Is Ultra Petroleum the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Ultra Petroleum (NYSE: UPL  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Ultra Petroleum.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 13.2% Fail
  1-Year Revenue Growth > 12% 16.8% Pass
Margins Gross Margin > 35% 74.6% Pass
  Net Margin > 15% 36.7% Pass
Balance Sheet Debt to Equity < 50% 130.2% Fail
  Current Ratio > 1.3 0.43 Fail
Opportunities Return on Equity > 15% 33.3% Pass
Valuation Normalized P/E < 20 12.59 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Ultra Petroleum finishes with a middle-of-the-road score of five. But despite the challenges the natural gas producer faces, it also has a huge competitive advantage over its peers that should help it only get stronger in the years ahead.

Despite its oil-centered name, Ultra Petroleum has a huge presence in both the oil and natural gas industry. Its primary properties are in the Green River Basin of Wyoming as well as the Marcellus Shale area of north-central Pennsylvania.

What makes Ultra special is its ultra-low production costs. With half the expenses of industry leaders like Chesapeake Energy (NYSE: CHK  ) and Range Resources (NYSE: RRC  ) and significant savings even over fellow low-cost producer Southwestern Energy (NYSE: SWN  ) , Ultra has managed to stay not only profitable but wildly profitable, even with natural gas prices at stubbornly low levels.

However, that hasn't kept the shares from falling along with the recent drop in oil prices. Ironically, though, because Ultra has retained about 90% exposure to natural gas, crude prices shouldn't have that big an impact on its earnings.

The big question for Ultra is whether some catalyst will ignite natural gas prices higher. Whether it's demand-creating innovations from Clean Energy Fuels (Nasdaq: CLNE  ) or Westport Innovations (Nasdaq: WPRT  ) or simply big industry substituting cheap gas for more expensive fuels, Ultra will benefit whenever the push toward natural gas becomes a reality.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Ultra Petroleum to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Ultra Petroleum. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy, Westport Innovations, Ultra Petroleum, and Range Resources, as well as writing puts in Southwestern Energy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 17, 2011, at 8:52 PM, MHedgeFundTrader wrote:

    I received some questions last week on my recent solar pieces as to whether I minded paying more money for “green” power. My answer is “hell no,” and I’ll tell you why. My annual electric bill comes to $1,500 a year. Since the California power authorities have set a goal of 33% alternative energy sources by 2020, PG&E (PGE) has the most aggressive green energy program in the country (click here for “The Solar Boom in California”). More expensive solar, wind, geothermal, and biodiesel power sources mean that my electric bill may rise by $150-$300 a year.

    There is another factor to count in. Anyone in the oil industry will tell you that, of the current $82 price for crude, $30 is a risk premium driven by fears of instability in the Middle East. The Strategic Petroleum Reserve, every available tanker, and thousands of rail cars are all chocked full with unwanted oil. This is why prices remain high.

    If enough of the country converts to alternatives and adopts major conservation measures, then we can quit importing oil from that violent part of the world. No more sending our president to bow and shake hands with King Abdullah. Oil prices would fall, our military budget would drop, the federal budget deficit would shrink, and our taxes would likely get cut.

    Yes, these are simplistic, back of the envelop calculations that don’t take into account other national security considerations, or our presence on the global stage. But these numbers show that even a modest conversion to alternatives can have an outsized impact on the bigger picture.

    By the way, please don’t tell ExxonMobile (XOM) or BP (BP) I told you this. They get 80% of their earnings from importing oil to the US. I don’t want to get a knock on the door in the middle of the night.

    TheMadHedge-FundTrader

  • Report this Comment On October 20, 2011, at 10:19 PM, DanCooper76 wrote:

    takeover target.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1570820, ~/Articles/ArticleHandler.aspx, 11/28/2014 5:03:45 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement