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Why This Energy Driller's Shares Nosedived 23% in July

By Reuben Gregg Brewer - Updated Aug 6, 2018 at 10:11AM

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Ultra Petroleum Corp. has been cratering all year, despite solid results, but there's a good reason for investors to be worried

What happened

The stock price of Ultra Petroleum Corp. (UPL) fell 23% in July, according to data provided by S&P Global Market Intelligence. But that's just the continuation of a year-long trend that has left the energy driller's shares down a painful 80% or so in 2018. If you look at the earnings headlines so far this year, the steep stock decline would seem somewhat illogical. But when you dig into the company's first-quarter earnings release, it starts to make a lot more sense.

So what

Ultra's first-quarter production was up 13% year over year, beating the company's own expectations. That followed a roughly 6% production increase in 2017, a year in which the company saw a 25% revenue advance on the strength of higher realized oil and natural gas prices. These are strong numbers that you would expect investors to be pleased to see. And while adjusted net income fell $0.04 to $0.24 per share year over year in the first quarter, that wasn't exactly surprising given the drop in Ultra's realized natural gas prices year over year. And, it shouldn't have been enough to lead to the huge share-price loss so far this year. 

Two men writing in notebooks in front of an oil well.

Image source: Getty Images.

The problem appears to be the company's shifting focus. At the start of the year, Ultra was expecting modest production growth in 2018 backed by an investment plan that included horizontal and vertical drilling. However, the energy driller's horizontal wells had proven so successful in the first quarter that it made the decision to curtail its vertical drilling plans and focus more heavily on horizontal wells. That makes sense given the success of the horizontal wells Ultra has been drilling.

However, for a company that only exited bankruptcy in 2017, this would appear to be an aggressive move. Moreover, Ultra noted that the drilling shift would lead to some short-term pain in the form of lower production in the second quarter. It expects the directional change (pun intended) to lead to higher production for the full year, but it seems investors are taking a show-me attitude. That makes sense given that there's not a huge amount of data for investors to examine to back up management's decision to change gears.   

Now what

A little more than a year out of bankruptcy, Ultra Petroleum is making a big capital allocation decision. Investors already know that the change is expected to mean weak second-quarter production numbers. And while second-quarter earnings will provide an important update on the progress of the driller's new direction, it's completely reasonable that investors are stepping back from the shares. Simply put, uncertainty is high right now. All but the most aggressive investors should probably stay on the sidelines until Ultra's horizontal well focus proves to be a worthwhile bet.

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