What happened

Ultra Petroleum Corp.'s (OTC:UPL) shares fell 14.5% in September, according to data provided by S&P Global Market Intelligence. But that drop just seemed normal for this oil and natural gas driller, which saw its stock decline more than 87% through the first nine months of 2018. That said, there was news in the month that showed just how bad things are here.

So what

Ultra Petroleum's biggest issues reside on its balance sheet. Long-term debt is roughly $2.2 billion, and shareholder equity is negative $1.1 billion. Although the company reported GAAP earnings of $0.14 per share in the first half, it is clearly a highly leveraged company -- interest expenses ate up roughly 50% of operating earnings through the first six months of 2018 (and nearly 60% in the second quarter). And, to make matters worse, the products it sells are highly volatile commodities. This is not a good combination. 

A man writing in a notebook with an oil well in the background

Image source: Getty Images.

It's little wonder that investors are concerned about Ultra Petroleum's financial future. And with negative shareholder equity, it's highly likely that shareholders would get nothing in a liquidation scenario. This picture didn't get any better in September, based on the company's announcement that it was unable to come to terms with key lenders to amend a term loan due in 2024. At the same time, the company announced that the borrowing base on its reserve-based credit facility was reduced by around 7%, or $100 million. To put it another way, September proved that leverage and liquidity remain deeply concerning issues.   

Now what

Ultra Petroleum is in a very concerning situation financially. It operates in a highly volatile industry, and lenders do not appear particularly supportive right now. Most investors should probably avoid the stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.