Earlier this year, I bought shares of Ultra Petroleum (NYSE: UPL) when it was trading at around $20 a share. Though the stock went as high as $24 a share a couple of months later, it has since returned to the level of my purchase price.
Still, I think the company's value propositions remain very much intact. Let me explain why I find the company an attractive opportunity, especially for those who are bullish on longer-term natural gas prices.
High-quality asset base
The first value proposition I see for Ultra Petroleum is its superb, albeit highly concentrated, asset base. The company has total reserves of 17 trillion cubic feet spread across the Jonah and Pinedale fields in the Green River Basin of Wyoming, where it controls nearly 23,000 net acres, and Pennsylvania's Marcellus shale, where it commands roughly 260,000 net acres.
Importantly, both plays are characterized by relatively low decline rates and extremely long reserve lives, which gives Ultra plenty of room to ramp up drilling over the next several years. According to the company's estimates, its Pinedale assets have a reserve life of more than 30 years, while decline rates are between 20%-30%, significantly lower than other gas plays such as the Barnett and Haynesville shales, which feature decline rates of roughly 55% and 85%, respectively.
Industry-leading cost structure
Another major reason I like Ultra is its industry-leading cost structure. Last year, the company's closest competitors in terms of all-in costs per Mcfe were Chesapeake Energy (NYSE: CHK), which needed gas prices of just under $4 to break even, Devon Energy (NYSE: DVN), which had all-in costs of around $4.50, and Range Resources (NYSE: RRC), which needed a gas price of around $5.50 to make a profit on its gas wells, according to an analysis by Wells Fargo.
In the second quarter, Ultra's all-in costs per Mcfe came in at $2.88, with cash costs of just $1.85 per Mcfe. This was driven mainly by efficiency gains, as the company reduced its average spud-to-total depth time in the quarter to just 9.6 days -- a company record. Well costs also continue to fall, with Ultra reporting that its typical Pinedale well now costs just under $4.4 million, down from about $4.7 million as of the end of last year.
Vast inventory of future drilling locations
In addition to its low costs, Ultra boasts a truly massive inventory of future drilling opportunities. While the company has cut back on spending and drilling activity this year because of lower realized gas prices, its vast inventory of undeveloped acreage gives it plenty of room to ramp up activity as prices rise over the years.
For instance, Ultra's acreage in the Green River Basin, which is concentrated mostly in the Pinedale field, is only 25% developed, which leaves the company with more than 5,000 gross locations waiting to be drilled in the future. Similarly, less than 10% of the company's Marcellus assets are developed, leaving more than 3,340 locations to be drilled.
The bottom line
For investors who are bullish on natural gas prices over the next few years, I think Ultra Petroleum represents a truly superb opportunity. Not only does it have stellar asset base of long-lived, low-decline assets, but its drilling and development costs are among the lowest in the industry, which protects it from further stagnation in natural gas prices.
It also has a disciplined, results-focused management team that allocates capital only to the most profitable opportunities and has been investing within cash flow since the middle of last year. Last but certainly not least, Ultra has more than 20+ years of inventory in two highly economical shale gas plays, which gives it ample room to accelerate drilling as gas prices rise.
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