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August 4, 2010
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Natural gas producer Ultra Petroleum Corp.’s (UPL) second-quarter 2010 results exceeded our expectations, primarily based on higher production and improved efficiency in drilling. Earnings per share, excluding special items, came in at 54 cents, surpassing the Zacks Consensus Estimate of 50 cents and prior-year quarter’s 51 cents.
Including special items, the company’s earnings per share were 40 cents, compared with a loss per share of 17 cents in the year-ago period.
The company reported total operating revenue of $228.4 million, up 75.2% year over year. However, the reported quarter’s revenues failed to match up with the Zacks Consensus Estimate of $258 million.
Quarterly Production
Production during the quarter increased 17.9% year over year to a record 52.4 billion cubic feet equivalent (Bcfe), reflecting the company’s successful drilling activities. Natural gas volumes jumped 18.7% year over year to 50.4 billion cubic feet (Bcf), while oil production decreased slightly (by 0.6%) to 327,919 barrels.
Realized Prices
Ultra Petroleum's average realized price on natural gas leaped 50.9% to $4.09 per thousand cubic feet (Mcf), based on the completion of the REX-East Pipeline segment. Including commodity derivative gains/losses, average realized natural gas price for the quarter was $4.83 per Mcf, down 4.2% from the prior-year level. The average oil price for the quarter, at $67.64 per barrel, was up significantly from the second-quarter 2009 level of $46.27 per barrel, attributable to increased production levels.
Costs, Expenses & Margins
Lease operating expense rose 35.0% year over year to $46.5 million, mainly on the back of higher severance and production taxes due to higher commodity prices, somewhat offset by reductions in fuel cost and gathering expenses. During the quarter, the company reported all-in costs of $2.62 per Mcfe, up 7.8% from the same period in 2009. However, the company was able to achieve a healthy 67% cash flow margin and a 31% net income margin.
Balance Sheet
As of June 30, 2010, the company had cash and cash equivalents of $8.32 million and long-term debt of $1.18 billion.
Guidance
The company expects full-year 2010 production to be in the range of approximately 213 Bcfe to 216 Bcfe, with the third quarter 2010 production expected to be in the range of 54.5 Bcfe to 55.5 Bcfe. Ultra Petroleum is also looking forward to a 20% per annum growth for 2011 (estimated production of 250 to 260 Bcfe) and 2012 (estimated production of 295 to 310 Bcfe). Ultra Petroleum further guided toward a capital investment program of $1.45 billion for 2010.
Our Recommendation
Ultra Petroleum’s performance over the last few years highlights its attractive expansion opportunities. We believe that the company will be able to sustain the industry-leading production and reserve-growth prospects, based on the massive exposure to the high-return Marcellus Shale play and Green River Basin of Wyoming.
However, we are compelled to retain a long-term Neutral recommendation on the stock, reflecting the company’s sensitivity to gas price fluctuations and absence of any near-term upside potential of the stock. This is supported by the short-term Zacks #3 Rank (Hold) rating.
Read the full analyst report on "UPL"
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