My last report on Ultra Petroleum (UPL) resulted in a number of questions about Opal Hub pricing and Ultra's projected realised price for its production, so I figured I would go into more detail here.
Ultra is benefiting somewhat from high Rockies natural gas prices for now, although hedges offset most of that benefit. Ultra's stock hasn't seen a boost since the longer-term outlook for Rockies natural gas prices looks relatively mediocre.
Ultra's restructuring risk remains high despite near-term prices, as it may be challenging for long-term Rockies natural gas prices to average above what Ultra needs.
Notes On Opal Hub Pricing
Opal Hub pricing has become more volatile (with significant price spikes), largely due to an Enbridge natural gas pipeline explosion in October near Prince George in British Columbia. This pipeline historically provides around 50% of the natural gas used in Washington, Oregon and Idaho.
Opal Hub pricing is affected since the reduction in available supply from Canada means that those states are attempting to pull more from the Ruby and Northwest pipelines that go through Opal.
Source: Northwest Gas Association via NGI
Enbridge has restored the pipeline to 85% of capacity, but since the pipeline typically runs at full capacity during the winter months, this constrains the export flows to the US. Exports from Canada to the US via the Enbridge Westcoast pipeline are also being affected by high levels of Canadian demand during the recent cold snap.
Thus between high Canadian demand and reduced overall capacity, exports to the US via the Westcoast pipeline may be reduced by close to 50% at this time. At the same time, regional Northwest US demand is higher than usual due to the winter storms, driving nearby hub (Malin, Opal, NW Sumas) prices up significantly, while production has been affected a bit by freezing temperatures as well.
Source: Canada National Energy Board
Q4 2018 And Q1 2019 Realised Prices
I will now look at what the changes in Opal Hub pricing may mean for Ultra's results. In Q4 2018, Opal Hub prices may have averaged around $4.45 per MMBtu. This is partially based on Wyoming government data.
That translates into a price of $4.76 per Mcf for Ultra's natural gas during Q4 2018 after applying the BTU factor mentioned in its presentation.
However, Ultra hedged most of its production (both via Henry Hub swaps and NW Rockies basis differential swaps) for Q4 2018, resulting in a hedging impact of negative $2.10 per Mcf (assuming 680 MMcf per day in natural gas production). Thus, after hedges, Ultra would be expected to realise $2.66 per Mcf for its natural gas in Q4 2018. The impact of oil/condensate (based on 5,000 barrels per day of production) and its associated hedges adds $0.31 per Mcfe to Ultra's realised price, making it an estimated $2.97 per Mcfe in Q4 2018.
|Opal Price ($/MMBtu)||$4.45|
|Price Per Mcf (Before Hedges)||$4.76|
|Henry Hub Swap (Per Mcf)||-$0.91|
|NW Rockies Basis Swap (Per Mcf)||-$1.19|
|Price Per Mcf (After Hedges)||$2.66|
|Realised Price per Mcfe||$2.97|
In Q1 2019, the average Opal price may end up being around $4.50 per MMBtu. While Opal prices have soared above $10 recently, it will probably drop down to more regular levels later in February as the temperature in the Northwest returns to more historical levels. Even if Opal averages around $7 in February, the quarter average may end up at around $4.50 based on January actuals and March futures. This results in an estimated realised price of $4.82 per Mcf for Ultra's natural gas before hedges and $2.94 per Mcf after hedges. Ultra's realised price per Mcfe is estimated at $3.24 for Q1 2019.
|Opal Price ($/MMBtu)||$4.50|
|Price Per Mcf (Before Hedges)||$4.82|
|Henry Hub Swap (Per Mcf)||$0.02|
|NW Rockies Basis Swap (Per Mcf)||-$1.90|
|Price Per Mcf (After Hedges)||$2.94|
|Realised Price per Mcfe||$3.24|
Ultra is expected to generate around $31 million in additional revenue with a realised price of $3.24 per Mcfe (compared to $2.75 per Mcfe).
Realised Prices During Remainder Of 2019
After Q1 2019, Opal prices go down significantly since the Westcoast pipeline should have room for historical export levels after the winter season even if it isn't restored to full capacity yet.
In Q2 to Q4 2019, the Opal Hub price may average around $2.33 per MMBtu based on current strip prices, around $0.44 less than Henry Hub. This results in an estimated realised price of $2.49 per Mcf for Ultra's natural gas during those quarters before hedges. Ultra's Q2 to Q4 natural gas hedges have slightly negative value, resulting in a realised price of $2.43 per Mcf after hedges. After oil/condensate sales and hedges are factored in, Ultra would end up with a realised price of $2.74 per Mcfe for its production.
|Q2 to Q4 2019|
|Opal Price ($/MMBtu)||$2.33|
|Price Per Mcf (Before Hedges)||$2.49|
|Henry Hub Swap (Per Mcf)|| |
|NW Rockies Basis Swap (Per Mcf)||-$0.06|
|Price Per Mcf (After Hedges)||$2.43|
|Realised Price per Mcfe||$2.74|
The same exercise for 2020 and 2021 results in an estimated realised price of $2.70 per Mcfe for Ultra in 2020 and $2.56 per Mcfe in 2021.
|Opal Price ($/MMBtu)||$2.27||$2.12|
|Price Per Mcf (Before Hedges)||$2.43||$2.27|
|Henry Hub Swap (Per Mcf)||-$0.02||$0.00|
|NW Rockies Basis Swap (Per Mcf)||$0.00||$0.00|
|Price Per Mcf (After Hedges)||$2.41||$2.27|
|Realised Price per Mcfe||$2.70||$2.56|
EBITDA and Valuation
Based on strip prices and including the effect of hedges, Ultra may now deliver around $470 million EBITDA in 2019, $445 million in 2020 and $415 million in 2021 with production averaging 710 MMcfe per day.
Ultra will be basically operating at around breakeven cash flow (and slightly increasing debt due to the approximately $13 million per year in PIK interest) if it wants to maintain production over the next three years, so it does need an improvement compared to strip prices be able to deleverage.
Ultra is benefiting a bit (despite its hedges) from the near-term spike in Opal prices. However, its stock hasn't gone up since the effects of the pipeline issue should abate soon and the pipeline is expected to run at full capacity again well before next heating season.
That being said, I can see Ultra the argument for Ultra being worth a (very) speculative look at $0.64 per share. I believe there is a high chance that Ultra eventually ends up restructuring again, and it does need significantly higher realised prices and/or a significant improvement to its drilling costs and cost structure to be able to avoid that eventual fate. It may have some time (if covenant issues can be worked out) to wait for those potentially higher prices and work on cost improvements though.
Ultra Petroleum is only seeing limited benefit from high Rockies natural gas prices due to its hedges. It may gain around $31 million in additional revenue during Q1 2019, but the longer-term outlook for Ultra remains weak at strip prices. That being said, Ultra could be worth a highly speculative look at $0.64 per share as long as one is comfortable with the high risks associated with the company. Actual prices may end up differing from current strip prices, but natural gas production growth will need to slow and perhaps decline for Opal prices to average the $2.75 to $3.00+ that Ultra probably needs in the longer-term.
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