last year, as investors have been selling the
stock for its weak fundamentals and tepid outlook. The
disappointing fourth quarter results have added to this
bearishness.
Houston, Texas-based Ultra Petroleum is an 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 of southwest Wyoming, mainly covering the
Pinedale and the Jonah fields.
As of year-end 2011, Ultra Petroleum had 4.98 trillion cubic
feet equivalent (Tcfe) in proved reserves, of which more than 96%
was natural gas and about 41% was developed. Production averaged
245.3 billion cubic feet equivalent (Bcfe) during the year,
comprising 97% gas and 3% crude oil/ liquid hydrocarbons. 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 recently reported lower-than-expected EPS for the
December quarter – 58 cents versus the Zacks Consensus Estimate of
61 cents – adversely affected by lower natural gas prices.
A supply glut has pressured natural gas prices during the past
year or so, as production from dense rock formations (shale) –
through novel techniques of horizontal drilling and hydraulic
fracturing – remain robust, thereby overwhelming demand.
As a matter of fact, natural gas prices have dropped over 50%
from 2011 peak of $4.92 per million Btu (MMBtu) in June to the
current level of around $2.30 (referring to spot prices at the
Henry Hub, the benchmark supply point in Louisiana). Incidentally,
prices hit a 30-month low of $2.01 earlier this month.
To make matters worse, a near-record mild weather across most of
the country curbed natural gas demand for heating all winter,
leading to an early beginning for the stock-building season. The
grossly oversupplied market continues to pressure commodity prices
in the backdrop of sustained strong production.
This has forced Ultra Petroleum – and other natural gas players
like Talisman Energy Inc. (TLM), Encana
Corp. (ECA), etc. – to announce drilling curtailments. The
company has reduced its 2012 capital budget by 38% year over year
to $925 million. Ultra Petroleum's investment for development
drilling has been slashed even more drastically, down 50% to just
$650 million from the $1.3 billion expended last year.
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.
Given these concerns, we expect Ultra Petroleum to perform below
its peers and industry levels in the coming months. As such, we see
little reason for investors to own the stock. Our long-term
Underperform recommendation is supported by a Zacks #5 Rank
(short-term Strong Sell rating).
ENCANA CORP (ECA): Free Stock Analysis Report
TALISMAN ENERGY (TLM): Free Stock Analysis Report
ULTRA PETRO CP (UPL): Free Stock Analysis Report
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