We are initiating coverage on Ultra Petroleum Corp. (UPL) with a Neutral recommendation and a target price of $55.
Houston, Texas-based Ultra Petroleum is an independent 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. Ultra Petroleum also holds substantial acreage in the Marcellus Shale region of Pennsylvania. As of now, the company’s total holdings in the region is approximately 480,000 gross acres (250,000 net), with the potential for 1,800 net drilling locations.
Ultra Petroleum’s reserve and production growth performance over the last few years has been one of the best in its peer group. Importantly, the company seems well positioned to sustain the strong growth momentum for quite some time based on its impressive exposure to the high-return Marcellus Shale play.
However, the company’s high natural gas exposure remains a cause for concern. Despite the recent uptick, natural gas prices are still way off the July 2008 highs, when they rallied to over $13 per million Btu (MMBtu). Ultra Petroleum, which derives approximately 95% of its reserves/production from natural gas, has seen its sales and income fall drastically in recent quarters on the back of a sharp drop in commodity prices.
We believe this trend will continue to hurt the company’s revenue and profitability in the near future. Consequently, we do not anticipate a significant upside and expect the stock to perform in line with the broader market.
Read the full analyst report on “UPL”
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