Why This Gas Producer Could Be Hugely Undervalued

Ultra Petroleum looks significantly undervalued based on an enterprise value-to-proven reserves basis.

Mar 16, 2014 at 12:00PM

Though drastic reductions in spending have weighed on Ultra Petroleum's (NYSE:UPL) production, earnings, and stock price performance in recent years, the company's future looks a lot brighter. In addition to sharply improved earnings and cash flow expectations this year thanks largely to its acquisition of oil-rich acreage in Utah's Uinta basin, there is reason to believe that the company could be significantly undervalued on an enterprise value-to-proven reserves basis. Let's take a closer look.

Horizontal

Photo credit: Wikimedia Commons.

Big boost to proven reserves
Ultra boosted its year-end 2013 proven reserves by 18% to 3.6 trillion cubic feet equivalent, bringing its organic reserve replacement to an extremely healthy 307%. The year-over-year increase in proven reserves was due largely to higher gas prices and significant well cost reductions at its operations in Wyoming's Pinedale field. Several of Ultra's peers also reported significant growth in reserves.

For instance, Range Resources (NYSE:RRC) boosted its year-end 2013 proven reserves by 26% to a record high of 8.2 trillion cubic feet equivalent, or Tcfe, while Cabot Oil & Gas (NYSE:COG) saw a 42% increase in its proven reserves to 5.5 Tcfe and Southwestern Energy (NYSE:SWN) reported a whopping 74% jump in proven reserve estimates to roughly 7 Tcfe.

In addition to the higher gas price environment, all three companies cited improved well performance and cost reductions at their core operations as the reason for the improvements. While Ultra's growth in proven reserves wasn't as impressive, the value of the company's reserves increased by a lot more than their size -- the key indicator that Ultra could be undervalued.

Even bigger boost in value of reserves
As of year-end 2013, Ultra estimated the PV-10 value of its proven reserves -- representing their pre-tax future net cash flows discounted at 10% -- to be $4.1 billion, up 83% from a year ago. This is especially impressive considering that gas prices rose only 33% year over year and speaks to the high quality of Ultra's reserves.  

Further, the PV-10 calculation was based on a gas price of just $3.50 per Mcf. Using a gas price of $4.50 per Mcf -- closer to where the spot price is right now -- the PV-10 value of Ultra's reserves would rise to $5.7 billion. But it gets even better. Ultra performed a second sensitivity test on its proven reserves assuming the same gas price of $4.50 per Mcf but under an increased investment scenario.

Under this increased investment scenario, the company estimates that it could book an additional 3.5 Tcfe of reserves in the proven category, resulting in a PV-10 value of $8.5 billion. And with a gas price of $5.00 per Mcf, the company's total proven and probable reserves would rise to 10.8 Tcfe, yielding a PV-10 value of $12.3 billion.

While the latter scenario of $5.00 per Mcf gas may be overly optimistic, I think the company's PV-10 value of $8.5 billion under its $4.50 per Mcf gas and increased investment scenario is probably a more accurate measure of its current value. Given that Ultra's current enterprise value is around $6.3 billion, this suggests that the company could be meaningfully undervalued.

Ultra's best days lie ahead
This year should mark a major turning point for Ultra, as it ramps up spending and focuses on its highest rate of return assets, namely Wyoming's Jonah and Pinedale fields and its newly acquired oil-rich assets in Utah's Uinta basin.

In Wyoming, the company is expecting to generate returns in excess of 70% this year at a gas price of $4.50 per MMBtu, while in Utah, its returns could exceed 500% at a wellhead oil price of $80 per barrel. With these kinds of returns, it's no surprise that the company is forecasting 40% growth in EBITDA and cash flow this year.

What's more is that this guidance could actually prove conservative, judging by the company's exceptional initial results in the Uinta basin, where well performance and production have easily surpassed the company's expectations. With an attractive valuation and stronger, more oil-weighted growth on the way, Ultra should see its streak of underperformance end this year.

Get ready for the next energy boom
Ultra Petroleum isn't the only company benefiting from the record oil and natural gas production that's revolutionizing the United States' energy position. That's why The Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free.

Arjun Sreekumar owns shares of Ultra Petroleum. The Motley Fool recommends Range Resources and Ultra Petroleum and has options on Ultra Petroleum. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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