Natural gas producer Ultra Petroleum Corp.’s (UPL) third quarter 2010 results exceeded our expectations, primarily based on a strong organic growth and improved margins. Earnings per share, excluding special items, came in at 60 cents, surpassing the Zacks Consensus Estimate of 55 cents and prior-year quarter’s 57 cents.
Including unrealized, mark-to-market gain, the company’s earnings per share were $1.05, compared with a loss per share of 6 cents in the year-ago quarter.
The company reported total operating revenue of $240.4 million, up 54.9% year over year. However, the reported quarter’s revenues were below the Zacks Consensus Estimate of $281 million.
Quarterly Production
Production during the quarter increased 20.8% year over year to a record 55.4 billion cubic feet equivalent (Bcfe), reflecting the company’s successful drilling activities. Natural gas volumes jumped 21.9% year over year to 53.4 billion cubic feet (Bcf), while oil production decreased slightly (by 0.2%) to 340,689 barrels.
Realized Prices
Ultra Petroleum’s average realized price on natural gas leaped 32.0% to $4.08 per thousand cubic feet (Mcf). Including commodity derivative gains/losses, average realized natural gas price in the quarter was $4.84 per Mcf, down 5.6% from the prior-year level. The average oil price for the quarter, at $66.00 per barrel, was up significantly from the third-quarter 2009 level of $57.47 per barrel.
Costs, Expenses & Margins
Lease operating expense rose 28.3% year over year to $46.7 million. During the quarter, the company reported all-in costs of $2.52 per Mcfe, up 1.6% from the same period in 2009. However, the company was able to achieve a healthy 71% cash flow margin and a 33% net income margin.
Balance Sheet
As of September 30, 2010, the company had cash and cash equivalents of $7.22 million and long-term debt of $1.33 billion.
Guidance
The company expects full-year 2010 production to be in the range of approximately 213 Bcfe to 216 Bcfe, with the fourth quarter 2010 production expected to be in the range of 56.7 Bcfe to 59.7 Bcfe. Ultra Petroleum further guided toward a capital investment program of $1.45 billion for 2010.
Our Recommendation
We believe that Ultra Petroleum’s strong production, reserve-growth prospects and competitive cost structure will help the company to perform better than its peers in the coming months. Moreover, the large acreage position in Marcellus Shale play and Green River Basin of Wyoming provides the company with a multi-year inventory of low-risk development drilling opportunities.
However, the company’s sensitivity to gas price fluctuations and operational disruptions in exploration and production keep us concerned.
We are maintaining our long-term Neutral recommendation on the stock. Ultra Petroleum currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
ULTRA PETRO CP (UPL): Free Stock Analysis Report
Zacks Investment Research
