How Ultra Petroleum Is Planning Its Turnaround

On Friday, Ultra Petroleum (UPL) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

As one of the lowest-cost producers of natural gas, Ultra Petroleum benefited greatly from the energy boom in 2007 and early 2008. But when the bottom fell out of the market, even Ultra's low costs weren't enough to leave it unscathed. Let's take an early look at what's been happening with Ultra Petroleum over the past quarter and what we're likely to see in its quarterly report.

Stats on Ultra Petroleum

Source: Yahoo! Finance.

Why Ultra Petroleum's poised to pop this quarter
Analysts have gotten a lot more excited about Ultra Petroleum's earnings prospects in recent months. A $0.04-per-share increase in first-quarter-earnings estimates is a good start, but raising full-year projections by more than $0.50 per share -- an increase of more than half -- shows just how much enthusiasm the company is seeing right now. The stock has also been doing very well, rising 15% since late January.

Ultra has faced a huge challenge recently, as low natural gas prices have crushed its profitability. In February, CEO Michael Watford called 2012 a "train wreck," as the company's concentration on gas worked against it. In particular, as Motley Fool contributor Tyler Crowe noted, even a relatively small drop in nat-gas prices hits Ultra twice: once in outright revenue for gas it produces, and again in forcing the company to downgrade some of its proven reserves, leading to asset writedowns.

But now, natural gas has started to climb, and that same effect should work in reverse to boost Ultra's prospects. Moreover, Ultra has gained a lot of expertise at drilling shale gas wells cheaply, cutting drilling costs by 30% since 2006. Ultra was already among the lowest-cost producers of natural gas, and further efficiency gains will only help increase profits when prices rebound.

Perhaps most importantly, Ultra hasn't made the same mistakes as some of its formerly gas-focused competitors in buying high and selling low. Chesapeake Energy (CHKA.Q) and SandRidge Energy (NYSE: SD) largely gave up on gas, seeking to broaden their asset bases further into more lucrative oil and natural gas liquids. Yet as Chesapeake and SandRidge have sold off assets at the least desirable time, Ultra has stayed committed to gas and therefore stands to benefit more from its recent gains.

In Ultra's quarterly report, look for any comments about whether the company is seeking to make any major strategic moves. Some have pegged Ultra as a takeover target in its own right, but a better move could come from Ultra being the aggressor in grabbing up more gas assets on the cheap.

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