We add small cap independent producers, Ultra Petroleum (NYSE:UPL), Range Resources (NYSE:RRC) and Petrohawk (NYSE:HK), to our coverage at initial McDep Ratios of 0.95, 1.28 and 1.25 respectively. Cash flow multiples are at the high end of the range. Each stock has scored impressive price gains that have slowed to the point where RRC and HK trade below their 200-day averages. Six-year natural gas also trades below its 40-week average. In other words, the stocks may not appreciate immediately. Yet, the long-term potential remains strong as the three companies have the resources to support expanding natural gas production. As a result, we’ll be refining and updating our analysis as we watch for timely opportunities.
Ultra Adds Marcellus Action to Rockies Base
Ultra’s investment value today lies in its concentrated position in the Pinedale Anticline of western Wyoming, one of the top ten natural gas fields in the U.S. The tight formation offers abundant further development opportunity. The problem is that the market does not need new capacity now. For more current action, UPL has taken a position in the Marcellus shale of Pennsylvania where operators are scrambling to identify and lock up resources that can be produced by latest horizontal multi-stage fracturing technology. Meanwhile, debt is low at 0.12 times present value and cash flow multiples (EV/Ebitda and PV/Ebitda) relate normally to Adjusted Reserve Life. A high 59% of proven reserves are undeveloped.
Range Resources a Marcellus Pioneer
Who would have thought that the long, long life, low producing rate Appalachian natural gas resource could be become a quickly profitable, high-rate producer? Range did. Today almost any story about the West Virgina, Pennsylvania and New York clean fuel boom mentions the early adaptor, RRC. Thus, it is little surprise that the McDep Ratio for a popular stock looks high at 1.28. Nonetheless, the outlook for the stock appears bright in our natural gas framework as continued rapid growth may soon justify higher valuation. Meanwhile, debt is also high at 0.26 times present value that includes undeveloped reserves at 45% of proven. The debt position appears more benign with a 1.26 ratio of Enterprise Value to Market Cap.
Petrohawk an Early Haynesville Producer
The most prominent small cap independent in the shale gas exploration of Louisiana, Petrohawk, was among the first to alert investors to the new exploitable resource. As a result, HK has been a popular stock and understandably scores a higher McDep Ratio. At the same time, risk is also high with debt at 0.35 times present value and undeveloped reserves at 67% of proven. Yet, the financial vulnerability could be an attraction to a well-capitalized acquirer. Meanwhile, as financial conditions are likely to continue to improve, HK may be able to manage its leverage and achieve further high growth.
Originally published on April 9, 2010.