Ultra Petroleum (NYSE: UPL ) reported its fourth-quarter and full-year results yesterday, and consequently dropped 6%. There is more to this story than meets the eye, however, and yesterday's drop may prove to be a compelling entry point for investors.
Ultra is an independent natural gas outfit with properties in the Green River Basin of Wyoming and the Marcellus Shale in Pennsylvania. Its two assets in Wyoming, the Pinedale and Jonah fields, are spread over 112,000 gross acres and feature an interest in 1,300 producing wells.
Ultra's assets in the Marcellus shale are concentrated in north-central Pennsylvania, where its position totals 250,000 net acres, with potential for 1,800 net drilling locations.
Fourth-quarter, full-year results
Given the climate for natural gas prices these days, it wouldn't be farfetched to expect a company producing almost nothing but natural gas to get slammed, but Ultra did all right. Production volumes were up 17%. This improvement, combined with Ultra's ability to successfully hedge gas prices and rein in operating costs, resulted in operating cash flow of $251.4 million -- a 27% YOY increase.
For the year as a whole, Ultra increased operating cash flow by 26%, from $764.5 million in 2010 to $964.3 million in 2011. Production increased 15%, to a company record 245.3 billion cubic feet of equivalent. Breaking that number down, we see that production was a mix of 236.8 Bcf of natural gas and 1.4 million barrels of condensate. Commodity hedges contributed $213.3 million, good for $1.38 per diluted share.
Ultra also clarified operations goals for 2012, and suffered a battering at the hands of the market as a result. The company announced that it won't begin new drilling in its Marcellus or Pinedale positions, reducing its development drilling program 50%, from $1.3 billion in 2011 to $650 million in 2012. Capital expenditures will also decrease from $1.5 billion in 2011 to $925 million for 2012.
Production estimates for the year now range from 683 million cubic feet per day to 710 MMcfe/d.
Bulls will certainly see yesterday's stock plunge is a bit of an overreaction. Production guidance for this year still comes out potentially 6% higher than last year's. Though this may not be the dramatic growth the market was hoping for, management's previous indication that it would ramp production up over 20% from last year would be reckless given the price of natural gas right now. I'll take a smart decision by management to pull back over pandering to the market any day.