There's not much more digital ink to be spilled on the state of the natural gas environment. Massive supply increases from basins like the Marcellus have pushed prices down to uneconomical levels, and those producers who can are switching over from natural gas to oil and liquids. Unfortunately, while Ultra Petroleum (NYSE:UPL) is one of the best-run natural gas companies, the company's reserve base is almost completely natural gas and potential declines in production and profits could pressure liquidity in the coming year.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Production a No-Win Proposition
While Ultra Petroleum reported a 4% sequential increase in production; it is looking as though production is going to start sliding as the year goes on. Making matters worse, hedges will roll off progressively throughout the year and leave the company with the unenviable position of choosing to curtail production further or produce uneconomically.

It's actually even a little worse than that, though. While Ultra has long posted superior profitability to other notable gas-heavy names like Chesapeake (NYSE:CHK) and Range Resources (NYSE:RRC), even Ultra cannot make much money below $3 natural gas.

Unfortunately, about three-quarters of the company's acreage in the Marcellus is operated by Royal Dutch Shell (NYSE:RDS-A, RDS-B) or Anadarko (NYSE:APC) and out of Ultra's direct control. While Ultra can elect not to participate in wells ("non-consent"), doing so with wells being drilled on pads (most of what Shell does) can cut Ultra out of an entire 640-acre unit. Given management's recent commentary, it sounds like the relationship with Shell may be fraying, as Ultra is not pleased with Shell's drilling costs, nor its apparent desire to push ahead on uneconomical wells (or at least insufficiently economical from Ultra's perspective).

SEE: Oil And Gas Industry Primer

Not Much Oil to the Rescue
With low gas prices, companies ranging from Chesapeake to Penn Virginia (NYSE:PVA) to Apache (NYSE:APA) have been trying to switch as much production as possible from gas to oil. Unfortunately, while Ultra does have some higher-liquid assets in the Niobrara, those can't be brought on overnight and they're likely not large enough to really rescue the company from a terrible gas environment. What's more, it's not as though Ultra Petroleum really has the liquidity or balance sheet flexibility to quickly change its reserve profile.

SEE: Earning Forecasts: A Primer

The Bottom Line
Although Ultra Petroleum can make money below $4.50 natural gas, I'm not sure the stock is terribly exciting below that level, apart from a turnaround story. There have certainly been some positive developments towards greater long-term use of gas in the U.S. Companies like Navistar (NYSE:NAV) are pushing ahead with natural gas-powered Class 8 trucks, utilities have begun using more natural gas and turbine manufacturers like Siemens (NYSE:SI) and General Electric (NYSE:GE) see a bright future for natural gas-fired electricity generation in the U.S.

The bigger question revolves around investors' threshold for further pain. While I do believe Ultra Petroleum's liquidity position limits its options, I think we're a long way away from more existential concerns. But that's not to say that this stock couldn't push much lower if and when natural gas prices weaken further (ask a coal stock investor). Consequently, while Ultra Petroleum looks cheap on long-range models and will again be a go-to name when natural gas prices recover, the short-term environment will require a great deal more patience.

SEE: A Natural Gas Primer

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  2. Investing

    Top Investment Banks In The Energy Industry

    Many global Investment banks are highly involved in the energy industry, but there are also some smaller banks and boutiques that are strong players.
  3. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  4. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  5. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  6. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  7. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  8. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  9. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  10. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!