Zacks_Analysts' Blog : Ultra Petroleum Shines in 2Q - Analyst Blog

Natural gas producer Ultra Petroleum Corp. (UPL) has reported stellar second quarter 2011 results, buoyed by higher output from Wyoming and Pennsylvania regions along with reduced transportation charges and lower general and administrative costs.

Earnings per share, excluding special items, came in at 66 cents, beating the Zacks Consensus Estimate by a penny. Comparing year over year, Ultra Petroleum’s adjusted earnings per share leaped 22.2% from 54 cents.

Total operating revenue, at $280.6 million, was shy of the Zacks Consensus Estimate of $332.0 million. However, compared with the prior-year quarter, sales improved 22.9% from $228.4 million.

Production

Production during the quarter increased 12.8% year over year to 59.1 billion cubic feet equivalent (Bcfe), reflecting the company’s successful drilling activities. Natural gas volumes –– accounting for approximately 97% of the total –– jumped 13.3% year over year to 57.1 billion cubic feet (Bcf) and oil production increased 1.5% to 332,774 barrels.

Realized Prices

Ultra Petroleum's average realized price on natural gas increased 7.1% to $4.38 per thousand cubic feet (Mcf). Including commodity derivative gains/losses, average realized natural gas price for the quarter was $5.17 per Mcf, up 7.0% from the prior-year level. The average oil price for the quarter, at $92.35 per barrel, was much higher than the second quarter 2010 level of $67.64 per barrel.

Costs, Expenses & Margins

Lease operating expense dropped 3.5% from the previous-year quarter to $11.1 million. During the quarter, the company reported all-in costs of $2.83 per Mcfe, up 8.0% from the same period in 2010. Notwithstanding the rise, Ultra Petroleum’s competitive cost structure enabled it to achieve a healthy 73% cash flow margin and a 31% net income margin.

Capital Investment & Balance Sheet

During the quarter, Ultra Petroleum spent $398.0 million in capital investment. As of June 30, 2011, the company had cash and cash equivalents of $6.69 million and outstanding debt of $1.7 billion.

Guidance

Ultra Petroleum reaffirmed its full-year 2011 production in the range of approximately 245–255 Bcfe, implying an increase of up to 19% from 2010. For the third quarter, the company is looking to produce 62–65 Bcfe.

Outlook

We believe that Ultra Petroleum is favorably positioned to achieve its full-year growth target based on its impressive exposure to the high-return Marcellus Shale play and resource rich Denver-Julesburg Basin. With efficient manpower and a competitive cost structure, the company is evaluating a number of development projects that promise long-term benefits.

However, the company’s highly gas-weighted reserves/production profile and exposure to the inherently cyclical and volatile macro environment remain key areas of concern. Ultra Petroleum, which competes with other established onshore natural gas-focused firms like Devon Energy Corp. (DVN), Anadarko Petroleum Corp. (APC) and Chesapeake Energy Corp. (CHK), currently retains a Zacks #3 Rank (short-term Hold rating). We are also maintaining our long-term Neutral recommendation on the stock.