Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Ultra Petroleum: Are Investors Selling on the Wrong News?

The old investing saying "buy the rumor; sell the news" may be playing out for Ultra Petroleum  (NASDAQOTH: UPLMQ  )  recently, with shares down more than 8% since last week. It looks like much of this is being driven by the company's $650 million acquisition of oil assets in Utah. And with earnings set for the end of next week, one can't help but wonder if there isn't some speculation that this move points to a bad quarter, as natural gas prices have stayed relatively low. 

However, ExxonMobil  (NYSE: XOM  ) is increasing production of natural gas; last quarter it was the largest producer in North America. Additionally, Chesapeake Energy (NYSE: CHK  ) , the second largest domestic natural gas producer, is coming off a very strong quarter. Here's the rub: Natural gas prices were down significantly in the third quarter, as much as 23% from April's high to August's low.

Henry Hub Natural Gas Spot Price Chart

Henry Hub Natural Gas Spot Price data by YCharts

So what does this mean for long-term investors? Let's take a closer look.

Natural gas still at profitable levels
Even at the lowest levels during the third quarter, natural gas was still profitable for Ultra Petroleum. As Fool contributor Arjun Sreekumar describes, in the second quarter Ultra's cost of production was below $2.90 per Mcfe, while Chesapeake Energy needed to see prices above $4 to be profitable (though there is some likelihood that this number will decrease as Chesapeake sells off assets and reduces expense.) Additionally, the approach of winter should drive demand up, and historically this leads to higher prices over the season. 

Diversification activity at integrated majors as well
As I mentioned above, ExxonMobil was the largest U.S. producer of natural gas in the second quarter. At the same time, Royal Dutch Shell  (NYSE: RDS-A  ) (NYSE: RDS-B  ) recently signed an agreement to pay $280 million for more offshore oil drilling rights in Brazil. Shell counts natural gas as about one-half of its total production. So, as with Ultra Petroleum, what's happening here is just a matter of these producers adding to their production and assets in areas where they aren't as strong.

This diversification is a further reminder that global energy demand remains strong. And with the world's population expected to grow by another one billion people by 2025, this trend isn't reversing anytime soon -- even as renewable energy applications become a larger piece of the energy pie. 

Final thoughts
The falling price of Ultra Petroleum's shares is likely a combination of pre-earnings uncertainty (likely exacerbated by this large investment in oil production), and some profit-taking (the stock is up 23% since March); the long-term story is still strong. At the end of the day, adding assets in a play with a history of strong cash-flow generation, while also softening the impact of natural gas volatility is a winning move for long-term investors.

Seeing ExxonMobil increase its production of natural gas is an indication that the market demand (and pricing) should remain strong both in the short and long term, as its use as a transportation fuel, for electricity generation, and as an export all increase. For long-term investors, going with a company with a long-term history of low-cost production is a Foolish bet. Don't mistake the market's short-term reaction as a material change to the business. The long-term story at Ultra Petroleum looks great.


Looking for an overlooked play in the domestic energy boom?
One home run investing opportunity has been slipping under Wall Street's radar for months. But it won't stay hidden much longer. Forward-thinking energy players like GE and Ford have already plowed sizable amounts of research capital into this little-known stock... because they know it holds the key to the explosive profit power of the coming "no choice fuel revolution." Luckily, there's still time for you to get on board if you act quickly. All the details are inside an exclusive report from The Motley Fool. Click here for the full story!


Read/Post Comments (1) | Recommend This Article (1)

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 23, 2013, at 7:05 PM, wallstr33t wrote:

    All oil and NG stocks fell today and yesterday because of the drop in oil/ng prices. The analysts think oil may go down to $85. Plus this winter is supposed to be a mild one so I don't see as much NG used.

    Like you said, next week is earnings and a lot of people take profits when they are uncertain. Wasn't UPL downgraded by someone recently? That also draws uncertainity. And they just made a large purchase which draws a stock price down.

    I like there NG location in western Pa., a lot of Marcellus there that will last for years.. I'm waiting for UPL to go to 17/18 before purchasing. Morningstar loves it.

Add your comment.

Compare Brokers

Fool Disclosure

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: 2695631, ~/Articles/ArticleHandler.aspx, 9/27/2016 2:56:49 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...

Today's Market

updated Moments ago Sponsored by:
DOW 18,227.72 132.89 0.73%
S&P 500 2,159.36 13.26 0.62%
NASD 5,306.21 48.71 0.93%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/27/2016 2:12 PM
UPLMQ $4.82 Down -0.13 -2.63%
Ultra Petroleum CAPS Rating: **
CHK $6.15 Down -0.47 -7.11%
Chesapeake Energy CAPS Rating: ***
RDS-A $47.06 Down -0.41 -0.86%
Royal Dutch Shell… CAPS Rating: ****
RDS-B $50.04 Down -0.41 -0.82%
Royal Dutch Shell… CAPS Rating: ****
XOM $83.11 Up +0.05 +0.06%
ExxonMobil CAPS Rating: ****