Despite undergoing a major transformation, Ultra Petroleum (OTC:UPL) did not have a good year in 2014. The natural gas producer's stock rallied early in the year, only to be hammered by plunging oil prices.

UPL Chart

UPL data by YCharts.

This is a bit of a surprise, as less than 10% of Ultra's current production is oil. Investors need to keep this in mind when considering what 2015 might hold for the company.

Finding value
While Ultra Petroleum's oil business tripled production last year, that growth was off of a very low base. The company's real value lies in natural gas, which remains more than 90% of its production volume.

Last year was transformational for the company's natural gas business: Ultra divested lower-returning acreage in the Marcellus shale and acquired acreage in its core Pinedale play in a big trade with Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B). The following chart shows that deal added $1.8 billion in value to the company just through the proved reserves it acquired.

Source: Ultra Petroleum Investor Presentation. 

The company's proved reserves following the transaction, or 1P reserves, were worth $7.8 billion PV-10. The PV-10 value, which is the present value of the company's oil and gas reserves discounted by 10%, is an estimation of the value of the oil and gas in the ground that the company controls. In this case, the value of the company's most certain reserves exceeds Ultra Petroleum's current enterprise value of $5.5 billion.

Furthermore, that PV-10 value does not include the potential value of the company's probable or possible reserves, which as of the end of last year had a PV-10 value of $10 billion if natural gas prices rose to $5 per Mcf. This suggests the company's stock could be quite undervalued as long as natural gas prices don't plunge lower and stay depressed for a few years. In fact, rising natural gas prices in 2015 could be the key to correcting the disconnect between the company's market value and the value of its reserves.

What to expect in 2015
Ultra Petroleum's plan for 2015 is to create additional value from its natural gas assets by growing production and profits. As we see in the next slide, the company plans to boost production by about 15% annually for the next three years while it maintains spending discipline.

Source: Ultra Petroleum Investor Presentation.

The company intends to operate conservatively given the uncertain market conditions. This means it will keep its capital budget in check, while still delivering solid growth. The next slide illustrates that, depending on well costs and reserve size, Ultra can generate strong returns in the Pinedale field at current gas prices.

Source: Ultra Petroleum Investor Presentation.

The company can earn anywhere from 33% to 145% on the capital it invests to drill new wells. Those are solid returns, which is why Ultra Petroleum will drill new natural gas wells next year. This profitable growth might be unnoticed now, but eventually the market will realize that Ultra can still create value despite weaker commodity prices. 

Investor takeaway
Investors in Ultra Petroleum must realize its future is tied to that of natural gas, not oil. Because of this the company offers investors two distinct value propositions. First, the market appears to be significantly undervaluing Ultra's underlying asset value. At some point the market will realize this disconnect. Second, even at current natural gas prices, Ultra Petroleum offers investors double-digit production growth driven by strong economics. Add it up, and 2015 could be a very strong year for the company, particuclarly if natural gas prices head higher. 

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.