Ultra Petroleum (NYSE:UPL) is planning a major reduction in natural gas development drilling in 2012 as the company manages its way through an environment of continued low prices for natural gas in North America. (To know more about oil and gas, read Oil And Gas Industry Primer.)

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2012 Capital Budget
Ultra Petroleum has established a total capital budget of $925 million for 2012, down 38% from the $1.5 billion expended last year. The company's capital budget for development is being cut even more dramatically, and will total only $650 million in 2012, down 50% from the $1.3 billion used in 2011. The balance of the $925 million budget will be used for exploration, leasing and the construction of gathering and other infrastructure.

Production Growth
Ultra Petroleum's reduction in drilling will mean less production growth this year, and the company expects production to be in a range from 250 to 260 Bcfe. This represents a 2% to 6% increase over the 245.3 Bcfe produced in 2011.

This is a stunning level of growth for Ultra Petroleum, which historically has been one of the fastest growing exploration and production operators. The company grew production by 19% and 15% in 2010 and 2011, respectively, and at a compound annual growth rate of 24% from 2006 to 2010.

Drilling Reductions
Ultra Petroleum's drilling reductions will be spread across both of the company's core areas in 2012.

In the Rocky Mountain region, Ultra Petroleum is developing the Lance formation in the Pinedale Field in Wyoming. The company plans to spend $250 million in development drilling here in 2012, compared to $675 million in 2011.

Another company active in the Pinedale Field is QEP Resources (NYSE:QEP), which plans to spend $300 million on development here in 2012.

Ultra Petroleum is also active in the Appalachian Basin where the company is developing the Marcellus Shale in Pennsylvania. This region will get $400 million in 2012, compared to $540 million last year.

Other companies cutting Marcellus Shale drilling in 2012 include Talisman Energy (NYSE:TLM), which reported average production of 486 million cubic feet of natural gas equivalents per day from this play in the fourth quarter of 2011. The company ended 2011 operating 10 rigs in the Marcellus Shale and may reduce it to as few as three rigs in 2012.

Ultra Petroleum has allocated $30 million of capital in 2012 for exploration of prospective formations on its properties. The company has 110,000 net acres exposed to the Niobrara formation and originally planned to drill four vertical wells to test this play in the first quarter of 2012. If these test wells were successful, Ultra Petroleum was also planning to begin a horizontal evaluation of this play in 2012.

Continental Resources (NYSE:CLR) is also at an early stage of its exploration of the Niobrara and has drilled four wells into this play to date. The company plans to operate one rig here in 2012.

Ultra Petroleum also has exposure to the Geneseo formation, which lies above the Marcellus Shale on the company's properties in the Appalachian Basin. The company hasn't disclosed whether any exploration drilling is planned for this formation in 2012.

The Bottom Line
Ultra Petroleum is following the lead of many of its exploration and production peers and wisely cutting natural gas development in 2012. Although it may be painful for the company to sacrifice growth, this is the best strategy for the long term. (For additional reading, check out A Guide To Investing In Oil Markets.)

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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