Will Shorts Be Burned by This Natural Gas Company?

Investors in natural gas exploration and production company Ultra Petroleum's (NYSE: UPL  ) have had a rough couple of years. These investors once basked in the natural gas-fueled rally that saw Ultra's shares soar more than 6,000% from 2001 to 2008. Many of those same investors were later badly burned as natural gas prices collapsed, sending the company's shares down nearly 80% since hitting its peak in the summer of 2008.

Some of those same investors are now betting against the company. With the price of natural gas stuck below $4, these investors see continued tough times for the company. At last count, short interest stood at 13.8%. But should investors really be hating this natural gas company?

Why it's hated
Few companies are more levered to natural gas than Ultra Petroleum. While many of its peers are now focusing on oil and liquids plays, Ultra's focus continues be on developing its long-life natural gas reserves in the Pinedale and Jonah fields as well as continuing the exploration of the Marcellus shale. Investors shorting the stock don't believe this is the right path, given the continued low price of natural gas.  

It also didn't help that it's exploration in Colorado's Denver-Julesburg Basin has been a disappointment. According to CEO Michael Watford: "Although our core and log data indicate the presence of oil in the rocks, the petroleum system is immature, under-pressured, and not commercial. ... We'll continue to monitor industry activity in the region but have no immediate plans for additional exploration in the area." The company built up 139,000 acres in the play and will now turn its exploration capital elsewhere.

The final concern here is the company's debt. At just under $2 billion, that's still a lot of debt for a company with a market capitalization of about $3 billion. A further concern here is that until recently, the company was outspending its income. While the company has pulled back the reins on its spending and is now cash flow-positive, investors see a company that lacks flexibility in the face of depressed natural gas prices.

Why it should be loved
The good news, though, is that Ultra is one of the lowest-cost producers of natural gas. The company breaks even at $3 gas, whereas many of its competitors need gas to be north of $6 to turn a profit. With its costs so low, it can drill for gas when its peers can't. Further, Ultra estimates that it has 17 trillion cubic feet equivalent of future reserves on 4,600 future drilling locations.

Some of its most promising acres are in the Marcellus shale, where it has very strong partners in Anadarko Petroleum (NYSE: APC  ) and Royal Dutch Shell  (NYSE: RDS-A  ) to help it along the way. While partnering can be a blessing and a curse, in this case we're talking about world-class partners. In the short-term, though, the company won't be doing much work with either company as its Shell venture in the Marcellus will have only one rig running this year, while its Anadarko venture has no activity planned for the year ahead. However, longer term, the company sees the potential for 1,700 net wells, with the potential to produce 7.4 trillion cubic feet equivalent of natural gas. 

Another interesting asset for Ultra is its position in the Jonah Field. Ultra has more than 1,700 wells on 2,000 gross acres in the field, which produces 700 million cubic feet of natural gas per day. For some perspective on how prolific these assets are, last year LINN Energy (NASDAQ: LINE  ) bought 750 wells on 12,500 net acres in the play for about $1 billion. LINN's production is 145 million cubic feet equivalent per day. As you can see, Ultra has a great position in that field.

My Foolish take
There are two key takeaways here on Ultra Petroleum. First, the company is now living within its cash flow to grow its production. Combine that with its low-cost production, and you have the fuel for a company that could rocket higher once natural gas prices improve. Given the lack of natural gas drilling and its increased usage for transportation and electrical generation, I can see reasons for its price to head higher over the longer term. That's why I wouldn't be short this stock: It could really burn investors on a rebound.

There's another natural gas stock I wouldn't short, given that the movement toward alternative energy is gaining momentum. With the potential opportunity in this field, Clean Energy Fuels is a company to know, as it focuses its natural gas efforts primarily on trucking and fleets. It's poised to make a big impact on an essential industry. Read all about Clean Energy Fuels in our brand-new report. Just click here to get started.


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

Comments from our Foolish Readers

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  • Report this Comment On March 17, 2013, at 11:28 PM, Pinedalegas wrote:

    "Another interesting asset for Ultra is its position in the Jonah Field. Ultra has more than 1,700 wells on 2,000 gross acres in the field, which produces 700 million cubic feet of natural gas per day. For some perspective on how prolific these assets are, last year LINN Energy (NASDAQ: LINE ) bought 750 wells on 12,500 net acres in the play for about $1 billion. LINN's production is 145 million cubic feet equivalent per day. As you can see, Ultra has a great position in that field."

    What a bunch of foolish bunk.....

    1st, you imply that there are 1700 wells on 200 gross acres.. That is Nearly 1 well per acre. The Wyoming oil and gas conservation commission has never approved a density greater than 5 acre spacings.

    Perhaps you meant 2000 net acres which would mean that ultra has partners. Not a small matter to investors.

    2nd according to the Wyoming oil and gas conservation commission ultra only has around 70 or so producing wells in the Jonah field.

    3rd and most important, according to the WOGCC Ultra only produced 5.4 million cubic feet during the month of January 2013 Not the 700 million cubic feet per day you claim.

    If you knew anything at all about ultra you would know they are a very minor player in the Jonah field but a very major player in the pinedale anticline. In fact if the pinedale anticline were substituted for Jonah, some of your numbers would make more sense. Unfortunatly you are regurgitating numbers someone else gave you and you have absolutely no idea what they mean or where they came from. Not your fault you are just doing your job the best you can. It really doesn't speak we'll for the motley fool!!

    What an appropriate name.

  • Report this Comment On March 17, 2013, at 11:39 PM, Pinedalegas wrote:

    Correction: where I said 200 acres was a typo it should read 2000 acres as did the article.

  • Report this Comment On March 18, 2013, at 8:08 AM, TMFmd19 wrote:

    @Pinedale gas: Take a look at slide 4: http://phx.corporate-ir.net/External.File?t=1&item=VHlwZ...

    I interpreted the data to mean that it had 21,000 acres overall but right now the wells were on 2000 gross acres and 1,760 wells. Is that the way to interpret the data?

    The only point I was making was that LINN sees huge potential in Jonah which is good for UPL giving its potential there. The only reason to leave off Pindeale (which from your user name is obviously something you know a lot about) was because I know more about Johah as a LINN investor.

    Matt

  • Report this Comment On March 18, 2013, at 10:22 AM, Pinedalegas wrote:

    First, I'll apologize for a mistake I made. Ultra was producing around 25MMCF per day in Jan not the 5.4 I mentioned. Go to wogcc.state.wy.us then select field, type in Jonah. There you can view operators their wells and production. Note production numbers are by month.

    Slide is deceiving. Only the line labeled upl is about upl. All the rest are field numbers. For instance upl doesn't have 1760 wells in Jonah. According to the WOGCC there are currently 1796 completed wells for all operators in the Jonah field. BTW the 700 MMCF per day is a field total.

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