Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of independent natural gas and oil producer Ultra Petroleum (NASDAQ:UPL) surged as much as 11% early in trading on Jan. 15, before settling in at about a 5% gain. Considering the stock had given up as much as 45% of its value over the past few months, investors should be happy to see a positive day:
But what's driving the recovery? Honestly, there's not really any material news out there that one could identify as the thing that's behind it. However, the company did release an update on its hedging activity for the year on Jan. 12. Here's what it looks like:
What does this mean? In short, Ultra Petroleum has more than half of 2015's expected natural gas production locked in at a significant premium to the current spot price of natural gas. The 2015 average of $3.78 per Mmbtu is a 16% premium to recent prices, around $3.25, and Q1's hedge of $4.54 per Mmbtu is almost 40% higher than market prices right now.
So what: Ultra Petroleum has actively hedged a portion of its gas production for years as a way to protect against a collapse in natural gas prices. On the other side of the coin, however, its hedges can also limit the upside. Before falling off in December, natural gas was near or above $4 per Mmbtu for the majority of 2014:
This is a big part of the reason why Ultra only hedges a portion of its production, and not all of it.
Furthermore, the company highlighted that its Pinedale plays -- a primary production area for the company -- break even at $2 per Mcf, meaning the company has a significant margin of safety to operate at profitable levels.
Now what: Even after today's jump, Ultra Petroleum looks to me like one of the few good producers worth investing in right now. It does produce some oil -- and that amount is growing -- but natural gas is the company's largest product by both volume and sales. A solid management team is in place, and has historically been very conservative with allocating capital, meaning Ultra is usually well-positioned for market uncertainty. Considering the beating the stock has taken over the past few months, and the likely continued growth in demand for natural gas in the U.S., Ultra Petroleum deserves a close look for your portfolio.