Ultra Petroleum Corp. (NYSE:UPL)’s Controller and vice president Garland Shaw bought 3,000 shares of the company’s stock on March 4th at an average price of $16.20, according to a filing with the SEC. Shaw now owns almost 13,000 shares of Ultra’s stock, so in percentage terms this is a significant increase. Insider purchases are generally considered to be bullish signals, since the insider already earns income from the company and so buying more stock leaves them more exposed to company-specific risks; unless they are particularly confident in the company, the principles of diversification would actually guide towards selling shares.
Revenue was down 24% in 2012 compared to 2011, and this was almost entirely due to lower natural gas revenue. Even after the decline Ultra earns over 80% of its revenue from sales of natural gas, where prices have been in decline due to high production. As a result, even after adding back a large impairment the company’s pretax income fell from about $710 million in 2011 to about $100 million last year. Cash flow from operations also plunged, though because the company slashed capital expenditures operations generated more cash than were used in investing activities- which had not happened in the previous four years.
Still, conditions are poor though we’d generally point to the natural gas market rather than any company-specific factors. Analyst expectations are for $1.18 in EPS for 2013, implying a current-year earnings multiple of 14. From that point they expect net income to increase further. However, the stock has a number of bears with 15% of the outstanding shares being held short.
Hedge fund interest in Ultra is moderate. Billionaire Israel Englander’s Millennium Management reduced its holdings of the stock by 78% between October and December, to about 610,000 shares (see Englander’s stock picks). Marathon Asset Management included Ultra Petroleum among its top single-stock holdings at the end of the quarter (find Marathon’s favorite stocks), but it was the only filer in our database of 13F filings which had more than $25 million invested in the company. Hedge fund interest in small-cap stocks such as Ultra can be particularly worth considering, since these stocks often receive less attention from mutual funds and the media and as such can be a rich source of alpha: we have found that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year.
How does Ultra compare to its peers?
We can compare Ultra to other natural gas and oil producers including Chesapeake Energy Corporation (NYSE:CHK), SandRidge Energy Inc. (NYSE:SD), Southwestern Energy Company (NYSE:SWN), and Devon Energy Corp (NYSE:DVN). Chesapeake and SandRidge have been hit by management issues in the last year, with Chesapeake’s CEO recently stepping down and activists targeting SandRidge’s management as well; both companies- and likely Ultra as well- overextended themselves and were unprepared for a fall in natural gas prices. Currently, Chesapeake’s forward P/E is 11 as analysts expect the company to recover (its recent earnings report beat expectations but was still down from a year earlier). SandRidge is expected to be unprofitable both this year and next year. Both stocks are also popular short targets.
The sell-side is similarly optimistic about the prospects of Southwestern and Devon, with forward earnings multiples less than 20 in each case. Devon actually experienced a decline in revenue last quarter compared to the fourth quarter of 2011, while Southwestern’s product sales were up only slightly. Of course commodity prices would be the leading cause of any recovery at these companies, though we are skeptical that they are good buys based on where they trade even in comparison to a normally optimistic Street. We would note that short interest is considerably lower at Southwestern and Devon than the three companies we’ve discussed.
Even assuming a rise in natural gas prices (which, to some extent, should occur eventually as the U.S. builds out export capacity), we’re uncertain that this is a good insider purchase to imitate. A number of other companies are in a similar situation to Ultra, and in particular Chesapeake seems that has reacted well by selling off assets. Certainly the current environment leads us to avoid the industry, and even down the line Ultra might not be as good a buy as its peers.
Disclosure: I own no shares of any stocks mentioned in this article.
