Source: Southwestern Energy.
Ultra Petroleum (UPL) is about as close to a natural gas pure-play as investors can find. In fact, at last count, 97% of its production was natural gas, and it trailed only Southwestern Energy (SWN 0.14%) as the most levered to gas among large producers. However, that's slowly starting to change as oil production is expected to be what fuels Ultra Petroleum's growth over the next few years.
Shifting priorities
A couple of years ago, Ultra Petroleum was basically focused on natural gas production growth for the sake of growth. The company loaded up on debt as it outspent its cash flow by a considerable margin. Unfortunately, it was caught flat-footed by the plunging price of natural gas and was forced to change its ways. Today, we find Ultra Petroleum investing within its cash flow, and only on wells that will generate an internal rate of return in excess of 20%.
Given the continued low price of natural gas, that plan isn't producing a lot of growth as the margins it's earning on natural gas aren't all that high. In order to boost margins, Ultra Petroleum sought to add some oil assets to its portfolio, and was able to do so last year by spending $650 million to acquire oil producing properties in the Uinta Basin of Utah. That one deal is what's quietly turning Ultra Petroleum into an oil growth story.
At the company's present pace of growth, it expects to grow its natural gas production by a grand total of 3% from 2013 to 2016. Oil production, on the other hand, is expected to surge 586% over that same time frame. While the company is starting off of an ultra-low base, the growth in oil production will have a big impact on companywide production growth. Instead of meager single-digit production growth from a focus on natural gas, Ultra Petroleum's overall production growth is expected to be 21% over that timeframe.
That growth should have a significant impact on Ultra Petroleum's bottom line. The company's EBITDA is expected to grow from the $604 million the company produced last year to more than a billion dollars by 2016. That's with the expectation that the price of natural gas won't head all that much higher while oil prices fall.
Hoping to follow
What's interesting is that we're seeing other natural gas-focused producers begin to follow this pathway to growth. Earlier this year, Southwestern Energy spent $180 million to pick up acreage in the emerging liquids-rich Niobrara play from Quicksilver Resources (NYSE: KWK) and another partner. The deal brought Southwestern Energy 312,000 net acres that are being targeted for oil, natural gas and NGLs. While this play isn't as developed as the Uinta Basin, Southwestern Energy is hoping that it, along with other new ventures in developments, will one day fuel oil-rich growth.
Source: Southwestern Energy.
That said, Southwestern Energy has a long way to go before its oil developments deliver any real growth. The assets it picked up from Quicksilver Resources contained just 70,000 barrels of proved reserves. Moreover, the company's other emerging developments including the Brown Dense, DJ Basin and a project in Canada are still in the initial phases of exploration. Because of this it's well behind Ultra Petroleum, which opted to buy a developed project after striking out on its own Niobrara development.
Investor takeaway
Ultra Petroleum is quietly becoming an oil growth story thanks to last year's Uinta Basin acquisition. In fact, that acquisition is really what is going to fuel all of the company's growth over the next few years. Meanwhile, peers like Southwestern Energy are taking a riskier path to oil-rich growth making Ultra Petroleum the better buy for investors seeking a little upside to oil.
