Will Ultra Petroleum Corp Have the Last Laugh?

Ultra Petroleum finishes off the year on good footing.

Feb 26, 2014 at 1:46PM

A couple years back, it seemed that natural gas producers were doomed unless they switched quickly to liquids production. This fear was so great that even Chesapeake Energy (NYSE:CHK), one of the biggest natural gas producers in America (second to ExxonMobil), poured most of its capex into liquids-rich plays.

To keep up the momentum, Chesapeake Energy will continue to shift its production mix toward liquids. Part of this will be achieved by focusing on the best oil plays, like the Eagle Ford. Overall, 2014 will see Chesapeake Energy operate an average of 41 to 48 rigs on liquid plays versus just 14 to 17 rigs on natural gas plays.

While Chesapeake Energy has been aggressively moving away from dry gas production, Ultra Petroleum (NYSE:UPL) took a much calmer approach. This decision seems to have been vindicated, as North American natural gas prices have bounced off a low of $2 mmBtu to $5-$6 mmBtu due to extremely cold weather spurring demand for natural gas used for heating. 

Gassed up, but headed down a different road
Ultra Petroleum's production mix was 96.5% weighted toward natural gas according to its latest quarterly update. While gas remains the base on which Ultra Petroleum stands, management seems optimistic about its oil production.

With the $649.8 million acquisition of oily Uinta Basin assets officially closed, Ultra Petroleum's management is guiding for a 40% increase in cash flow and EBITDA this year. This will be achieved through a tripling of its oil production through the development of its newly acquired acreage. Now Ultra Petroleum may finally be able to live up to its petroleum namesake if it can expand its oil output.

The timing couldn't be better, as soaring natural gas prices could help prop up future investment in oil plays. In 2013, Ultra Petroleum received a realized price of $3.57 mmBtu for its natural gas after factoring in hedging losses and gains. With gas prices on the rise, expect Ultra's realized natural gas prices to start trending upwards.

For this year alone, Ultra has hedged 118.4 Bcf of its natural gas production at an average price of $4.20 mmBtu. Through better realized prices, Ultra Petroleum will be able to move into oil production while cleaning up its balance sheet.

Salvage the balance sheet
While the future is looking bright this year for Ultra's bottom line, its balance sheet remains a problem. Being $2.5 billion in debt and having only $10.7 million in cash isn't something to be proud of, which is why Ultra Petroleum must boost its liquidity. If Ultra doesn't fix its balance sheet now, when the time comes to pay up, shareholder dilution or an unexpected sharp cut in capex could significantly hamper stock performance as growth is cut short.

Assuming everything goes well
If Ultra is smart and builds up its cash pile or pays off its debt while still growing oil production, then the next few years could be Ultra Petroleum's time to shine. With natural gas prices significantly above the cost of production ($3.08-$3.28 per Mcfe), margins will continue to expand.

Even with such a gas-heavy production mix, by controlling operating expenses Ultra was able to post a 55% cash flow margin and a 28% net income margin. As realized prices continue to climb much faster than costs, margin expansion will be a boon for investors.  

The Uinta Basin offers the most upside for shareholders as Ultra Petroleum plans to use its new acreage to triple oil output. That's nothing to laugh at, even if it is off a low base. Last quarter's average daily oil output was around 3,500 bpd, so by the end of 2014 that should rise to over 10,000 bpd if management can live up to its word.

Foolish conclusion
Ultra Petroleum has stood by natural gas to the bitter end, and luckily the supply demand situation continues to move in Ultra Petroleum's favor. 2015 will see the beginning of US LNG exports, which is what investors of all natural gas producers are closely watching. Shareholders of Chesapeake Energy and Ultra Petroleum are hoping LNG exports will provide a profitable floor for dry gas prices, allowing for a stable stream of cash flow beyond what hedging can provide.

This is the year of Ultra Petroleum, the year that it can prove it's fully capable of changing with the times while keeping a tight lid on costs. The market is moving in Ultra's favor while clever investments will support its guidance.

An energy investor's dream?
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!


Callum Turcan has no position in any stocks mentioned. The Motley Fool recommends Ultra Petroleum. The Motley Fool has the following options: long January 2016 $25 calls on Ultra Petroleum. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers