It also didn’t help that it’s exploration in Colorado’s Denver-Julesburg Basin has been a disappointment. According to CEO Michael Watford: “Although our core and log data indicate the presence of oil in the rocks, the petroleum system is immature, under-pressured, and not commercial. … We’ll continue to monitor industry activity in the region but have no immediate plans for additional exploration in the area.” The company built up 139,000 acres in the play and will now turn its exploration capital elsewhere.
The final concern here is the company’s debt. At just under $2 billion, that’s still a lot of debt for a company with a market capitalization of about $3 billion. A further concern here is that until recently, the company was outspending its income. While the company has pulled back the reins on its spending and is now cash flow-positive, investors see a company that lacks flexibility in the face of depressed natural gas prices.
Why it should be loved
The good news, though, is that Ultra Petroleum Corp. (NYSE:UPL) is one of the lowest-cost producers of natural gas. The company breaks even at $3 gas, whereas many of its competitors need gas to be north of $6 to turn a profit. With its costs so low, it can drill for gas when its peers can’t. Further, Ultra estimates that it has 17 trillion cubic feet equivalent of future reserves on 4,600 future drilling locations.
Some of its most promising acres are in the Marcellus shale, where it has very strong partners in Anadarko Petroleum Corporation (NYSE:APC) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A) to help it along the way. While partnering can be a blessing and a curse, in this case we’re talking about world-class partners. In the short-term, though, the company won’t be doing much work with either company as its Shell venture in the Marcellus will have only one rig running this year, while its Anadarko Petroleum Corporation (NYSE:APC) venture has no activity planned for the year ahead. However, longer term, the company sees the potential for 1,700 net wells, with the potential to produce 7.4 trillion cubic feet equivalent of natural gas.
Another interesting asset for Ultra is its position in the Jonah Field. Ultra has more than 1,700 wells on 2,000 gross acres in the field, which produces 700 million cubic feet of natural gas per day. For some perspective on how prolific these assets are, last year Linn Energy LLC (NASDAQ:LINE) bought 750 wells on 12,500 net acres in the play for about $1 billion. LINN’s production is 145 million cubic feet equivalent per day. As you can see, Ultra has a great position in that field.
My Foolish take
There are two key takeaways here on Ultra Petroleum Corp. (NYSE:UPL). First, the company is now living within its cash flow to grow its production. Combine that with its low-cost production, and you have the fuel for a company that could rocket higher once natural gas prices improve. Given the lack of natural gas drilling and its increased usage for transportation and electrical generation, I can see reasons for its price to head higher over the longer term. That’s why I wouldn’t be short this stock: It could really burn investors on a rebound.
The article Will Shorts Be Burned by This Natural Gas Company? originally appeared on Fool.com and is written by Matt DiLallo.
Fool contributor Matt DiLallo owns shares of Linn Energy. The Motley Fool recommends Clean Energy Fuels and Ultra Petroleum, owns shares of Ultra Petroleum, and has options on Ultra Petroleum.
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