Ultra Petroleum (UPL +0.00%), the Houston-based independent oil and gas producer, reported strong first-quarter financial results on Thursday, led by sharply higher crude oil production and stronger realized natural gas prices. Let's take a closer look at the company's first-quarter performance and why it's positioned for much stronger growth over the remainder of 2014 and in the years ahead.
Drilling operations in Utah's Uinta basin. Photo credit: Newfield Exploration.
The numbers that matter
Ultra reported first-quarter adjusted net income of $135.4 million, or $0.87 per diluted share, up 131% from $58.5 million, or $0.38 per diluted share, in the same quarter a year earlier, as revenues jumped 45% year over year to $326.3 million.
This impressive year-over-year jump in profits was driven largely by higher crude oil and condensate production and higher averaged realized prices for natural gas. Ultra's total oil and gas production for the first quarter came in at 57.2 billion cubic feet equivalent, or Bcfe, which consisted of 53.3 billion cubic feet of natural gas and 658.0 thousand barrels of crude oil and condensate.
Rising cash flow, expanding margins
While that's down slightly from 59.3 Bcfe in the first quarter of 2013, the company's production of crude oil and condensate jumped 145% year-over-year, which boosted oil revenues by 135%. Meanwhile, the company's first-quarter average realized natural gas price surged 42% year over year to $4.96 per thousand cubic feet.
As a result of sharply higher oil production and higher realized gas prices, the company's operating cash flow surged to $201.1 million, or $1.30 per diluted share, up 63% from $123.0 million, or $0.80 per diluted share, in the year-earlier period, while its cash flow margin and net income margin improved to 63% and 42%, respectively, up from 55% and 26% in the year-earlier period.
The company's EBITDA margin also improved from 67% a year earlier to 72% in the first quarter, while its return on capital jumped from 16% to 25% thanks to its decision to reduce its spending in the Marcellus, its lowest rate-of-return asset. In short, Ultra's new capital allocation strategy is paying off handsomely.
Rising free cash flow, falling leverage
Considering the company's first-quarter capital expenditures were just $126 million, this means it generated $75 million in free cash flow. This is a highly encouraging development for Ultra's shareholders, since it means the company's three core assets -- the Uinta basin in Utah, the Jonah and Pinedale fields in Wyoming, and the Marcellus shale in Pennsylvania -- are now all self-funding, marking a sharp reversal from previous years, when the company frequently outspent its cash flow.
Sharply higher free cash flow allowed the company to reduce its bank indebtedness by $45 million during the quarter, which lowered its long-term debt from $2.47 billion as of year-end 2013 to $2.425 billion as of the end of the first quarter. As a result, Ultra's debt-to-EBITDA ratio fell from around 3.5 to just 3.1 and is expected to fall to 2.7 by the end of the year.
This is important not only in terms of improving the company's risk profile but also because Ultra needs a debt-to-EBITDA ratio of less than 3.5 to comply with its debt covenant for its revolving credit facility that matures in 2016. With $585 million of available liquidity under this credit facility, Ultra finds itself in much better financial health and is unlikely to have to resort to debt issuances for the foreseeable future.
Why Ultra could exceed its targets this year
Ultra's new strategy of focusing its capital on its highest-rate-of-return opportunities in the oil-rich Uinta basin and the Jonah and Pinedale fields of Wyoming is already delivering significant improvements in EBITDA, cash flow, and margins. This is allowing the company to pay down debt, reduce its leverage, and position itself for more profitable growth.
Going forward, Ultra may be able to exceed its initial guidance of 40% year-over-year growth in EBITDA and cash flow this year if its tremendous success in the Uinta basin continues at the current pace. Net Uinta production averaged 4,524 barrels of oil equivalent per day during the first quarter and is expected to grow 74% from first-quarter levels by year's end.
This should generate full-year 2014 EBITDA of nearly $900 million and full-year operating cash flow of $760 million, which would represent nearly 50% and more than 50% year-over-year growth, respectively. Assuming the company sticks to its $560 million capital program for the year, this should result in $200 million of free cash flow, allowing the company to further reduce its leverage.
All told, I think there's a very real possibility that Ultra could exceed its targets for production, EBITDA and cash flow this year, which could drive its share price to $35 to $40 per share by year's end.
