Falling Natural Gas Prices, Ultra Petroleum Sticks with CAPEX Budget

The Company: Ultra Petroleum Corp, an onshore U.S. natural gas producer.
The Filing: FORM 10-Q filed with the SEC on August 6, 2008.
The Finding: Tighter credit and lower energy prices are forcing U.S natural gas drillers, such as Chesapeake Energy and Petrohawk Energy, to scale back capital expenditure budgets. Mark Smith, Chief Financial Officer of Ultra Petroleum, told attendees at the 2008 Oil & Gas Investment Symposium in San Francisco, however, that Ultra's liquidity continues to remain more than adequate to fund the 2008 capital budget of $945 million.

The Upshot: Operating cash flow was up 67 percent over the first-half 2007 level to $398.4 million, due to higher net income and deferred income taxes. The balance sheet remains healthy, with $60.3 million in cash on hand and no long-term bank debt. Although current working capital is running at a deficit of $136.7 million, at June 30 the company had $500 million of available borrowing capacity under a credit facility with JP Morgan.

The company's primary production is in Wyoming. Fifteen Ultra-operated rigs in the Pinedale Field, located in the Green River Basin of Southwest Wyoming, are producing wells that flowed an average seven Mcfe per day in the second-quarter ended June, and require prices slightly above $4.84 per MMbtu to continue operating profitably (assuming a 10 percent internal rate of return).

Ultra reported natural gas and crude oil production of 34.3 Bcfe for the second-quarter 2008 ended June 30, up 23 percent over the same period last year. Realized natural gas prices for the second-quarter were $8.06 per Mcfe, including the effects of hedging.

As one of the lowest cost U.S. producers, with a net-income breakeven of $2.72 per Mcfe, compared with a mean peer group cost structure of about $5.44 per Mcfe, Ultra's wellhead economics point to a much lower breakpoint for natural gas prices before it needs to consider shutting-in wells.

Looking forward to 2009, Ultra has 90,000 MMbtu per day hedged at a price of approximately $7.55 per Mcfe, and for calendar 2009 about 40,000 MMbtu per day hedged at a price of roughly $7.91 per Mcfe. NYMEX Natural Gas Futures for November delivery closed at $6.768 per MMbtu on Tuesday.

The Question(s): Despite its core-competence as a low-cost producer, additional exploration and drilling activities will be necessary to boost desired production growth. Will production costs creep higher as Ultra expands its activities into the Marcellus Shale gas play in portions of Pennsylvania? And, with natural gas prices falling, will growth in quarterly production be sufficient to offset potential cash flow declines?

David Phillips

David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.

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