Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of Ultra Petroleum (UPL), an independent U.S. producer of oil and natural gas, fell $1.71 today, good for almost an 11% loss. The stock is down almost 40% since Nov. 1, and more than 52% since oil prices peaked in mid-June:
However, today's big drop was driven by falling natural gas prices. The Henry Hub spot price for wholesale natural gas fell more than 9% to $3.144 today, approaching a two-year low.
So what: Natural gas is Ultra Petroleum's biggest business, making up more than 90% of production, and nearly three-fourths of total sales. While Ultra is one of the lowest-cost producers, and should be able to weather these low prices, the market's reaction is to the so-far unseasonably warm winter, which has resulted in much lower use of natural gas for heating than anticipated. In short, some are fearing a market oversupply.
Now what: The domestic reserves of natural gas ready for use are about where they were last year, and it's still the very early stages of winter, and most meteorological forecasts predict cold weather in January and February, so the bear market on gas could very well reverse course in just a few weeks' time. Furthermore, it looks like the stock market is potentially overreacting to the daily spot price movement of gas, considering that Ultra operates a pretty extensive hedging program to protect itself from these kinds of drops.
Most importantly, Ultra Petroleum is one of the best operators in the industry, and there's a good chance that its stock is getting driven down well below what is probably fair value for a great company. Patient investors with a long-term outlook would do well to consider opening or adding to their position at this price.
Don't get me wrong: The stock could get pushed further down in the short-term, but the long-term tailwinds for natural gas demand, and the company's solid operational position and leadership make it a great bet for long-term outperformance.
