Ultra Petroleum: Attractive Momentum Play On Verge Of Breakout

May.29.14 | About: Ultra Petroleum (UPLMQ)


Momentum energy play Ultra Petroleum has recently pulled back 10% but seems to be forming a positive technical pattern.

The pessimism on the shares seems unwarranted given it continually beats earnings estimates and has been a good performer overall in 2014.

More importantly the stock is very cheap given its growth prospects and offering a nice entry point here.

Good piece on Yahoo! Finance today on a possible "cup and handle" formation forming on momentum energy play Ultra Petroleum (UPL). Technicians view this formation, although they tend to disagree on whether one is forming at times, as a positive catalyst which could trigger a break out.

Being more of a fundamental investor I like the valuation case on this energy concern even though it has already been a star performer so far in 2014. The stock's recent ~10% pullback could be an attractive entry point for growth investors. For momentum traders this could be one to get into for a shorter term play with tight stops.

The company has been buoyed nicely by natural gas prices that are near four year highs. These higher natural gas prices are bolstering consensus earnings estimates for the shares. FY2014 EPS estimates have gone from $2.20 a share to ~$2.90 a share over the past three months. FY2015's estimates have moved from ~$2.90 to over $3.35.

At around $27 a share this gives UPL a valuation of around eight times current 2015 earnings estimates. The company is tracking to grow revenues better than 30% this year and the stock has a five year projected PEG of significantly below 1 (.69). Earnings are tracking to better than 75% year-over-year (Y/Y) gains in 2014.

The company had a reserve replacement ratio of over 300% in 2013. It also plans to triple oil production over the next few years. A good portion of that growth will be driven by its recent acquisition of high-returning, accretive oil properties in the Uinta Basin for $650MM.

The company has been executing well against its plan of driving down well costs and strengthening its balance sheet. It does not have any major debt maturities until 2018. The stock has ~20% short interest and analysts are tepid on the shares overall even as Zack's just upgraded the shares to a "Strong Buy". The pessimism seems a bit overdone as the company has easily beat earnings estimates for five straight quarters. The average beat over bottom line consensus has averaged 18% over that time frame.

Last quarter the company posted earnings per share of 87 cents, 18 cents above the consensus. Revenues are showed over 44% Y/Y gains and beat expectations. Given the company's growth prospects, valuation of just over nine times forward earnings, possible positive technical picture and significantly negative sentiment; any breakout could be meaningful. BUY

Disclosure: I am long UPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.