Ultra Petroleum Limited (UPL) is an independent Exploration and Production (E&P) company, which is primarily a gas play and has shown continuous growth due to the shale gas boom in the U.S. The company has hedged most of its gas output at an average price of $4.42/MMbtu. The company has a cost advantage to its peers too.
The Oil and Gas Industry is primarily broken into three business segments, namely Exploration and Production (E&P), Pipeline and Processing, and Refining and Marketing (R&M).
Companies involved in just the E&P segment are involved in the discovery and production of oil and natural gas from new and existing reserves, and their profitability is tied to prices of oil and gas.
Excess Supply of Natural Gas Exerting Negative Pressure on Prices
The Natural Gas Industry has witnessed a boom in production of natural gas in the U.S. ever since the commercial introduction of hydraulic fracturing and horizontal drilling became viable for unconventional production of shale gas.
The excess supply of natural gas has exerted downward pressure on prices of natural gas in the U.S., as compared to international markets. The natural gas prices dipped below $2/mmbtu in the U.S.
Ultra Petroleum Corporation is an independent exploration and production (E&P) company, incorporated in 1979 in British Columbia, Canada. The company's operations are primarily based in Wyoming and Pennsylvania in the U.S., and it is involved in the unconventional production of oil and natural gas.
Natural gas sales increased 11% and 48% in 2011 and 2010, as compared to the previous year, while oil sales increased 28% and 42% in 2011 and 2010. Total revenue witnessed an increase of 13% and 47% in 2011 and 2010, as compared to the previous year.
Natural gas sales
As can be seen from the table above, natural gas sales revenue contributes approximately 90% of the total revenue for the company, making it primarily a gas play. The revenue for 1Q2012 was reported at $226.1 million, a decrease of 12% as compared to 257.3 million in 1Q2011. The decreased natural gas prices offset the increased production.
Diluted Earnings per share (EPS)
The company's EPS witnessed a decline of 3% in 2011, and an increase of 101% in 2010.The significant increase in the EPS in 2010 is due to a loss incurred in 2009, with respect to a write down of proved reserves of oil and gas. The EPS for 1Q2012 was reported as $0.55/share, an increase of 22% as compared to 1Q2011 EPS of $.45/share, and the increase in profitability is due to the unrealized gain on commodity derivatives and the increase in production.
The total production of UPL has shown an increase of 15% and 19% in 2011 and 2010. The net income of 2011 has shown a decline due to the lower realized gas prices. The 1Q2012 production of 68.8 bcfe, increased 23% on a gas equivalent basis from 55.8 bcfe in 1Q2011.
Cash flow from operating activities
The cash flow from operations has shown an increase of 25% and 39% in 2011 and 2010, as compared to the previous year. The CAPEX has shown an increase of 23% and 73% in 2011 and 2010, as compared to the previous year.
Proved Reserves and Reserve Replacement Ratio
The total proved reserves of the company have increases by 13% 5.0 Tcfe in 2011, as compared to 4.4 Tcfe in 2010. The reserve replacement ratio of the company increased to 339% in 2011 as compared to 324% in 2010.
Cost of Production
The all-in cost of the company is $2.88 per Mcfe, and the price of natural gas has to remain above that level for the company to remain profitable. Finding and development costs of the company have increased 8% to $1.60 per Mcfe, as compared to $1.48 Mcfe in 2010.
The company hedges its risk by undertaking positions in commodity derivatives. As reported on its financial statements for 2011, the company had entered into derivative contracts for 2012 for 129.1 MMMbtu at a weighted average price of $5.02/MMbtu. The company later entered into further commodity derivatives for 55 MMMbtu at a weighted average price of $3.02/MMbtu.
This has increased the net income of the company in 1Q2012, as compared to 1Q2011, even though prices declined to $2/mmbtu by the end of the quarter, which was a decrease of about 50% in prices from the same period last year.
The company has hedged approximately 70% of its expected output for the year at an average price of $4.42/MMbtu. If prices remained depressed in 2012, it will reduce the revenue of the company. However, profitability will increase.
We are of the opinion that UPL is in an advantaged position when compared to its peers, due to its commodity hedging, lower cost production, strong reserve base, increased production, and high reserve replacement ratio.
The company is trading at a P/E and P/B ratio of 23x and 1.95x, and has a profit margin of 43.78%. Given the valuations, the stock's outperformance and the factors mentioned above, we have a positive outlook on the stock.
3 month stock performance
YTD stock performance
12 month stock performance
For a better understanding of the shale gas boom and the industry, please refer to our previous reports: