Ultra Petroleum (NASDAQ:UPL), the Houston-based natural gas producer, reported its second-quarter financial results on Aug. 2. Let's take a closer look at why its earnings rose and what the company's future may hold.
Why Ultra Petroleum earnings rose
Ultra Petroleum reported earnings of $116.4 million, or $0.75 per share, compared to a loss of $1.19 billion, or $7.76 per share, in the same period a year earlier. Adjusted earnings came in at $0.47 per share, up from $0.51 a share last year. Total operating revenue rose from $170.3 million to $261.4 million.
The company's total production during the second quarter was comprised of 56.6 billion cubic feet of natural gas and 299.1 thousand barrels of condensate, with the main driver of production growth being the company's Pinedale assets in Wyoming's Green River Basin.
Including the effect of hedges, the average realized price for Ultra's natural gas output during the quarter was $3.80 per thousand cubic feet, while the average realized condensate price came in at $88.90 per barrel.
Quarterly highlights showcase a company that remains one of the lowest-cost producers of natural gas out there. For the second quarter, Ultra's all-in costs per thousand cubic feet equivalent came in at $2.88, a slight increase over the first quarter of the year when costs were $2.79 per thousand cubic feet equivalent yet still incredibly low compared to the rest of the industry.
Indeed, Ultra has consistently been an industry-leading operator in terms of finding and development costs per thousand cubic feet equivalent – a widely used measure of a company's effectiveness in exploration and production. Taken as a three-year average, Ultra's finding and development costs per thousand cubic feet equivalent have been just over $1, which compares favorably to competitors Southwestern Energy (NYSE:SWN), which spent a little under $1.50 on finding and development, and Cabot Oil & Gas (NYSE:COG), which spent around $1.20 per thousand cubic feet equivalent. Range Resources (NYSE:RRC), which spent a little under $1 per thousand cubic feet equivalent, was the only company with lower three-year average finding and development costs than Ultra Petroleum.
Part of the reason why Ultra continues to have an industry-leading cost structure is its consistent ability to cut costs through efficiency gains. During the quarter, Ultra reported that its average time from spud to total depth dropped below 10 days for the first time in its history, coming in at just 9.6 days. Well costs also fell meaningfully year over year, with the company's target Pinedale well cost now below $4.4 million, as compared to about $4.7 million as of the end of 2012.
Another positive sign from the quarter for Ultra is that its capital spending in now well within its cash flow. In the first half of the year, the company generated $258 million of cash flow while spending roughly $200 million on its drilling and completions program, thanks largely to a decelerated pace of investment compared to the first half of 2012, and to the aforementioned cost reductions.
The outlook for Ultra Petroleum
One of the most compelling reasons to invest in Ultra Petroleum is its strong portfolio of high-quality assets with superior economics, including nearly 50,000 net acres in the Green River Basin of Wyoming and roughly 260,000 net acres in Pennsylvania's Marcellus Shale, one of the most economical shale gas plays in the country.
Importantly, these assets aren't even close to being fully developed yet, and therefore offer ample room for the company to ramp up drilling activity as natural gas prices recover over the next few years. For instance, Ultra's acreage in the Green River Basin, which is concentrated mostly in the Pinedale field, is only 25% developed, while its Marcellus acreage is less than 10% developed.
I think Ultra Petroleum represents a solid long-term investment opportunity, especially if you are of the opinion that natural gas prices are headed higher over the next three to five years. In addition to being one of the lowest-cost producers out there, the company is led by a results-focused management team and has plenty of undeveloped acreage in some of the most economic natural gas plays in the country.