Ultra Petroleum vs. Southwestern Energy: Which Is the Better Buy Today?

Why Ultra Petroleum’s stronger production, earnings and cash flow growth prospects, and more attractive valuation make it a better buy than Southwestern Energy.

Jun 1, 2014 at 11:18AM

Given the recent surge in natural gas prices, investors are becoming more interested in natural gas exploration and production companies. Two worth considering are Ultra Petroleum (NYSE:UPL) and Southwestern Energy (NYSE:SWN), which are predominantly natural gas producers that have recently made bold moves into liquids-rich plays.

While both companies are highly capable, low-cost operators, I think Ultra Petroleum's stronger prospects for production and earnings and cash flow growth, along with its more attractive valuation, make it the clear winner.

M Shale Rig Nicholasatonelli

Photo credit: Flickr/Nicholas A. Tonelli.

Asset portfolios
Ultra Petroleum's core assets are located in Pennsylvania's Marcellus shale, Wyoming's Jonah and Pinedale fields, and Utah's Uinta Basin. The first two are gas-rich properties, while the Uinta is a recently acquired oil-rich asset.

Meanwhile, Southwestern's core assets are located primarily in Louisiana's gas-rich Haynesville shale and the Marcellus. The company recently agreed to acquire liquids-rich acreage in Colorado's Niobrara shale and also has exploratory liquids prospects in Canada and the southern U.S.

Growth outlooks
Ultra has had a rough time in recent years due to the prolonged slump in natural gas prices, which forced it to slash spending from $1.5 billion in 2011, to $835 million in 2012, and to just $385 million in 2013. As one would expect, production, EBITDA, margins, and cash flow all took a hit. But 2014 should mark a new beginning for the company as it returns to profitable growth.

Ultra is boosting spending this year to $560 million and ramping up activity at its two most profitable operations -- the Jonah and Pinedale fields and the Uinta Basin -- which generate rates of return in excess of 70% and 500%, respectively. Given the exceptional economics of these assets, the company forecasts 40% year-over-year growth in both EBITDA and cash flow.

Meanwhile, Southwestern is targeting a 2014 capital investment program of $2.3 billion, up modestly from $2.25 billion last year. Growth will come primarily from the company's Marcellus operations, where production is expected to grow by 60% year over year, while Fayetteville volumes are expected to be essentially flat.

Southwestern is guiding for full-year 2014 net income of $635 million to $645 million and operating cash flow of $1.92 billion to $1.93 billion, which is lower than last year's net income of $703.9 million and operating cash flow of $2 billion. However, the company could easily exceed these targets since its guidance assumes a 2014 NYMEX gas price of $3.75 per MMBtu, compared to the roughly $4.50 per MMBtu price the futures market is implying.

Valuation comparison
Now for the most important part -- valuation, arguably the best predictor of a stock's future returns. In this respect, I think Ultra is the undisputed winner. It trades at just under 8 times forward earnings, compared to just under 17 times for Southwestern. Ultra also looks meaningfully undervalued when you consider the value of its assets relative to its enterprise value.

Under an increased investment scenario assuming a $4.50 per MMBtu wellhead gas price, the PV-10 value of Ultra's proved reserves -- defined as their pretax future net cash flow discounted at 10% -- is $8.5 billion, significantly higher than its enterprise value of roughly $6.2 billion. With the futures markets predicting a gas price of roughly $4.50 per MMBtu over the remainder of the year, I think $8.5 billion is a better estimate of the company's value and suggests a fair value for the stock of $35-$40 a share.

However, Southwestern's property in the Niobrara shale, which it agreed to purchase for about $180 million in March from Quicksilver Resources (NASDAQOTH:KWKAQ) and a Royal Dutch Shell (NYSE:RDS-A) subsidiary, could be a game changer for the company due to the higher margins and cash flow from liquids production.

As Southwestern plans to begin drilling in the Niobrara as early as June, investors should keep an eye out for details regarding resource potential, development costs, rates of return, and other material information. These could have a meaningful impact on the company's net asset value and share price.

Investor takeaway
As you can see, Ultra's EBITDA and cash flow growth prospects are much stronger than Southwestern's due largely to an expected tripling of its oil production this year. Combined with its much more attractive valuation, I think Ultra is almost certainly the better investment right now. That said, Southwestern's newly acquired assets in the Niobrara offer significant upside potential to production, reserves, margins, and cash flow that could be a catalyst to boost its share price.

3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." 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 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