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Bearish on Ultra Petroleum's Future

Zacks Equity Research

Shares of Ultra Petroleum Corp. (UPL) are currently trading close to its 52-week low of $22.51. The natural gas producer has seen its share price fall more than 30% since the beginning of December last year, as investors have been selling the stock for its weak fundamentals and tepid outlook. The disappointing fourth quarter results have added to this bearishness.

Houston, Texas-based Ultra Petroleum is an energy firm engaged in the acquisition, development, exploration and production of oil and gas properties. The company’s operations are focused on the Green River Basin of southwest Wyoming, mainly covering the Pinedale and the Jonah fields.

As of year-end 2011, Ultra Petroleum had 4.98 trillion cubic feet equivalent (Tcfe) in proved reserves, of which more than 96% was natural gas and about 41% was developed. Production averaged 245.3 billion cubic feet equivalent (Bcfe) during the year, comprising 97% gas and 3% crude oil/ liquid hydrocarbons. Ultra Petroleum’s high natural gas exposure raises its sensitivity to gas price fluctuations, compared to its more-diversified independent peers with higher oil production.

The company recently reported lower-than-expected EPS for the December quarter – 58 cents versus the Zacks Consensus Estimate of 61 cents – adversely affected by lower natural gas prices.

A supply glut has pressured natural gas prices during the past year or so, as production from dense rock formations (shale) – through novel techniques of horizontal drilling and hydraulic fracturing – remain robust, thereby overwhelming demand.

As a matter of fact, natural gas prices have dropped over 50% from 2011 peak of $4.92 per million Btu (MMBtu) in June to the current level of around $2.30 (referring to spot prices at the Henry Hub, the benchmark supply point in Louisiana). Incidentally, prices hit a 30-month low of $2.01 earlier this month.

To make matters worse, a near-record mild weather across most of the country curbed natural gas demand for heating all winter, leading to an early beginning for the stock-building season. The grossly oversupplied market continues to pressure commodity prices in the backdrop of sustained strong production.

This has forced Ultra Petroleum – and other natural gas players like Talisman Energy Inc. (TLM), Encana Corp. (ECA), etc. – to announce drilling curtailments. The company has reduced its 2012 capital budget by 38% year over year to $925 million. Ultra Petroleum's investment for development drilling has been slashed even more drastically, down 50% to just $650 million from the $1.3 billion expended last year.

While subscribing to management’s outlook, we believe the realignment of Ultra Petroleum’s strategy will take some time to bear results and we expect the company to continue to struggle unless the outlook for natural gas prices improves.

Given these concerns, we expect Ultra Petroleum to perform below its peers and industry levels in the coming months. As such, we see little reason for investors to own the stock. Our long-term Underperform recommendation is supported by a Zacks #5 Rank (short-term Strong Sell rating).

Read the Full Research Report on UPL

Read the Full Research Report on TLM

Read the Full Research Report on ECA

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