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.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and article.

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.)

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

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

Related Articles
  1. Stock Analysis

    The 5 Best Buy-and-Hold Energy Stocks

    Understand why energy companies' stock are volatile when oil prices are volatile. Learn about the top five energy companies to buy and hold.
  2. Investing

    Have Commodities Bottomed?

    Commodity prices have been heading lower for more than four years, being the worst performing asset class of 2015 with more losses in cyclical commodities.
  3. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  4. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  5. Investing

    Oil: Why Not to Put Faith in Forecasts

    West Texas Intermediate oil futures have recently made pronounced movements. What do they bode for the world market?
  6. Investing

    The Quinoa Quandary for Bolivian Farmers

    Growing global demand for quinoa has impacted Bolivian farmers' way of life. Should the American consumer be wary of buying this product?
  7. Markets

    How Energy’s Debt Bubble Affects Your Portfolio

    Depressed crude oil prices are here to stay for the foreseeable future. Here's how it will affect an oil industry riddled with unsustainable debt.
  8. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  9. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  10. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  1. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  2. 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 >>
  3. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  4. 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 >>
  5. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  6. 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 >>

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!