Through the first quarter of the year, Ultra Petroleum (NASDAQ:UPL) is off to a great start. Shares are up 34% year to date and are currently demolishing the S&P 500. Whenever a company climbs this fast, it raises the question as to whether it can maintain this pace over the long haul. So let's take a look at the value of Ultra today in comparison to its peers -- Southwestern Energy (NYSE:SWN), Range Resources (NYSE:RRC), and Cabot Oil & Gas (NYSE:COG)-- and determine whether we can expect to see the company continue this success for the rest of the year.
Making up for lost time
Of all the oil and gas producers out there, it is hard to find one that suffered more through slumping natural gas prices of 2012 than Ultra Petroleum. Not only did it result in a 27% drop in revenue from the previous year and over $2.9 billion in asset writedowns made the balance sheet look terrifying.
For the most part, that scare is behind it, and the company can focus on what it does best: Be the lowest cost exploration and production company in the U.S.
Ultra has been able to attain this position because of its unique asset base. Instead of the focusing on some of the more popular shale formations, Ultra concentrates most of its drilling program in the Jonah and Pinedale gas field of Wyoming. These cheap-to-drill, slow-decline rate wells have a much longer economic life than shale wells. These advantages give Ultra an astounding ability to generate net income margins of greater than 25% over the past decade, excluding 2012. Comparing Ultra's net income margin to its natural gas-producing peers, Ultra is well out ahead.
|Company||Net Income Margin|
|Cabot Oil & Gas||16%|
What is even more impressive is that Ultra is also able to do something that very few companies in the oil and gas space can do today: grow production while generating cash flow from operations after capital expenditures. This is something that Cabot, Range, and Southwestern cannot claim right now.
Any juice left to squeeze
After such an impressive run so far this year, it would take a stellar year of operations for Ultra to meet those goals. If you were to only look at production growth for the year, it would seem as though this 33% rise was a bit shortsighted. However, the company's goal of 5%-9% production growth compared to last year doesn't tell the whole story. What is quite possibly just as important is where that growth will come from.
This year, Ultra anticipates its largest growth to come from its new oil-producing acquisition in the Uinta Basin. At the exit of 2014, Ultra expects to more than double oil production to almost 12,000 barrels per day. As we have seen for almost all exploration and production companies in the business of shale, oil generates a better rate of return. Furthermore, the well economics to Ultra's acreage in the Uinta support that. Total Finding & Development costs in this region are only $8.79 per barrel of oil equivalent, and wells in the region can expect acquisition adjusted returns greater than 60% even if the price of oil were to fall below $80 per barrel. With oil becoming a larger part of the production mix and better prices for natural gas, Ultra estimates that total EBITDA should grow by 36.5% by the end of the year.
When you consider the anticipated growth in EBITDA, then it isn't too much of a stretch to see shares of Ultra continuing on their current rise. In fact, shares are cheap in comparison to its peers on a price-to-forward earnings basis.
|Company||Price to Estimated Earnings (NTM)|
|Ultra Petroleum||12.56 times|
|Range Resources||40.36 times|
|Southwestern Energy||20.36 times|
|Cabot Oil & Gas||27.33 times|
What a Fool believes
Ultra may have had a decent run so far this year, but based on what the company has planned for the rest of the year, there is still plenty of room left to grow. Some investors may be slightly scared off because of its rather high debt load and one of the worst EBITDA-to-interest expense ratios in the industry of 5.61. This fear is understandable based on several other companies in this space getting into trouble with too much debt on their hands. However, Ultra's low-cost production will help put a dent in that debt load rather quickly, which will lead to better returns on equity down the road. There are lots of reasons to like Ultra Petroleum, and even at today's prices, you shouldn't be afraid to add this company to your portfolio.