Houston-based Ultra Petroleum (NASDAQ:UPL) reported adjusted earnings of $0.21 per share for the third quarter, beating consensus analyst estimates by $0.04. The natural gas producer rode on efficiency gains by reducing service costs and lived up to its billing of being a low-cost natural gas producer.

However, realized (unhedged) natural gas prices dove 28% year on year, to $2.68 per thousand cubic feet, dealing a significant blow to the company's bottom line.

Challenging market conditions slam financials
Revenue fell 23% year on year to 222.5 million in the quarter. While natural gas sales fell 11% to 188 million, crude oil sales dove a massive 56% to $34 million. While natural gas sales command the lion's share in the revenue pie chart, higher-margin crude oil sales provided the company a cushion in terms of cash flow. Unfortunately, the low oil price environment snatched away a good portion of the extra wiggle room.

Operationally, the company produced a record 75.4 billion cubic feet equivalent, or Bcfe, of oil and natural gas. This is a solid 21% jump from last year's third quarter and an impressive 7% hike sequentially. The following table gives a breakup of production growth for natural gas and crude oil individually.


Q3 2015

Q3 2014

Change (%)

Natural Gas (in Bcf)




Crude Oil (in kbbls)




Total (in Bcfe)




Data source: Ultra Petroleum earnings release.

From the above chart, we see that natural gas alone constituted 93.1% of total production with the rest being crude oil.

Cash flow from operations, less working capital changes, stood at $125 million, or $0.82 per share -- a 22% slide.

Core operations remain strong
Ultra Petroleum's core acreage in Pinedale, Wyoming, yielded 69.1 Bcfe, or 92% of the total production. The company's famed operational efficiency was at work once again with well costs at Pinedale down to $2.85 million per well -- a massive 25% cut from year ago levels. Total number of days to drill a well has also fallen to 8.6 days, down from an average 10.8 days in 2014. Management attributes a third of the cost savings to productivity improvements and the rest to service cost reductions.

If tracked back to the year 2006, management has so far managed to cut well costs in the Pinedale field by a massive 51% -- by no means a small feat.

Guidance and outlook
Management updated total production guidance for 2015 to the range of 288 Bcfe and 292 Bcfe, up 12.5% from the midpoint guidance given earlier this year. Importantly, cash flow is expected to exceed capital expenditures in the fourth quarter. Additionally, management is closing in on an asset sale in order to bring down debt levels.

Foolish takeaway
Despite drilling in the Wyoming acreage for the past 16 years, less than 40% of the total field is developed. That means these long lasting reserves hand Ultra Petroleum a massive advantage in terms of expertise and proprietary know-how of the field dynamics. Additionally, with management hedging 4.2 Bcf of natural gas to a price of $3.71 per Mcf in October 2015, there'd be more predictability to its cash flows. And that helps cover capital spending efficiently.