- Ultra Petroleum raised its 2014 exit production guidance for Uinta to 11,000 barrels of oil per day (gross).
- If guidance is achieved, the Uinta will contribute significantly to Ultra's EBITDA and promises to become the fastest growing and most profitable asset in the company's portfolio.
- Ultra estimates PV-10 value of 2P reserves in the Uinta at $1.4 billion, which is significant given the company's $3.9 billion market capitalization.
- Take-away capacity may remain the limiting factor for crude production growth in the basin.
During its fourth quarter earnings call last week, Ultra Petroleum (UPL) provided an update on its operating progress in the recently acquired Three Rivers asset in the Uinta Basin. The estimate for the 2014 exit production rate was raised to 11,000 barrels of oil per day (gross). The rapid ramp-up of production volumes is based on the assumption of just one rig running.
During the 8 weeks since Ultra assumed operation of the asset (the acquisition was announced in October, 2013 and closed in mid-December), the company spud 10 wells, initiated a production testing program and put in place enhancements to field operations that, according to the company, have already led to increased efficiencies.
The upward production rate revision and confident tone of commentary are positive signals with regard to the potential upside this property has to offer.
As a reminder, Ultra is developing the Three Rivers with a vertical program targeting oil-bearing sand sequences in the Lower Green River formation. The previous operator consistently drilled and completed wells for ~$1.5 million per well. At the time of the acquisition, Ultra estimated typical EURs per well in the ~250 barrels of oil range.
Ultra has operating advantage in the Uinta given the similarity of the Three Forks' geology to the Pinedale.
- Ultra reported that since taking over operatorship it has reduced its expected well cycle time from 8 days to 5.5 days. The spud to TD time for the latest wells averaged 3.0 days. While drilling efficiency gains are to be expected - the operation is transitioning into full development mode from being delineation driven - the result is nonetheless impressive.
- The company also reported that it has refined the completions program and implemented 24-hour frac operations similar to how it operates in the Pinedale. This helps minimize the number of wells waiting on completion as well as provides equipment use flexibility and efficiencies (which is especially important in cold winter periods).
- The company is experimenting with the use of electric submersible pumps ("ESPs").
- Ultra completed the build out of the infield gas gathering system and started marketing gas last week. Even though gas represents a relatively small percentage of the total production stream, the improvement should contribute to drilling economics.
As of the date of the earnings release, Ultra had a total of 60 wells drilled on the property, of which 54 wells were producing.
Production Test Results
The previous operator produced wells in the Three Rivers area on a constrained-volume regime. As a result, wells would produce at flat rates for months after being brought online. Ultra believes that in some cases production from existing wells might have been held back unnecessarily by the capacity of the surface equipment and artificial lift design.
In January, Ultra initiated a well-testing program on three existing producing wells located in highly productive areas of the field to better understand well deliverability and then optimize artificial lift and surface facilities.
- The first well, that had been online for nearly 15 months, tested at an average rate of 305 bopd.
- The second well tested an average rate of 284 bopd.
- The third well tested an average rate of 402 bopd. Ultra further tested this well with an electric submersible pump ("ESP"). The production level gradually increased over a 5-day period with production rates on the fifth day of nearly 540 bopd.
The result is certainly encouraging. While it is not clear what impact the accelerated production regime would have on the EURs, bringing cash flows forward should have positive impact on the already very attractive drilling economics.
Production Guidance Increased
At the time of the acquisition announcement in October 2013, Ultra estimated production from the Three Rivers at 4,700 barrels of oil per day (gross) from 38 wells. The company expected to exit 2014 at approximately 10,000 bopd (gross) by running one operated rig.
During the call, Ultra reported that it is currently producing ~7,100 bopd gross from 51 wells. Ultra revised its production forecast upward to 11,000 bopd gross (or over 9,000 bopd net). The 10% increase is driven in part by the strong well performance during the accelerated production testing and in part by the increase in the number of wells that the company will bring online throughout the year due to improved well cycle time. Ultra expects to produce an average of over 7,000 bopd (net) during 2014.
Taking into consideration all the contributing factors, the guidance may prove conservative.
Ultra booked 10.1 million barrels of proved developed reserves in Utah at year-end 2013 with a PV-10 value of $275 million. There were no PUDs booked.
2P reserves totaled 70 million barrels with a PV-10 value of $1.4 billion. Management expect that by the end of 2014 nearly 75%, or 45 million barrels, of these probable reserves will either be converted to proved developed or booked as PUDs. By that time, management expects to "get more comfortable with the asset" and will gain the confidence to book the reserves. These 45 million barrels have an estimated PV-10 of over $800 million, based on 2013 year-end SEC pricing (which equates to the wellhead price of $73.65).
Resource estimate has increased to 183 million barrels (net) based on recent well performance and additional locations assigned to the acreage. The PV-10 value of the 91 million barrels of possible reserves was estimated at $1.5 billion.
Marketing And Price Realizations
The crude oil that Ultra produces in the Uinta Basin has high black wax content. The Uinta production has been traditionally processed by refineries in the Salt Lake City area. The local refining market for black wax crude is now approximately 58,000 bopd. Ultra believes that expansions underway will increase refining capacity in the basin to approximately 100,000 bopd (Ultra did not specify the timeframe of these expansions to be achieved). In the meantime, excess production must be transported via rail outside the basin.
Due to the high wax content, the crude oil must be transported in heated and insulated rail cars. Ultra indicated that it sees refineries around the country adding infrastructure to handle heated cargoes. The company also commented that it expects local train service to evolve from manifest cargos that have been used so far to unit trains. Proving the trend, 3 unit trains were dispatched from Uinta recently, according to Ultra. The company expects that continued build out of unit train-capable infrastructure will improve market diversification for its crude oil.
Ultra is currently dispatching 4,200 barrels per day to local refineries through a combination of long- and short-term contracts. The balance is shipped by rail. The company has contracts in place for a minimum of 4,000 bopd of rail capacity, which can be expanded to 10,000 bopd. Ultra plans to use both rail and local markets in its marketing plan. This crude typically receives price of about 80% of NYMEX.
Ultra indicates very attractive economics and impressive PV-10 valuation for the Three Forks asset.
Assuming the company's projections live up to expectations and giving credit only to the ~55 million barrels of reserves that are currently projected to be booked as proved at the end of this year, total PV-10 value of the asset can be as high as $1.1 billion.
Given the negative stock price reaction to the acquisition announcement back in October, the stock price may not be discounting much more than the $650 million acquisition price paid by Ultra. This would leave over $400 million valuation upside from this asset alone, or ~10%-12% to current stock price.
Should the asset continue to perform, a similar upside may stem from additional reserves and resources.
Read-Across To Bill Barrett
The operating metrics indicated by Ultra for the Three Rivers remain in stark contrast to the guidance and commentary provided by Bill Barrett (BBG) during their most recent conference call.
Bill Barrett operates the East Bluebell block that offsets Ultra's Three Rivers immediately to the north. Bill Barrett continues to indicate D&C costs per well in the $3 million per well versus Ultra's $1.5 million (for wells that are typically deeper and may require more expensive completions).
Bill Barrett also guided to substantially lower drilling returns, in the 40%+ range, which compares to 100%-600%+ RORs indicated by Ultra.
Ultra's active involvement in the area will put Bill Barrett in the spotlight with regard to their operating results in the East Bluebell area. Bill Barrett may benefit from having a real-time case study against which it can benchmark its operating practices and drilling returns.
Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.