Ultra Petroleum Upgraded to Neutral - Analyst Blog
09 Maggio 2012 - 5:45PM
Zacks
We have upgraded domestic energy explorer Ultra
Petroleum Corporation (UPL) to Neutral from Underperform,
reflecting the company’s portfolio repositioning initiatives.
Houston, Texas-based Ultra Petroleum is an energy firm engaged
in the acquisition, development, exploration and production of oil
and gas properties. The company’s operations are focused on the
Green River Basin of southwest Wyoming, mainly covering the
Pinedale and the Jonah fields.
Both of these areas are endowed with rich natural gas reserves,
which have remained largely untapped to date. Importantly, Ultra
Petroleum seems well positioned to sustain the strong growth
momentum for quite some time based on its impressive exposure to
the high-return Marcellus Shale play.
As of year-end 2011, Ultra Petroleum had 4.98 trillion cubic
feet equivalent (Tcfe) in proved reserves, of which more than 96%
was natural gas and about 41% was developed. Production averaged
245.3 Bcfe during the year, comprising 97% gas and 3% crude oil/
liquid hydrocarbons. Ultra Petroleum’s high natural gas exposure
raises its sensitivity to gas price fluctuations, compared to its
more-diversified independent peers with higher oil production.
A supply glut has pressured natural gas prices during the past
year or so, as production from dense rock formations (shale) –
through novel techniques of horizontal drilling and hydraulic
fracturing – remain robust, thereby overwhelming demand.
As a matter of fact, natural gas prices have dropped more than
50% from 2011 peak of $4.92 per million Btu (MMBtu) in June to the
current level of around $2.45 (referring to spot prices at the
Henry Hub, the benchmark supply point in Louisiana). Incidentally,
prices hit a 10-year low of $1.82 last month.
To make matters worse, a near-record mild weather across most of
the country curbed natural gas demand for heating all winter,
leading to an early beginning for the stock-building season. The
grossly oversupplied market continues to pressure commodity prices
in the backdrop of sustained strong production.
This has forced Ultra Petroleum – and other natural gas players
like Talisman Energy Inc. (TLM), Encana
Corp. (ECA), etc. – to announce drilling curtailments.
Taking a cautious view of gas prices, Ultra Petroleum’s capital
program specifically focuses on the promising liquids-rich Niobrara
Formation in Colorado, which is a major shift away from dry natural
gas development.
The company has trimmed its current year capex by 25% from the
original guidance, while still looking for an up to 6% improvement
in its production.
While subscribing to management’s outlook, we believe the
realignment of Ultra Petroleum will take some time to bear results.
The company also lacks geographic diversification, which somewhat
hampers its competitive positioning.
As such, we expect Ultra Petroleum’s growth potential to be
restrained with little room for meaningful upside from current
levels. Our new long-term Neutral recommendation is supported by a
Zacks #3 Rank (short-term Hold rating).
ENCANA CORP (ECA): Free Stock Analysis Report
TALISMAN ENERGY (TLM): Free Stock Analysis Report
ULTRA PETRO CP (UPL): Free Stock Analysis Report
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