Ultra Petroleum: Negotiating A Debt Restructuring

| About: Ultra Petroleum (UPLMQ)

Summary

Ultra Petroleum appeared to have a high probability of a 2016 restructuring due to upcoming debt maturities and probable covenant violations.

Ultra is now attempting to negotiate an out-of-court restructuring and appears likely to not pay out its maturing March 2016 bonds.

Recent asset sales indicate that Ultra's assets are probably worth $2 billion or less in the current market, while net debt is $3.4 billion.

Noteholders are likely to only see a partial recovery as part of the debt restructuring proposal.

Current common shareholders are likely to see minimal to zero value post-restructuring.

I wrote about Ultra Petroleum (NYSE:UPL) a few weeks ago as my entry into the Top Short Idea For 2016 contest. That article is available only to PRO subscribers and Distressed Value Investing subscribers until March 3rd, but I will discuss Ultra some more here since the thesis of that article has already largely played out as expected.

The thesis of my previous article was that Ultra would have difficulty dealing with its 2016 cash burn and debt maturities, and that it may not be able to convert its $1 billion unsecured credit facility (maturing in October 2016) into a later maturity secured credit facility with a high enough borrowing base to cover its 2016 needs. As well, even if it did manage to cover its 2016 needs, there is another $766 million in 2017 and 2018 debt maturities to deal with. Ultra also appeared likely to violate various debt covenants by the end of Q1 2016. Thus a 2016 restructuring appeared quite likely to me.

Ultra noted on its recent Q4 2015 conference call that it was pursuing an out-of-court debt restructuring. I think there is a large chance that shareholders will be left with little to nothing after the debt restructuring, but I have closed my short position since it has already dropped to under $0.25.

Restructuring Discussions In Progress

Ultra Petroleum borrowed $266 million under its credit facility, which maxed out the available borrowings from that credit facility in an attempt to give it some liquidity while it attempts to negotiate an out-of-court debt restructuring. It also mentioned that it has been trying to obtain relief from debt covenants since early Q4 2015, but has so far been unsuccessful. There also are reports that Ultra is not planning to pay out its March 2016 bonds. Ultra indicated that it is currently working on forbearance agreements to allow more time for restructuring discussions.

2016 Outlook Based On Guidance

I previously estimated that Ultra would burn $85 million in 2016 with $40 oil and $2.50 natural gas since its hedges ran out in October 2015 and it was left without any protection after that point. This assumed that Ultra would spend $325 million in capital expenditures to maintain 290 Bcfe per year in production.

Ultra's 2016 guidance calls for 272.5 Bcfe in production and $260 million in capital expenditures. Running the 2016 numbers based on that production level and Ultra's estimated differentials for Q1 results in an estimate of $710 million in revenue.

Units

$ Per Mcf/Bbl

$ Million

Natural Gas [MCF]

256,150,000

$2.41

$617

Oil [BBLS]

2,725,000

$34.00

$93

Total Revenue

$710

Click to enlarge

Using Q1 cost guidance for lease operating costs and transportation over the whole year results in an estimate of $782 million in cash expenses in 2016.

$ Million

Lease Operating Costs

$251

Transportation

$79

Cash G&A

$7

Cash Interest

$185

Capital Expenditures

$260

Total Cash Expenses

$782

Click to enlarge

Thus, Ultra is now expected to burn approximately $72 million in 2016 at $40 oil and $2.50 natural gas. Much of the savings from capital expenditure reductions is offset by the reduced production. In addition, Ultra has $62 million in maturing March 2016 notes and its $1 billion credit facility (maturing in October 2016) that it needs to deal with.

Reserve Valuation

I estimated that Ultra's proved developed reserves would have a PV-10 of $1.3 billion to $1.7 billion with current bank price decks. Ultra reported that its proved reserves had a PV-10 of $1.87 billion at the end of 2015 based on SEC reference pricing of $2.59 natural gas and $50.28 oil. I believe that my estimated range would therefore be accurate based on current bank price decks, which may have moderately higher long-term prices, but would also have significantly lower short-term prices which contribute more to the PV-10 calculations.

Covenants

Ultra has two covenants that are extremely likely to be violated soon. It has a covenant for subsidiary level debt (including its credit facility) that requires debt to trailing twelve-month EBITDA to be 3.5x or less. This consolidated leverage ratio was at 3.4x at the end of 2015, resulting in a certain violation after Q1 2016 without a restructuring.

As well, it is required to maintain an annual ratio with the NPV-9 of its oil and gas properties to total funded debt of no less than 1.5x. This will most likely result in a violation once the NPV-9 report is delivered (due by April 1).

Asset Valuation

WPX Energy's recent natural gas asset sale had a valuation of $1,820 per flowing Mcfe. A similar valuation would make Ultra's producing assets worth around $1.4 billion currently. Ultra also has a significant amount of undeveloped assets (nearly 40% of 2014 PV-10), but the market for undeveloped assets is very weak right now. The combined value of Ultra's assets is therefore likely to be $2 billion or less currently. Ultra has around $3.4 billion in net debt, so its assets wouldn't cover all its debt currently. Given that situation, it seems very likely that any restructuring would leave current shareholders with a tiny fraction of the company at best and probably nothing. Ultra indicated that noteholders are likely to take a haircut on their principal.

Conclusion

The near-term debt maturities, lack of available liquidity to deal with those maturities and probable covenant violations made it very likely that a 2016 restructuring would occur. However, I didn't quite expect the restructuring thesis to play out as quickly as it did. Given that noteholders are not expected to receive a full recovery and that Ultra's assets are worth significantly less than its debt, it seems very likely that the current common shares will have minimal to no value post-restructuring.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.