Maybe the worst question an investor can ask about a stock or sector is "how much worse can it get?," as the answer is often something along the lines of "a lot." That seems like a relevant point when considering Ultra Petroleum (NYSE:UPL) - a natural gas-focused exploration and production (E&P) company that has long been a top-notch operator, but has suffered from rock-bottom gas prices. It's probably true that higher natural gas prices are inevitable as export-oriented liquefaction facilities come online and more energy consumption is shifted to gas, but that's a multi-year process that still leaves ample room for volatility in these shares.

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

Second Quarter Data Positive ... to a Point
Ultra Petroleum did better than expected in its fiscal second quarter, but it's not as though that will dramatically help sentiment.

Production improved 10% from last year, but shrank about 5% on a sequential basis. Ultra's production continues to be overwhelmingly gas-oriented and oil production didn't improve significantly on a sequential basis (it actually declined slightly). Realized prices were slightly better on a sequential basis, but down 22% from last year.

Ultra's production costs continue to be fairly respectable. Per-unit cash operating costs dropped about 7% sequentially and 12% from last year, though DD&A costs did rise both sequentially and annually.

SEE: A Guide To Investing In Oil Markets

Trading off Production for Returns
One of the talking points on Ultra for some time now has been the extent to which operating partners Royal Dutch Shell (NYSE:RDS.A, RDS.B) and Anadarko (NYSE:APC) will compromise Ultra's historical cost and return leadership.

Shell has been testing cheaper well options in the Marcellus, including using a smaller number of frac stages and lower fluid volumes, and that seems to be working pretty well. Nevertheless, both Shell and Anadarko have substantially cut back their drilling plans, with Shell now targeting half as many wells as originally forecasted. This is a consummate mixed blessing for Ultra, though. Yes, it's good to not fritter away the company's assets at such low prices, but drilling curtailments today mean less production growth next year.

How Will the Niobrara Go?
Ultra's best near-term prospect for oil and liquids production is in an acreage in the Niobrara, where the company is doing some early-stage work. While this is a promising area, thus far the Niobrara has been notoriously inconsistent and investors ought to temper their optimism with a little caution. Companies like Whiting (NYSE:WLL) and Devon (NYSE:DVN) have done alright there, but other companies like Apache (NYSE:APA) and Chesapeake (NYSE:CHK) have looked to sell some of their interests there.

SEE: Oil And Gas Industry Primer

The Bottom Line
I don't see that there's a huge amount of remaining coal-to-gas switchover capacity in the utility industry, and developments like expanded LNG exports and gas-fired generation are going to take years to bring on line. In other words, the long-term picture for higher natural gas prices is encouraging, but the near-term is just a guess - a cold winter would help, but inventories and production levels are still quite high.

Ultra Petroleum still seems too cheap on its long-term potential, but that potential could take quite some time to develop. If you look at Ultra's likely near-term EBITDA or cash flow the stock does not look all that cheap, but the picture changes with longer-term NAV/PV-10 types of analysis. This stock could work pretty well as a long-term holding, but potential buyers have to be willing to take on some near-term risk and the potential of dead money as natural gas prices work through this rut.

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

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  2. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  3. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  4. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  5. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  6. Stock Analysis

    The 3 Energy Stocks You'll Wish You Bought in 2015

    Learn about the energy sector and the types of companies that operate within the sector. Find out about some of the best-performing energy stocks in 2015.
  7. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  8. Stock Analysis

    The Safest Stocks You Can Invest in Right Now

    These stocks are likely to hold up better than others in a bear market, but there's a twist.
  9. Investing Basics

    5 Reasons to Expect Lower Stock Returns

    Lower stock returns are likely here to stay for some time. Here are five reasons why.
  10. Investing Basics

    What to Cut From Your Portfolio Right Now

    Owning stocks may shortly become too scary for your portfolio. Here's why, and here are some alternatives.
RELATED TERMS
  1. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  2. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  3. Benchmark Crude Oil

    Benchmark crude oil is crude oil that serves as a pricing reference, ...
  4. Unconventional Oil

    A type of petroleum that is produced or obtained through techniques ...
  5. Green collar

    A worker who is employed in an industry in the environmental ...
  6. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  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. 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 >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
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!