Ultra Petroleum (IL/A): Remain positive on Pinedale though Questar shares are preferred February 09, 2005
Goldman-Sachs
We continue to believe the Pinedale Anticline is one of the premier high- growth/high-return natural gas basins in North America and view positively Ultra Petroleum and Questar Corp. Ultra's 4Q 2004 results were generally in line with our estimates, and we continue to expect production growth at higher levels than company guidance. While Ultra is the most leveraged to the Pinedale versus Questar and Western Gas Resources, we believe that the implied valuation of Questar's E&P business considers a far less degree of our estimated Pinedale value versus Ultra. Ultra remains more price- sensitive versus Questar, and continued strength in natural gas prices can drive Ultra's valuation higher. We rate Ultra In-Line and Questar Outperform, both relative to an Attractive coverage view.
PRODUCTION GUIDANCE CONSERVATIVE; NOT BEATING GUIDANCE WOULD BE NEGATIVE We believe that Ultra's production guidance range of 65-67.5 Bcfe of production is extremely conservative and that the company must beat this range for further outperformance. Ultra deferred completions on about 14 net Pinedale Anticline wells from 2004 to 2005, and we are assuming that Ultra completes 25 net Pinedale wells in 2005, despite plans to drill an additional 50 net wells. At an estimated average first 3 months' production of 5 MMcf/d, we estimate 2005 Wyoming natural gas production of 59 Bcf. Combined with about 6,000 barrels per day of oil production - mostly from China - we estimate total 2005 production of 72.4 Bcfe.
KEY UPCOMING CATALYSTS (1) Potential for 10-acre spacing at Pinedale. The ability to successfully downspace Pinedale wells to 10-acres would be a significant positive for all Pinedale producers. The key drivers of how 10-acre spacing should be valued are: (1) the extent of any difference in reserves per well from 10-acre spacing versus 20-acre spacing; and (2) whether the ability to downspace accelerates drilling versus extends inventory. Our current net asset value assumption is based on minimal decrease in 10-acre well performance with no drilling acceleration due to existing service and capital constraints. We would note that Ultra has included 10-acre downspacing at the Jonah field in its model for estimating probable reserves, and that the reserves per location seem higher at Ultra than at Questar. (2) Questar's deep Pinedale exploration test. The potential for deeper hydrocarbon potential at Pinedale would be a positive catalyst for all Pinedale players, not just Questar, which is operating the exploration well. The high risk exploratory well, expected to resume drilling in May, could extend Pinedale reserve potential by 25-50%. While Ultra seems to be more liberal in its probable reserve considerations at Pinedale versus Questar, Ultra is not considering any deep potential. (3) Timing of China development. We expect China production to gradually rampup over the course of the next two years, though there are major milestones which need to be met to ensure on-time startups. The company plans to bring seven fields online by mid-2006, though on some new fields platform construction has not yet begun. The timing and performance of China wells remain key, and while higher light-heavy oil price differentials during 4Q 2004 hurt cash flows, ultimately this should not impact longer-term returns given that the production sharing contract is expected to reduce commodity price volatility over time. 4Q 2004
RESULTS IN LINE WITH EXPECTATIONS Ultra reported 4Q 2004 operating and financial results in line with expectations. EPS of $0.53 versus our estimate of $0.49 primarily reflecting a better-than-expected realized natural gas price, as did operating cash flow of $76 million versus our estimate of $73 million. All-in unit costs of $11.15 per barrel of oil equivalent (BOE) were above our estimate of $10.69 per BOE, with most of the difference arising from higher SG&A expense, which increased to $1.85 per BOE from $1.56 per BOE in 3Q 2004. The company realized commodity prices of $34.06 per barrel of oil and $5.70 per Mcf of natural gas versus our estimates of $39.62 and $5.15, respectively. The lower than expected oil price reflected the wide differential experienced by the company on its heavy Bohai Bay crude, while the strong gas price reflected a lower than expected pre-hedge differential on Ultra's Pinedale production versus Henry Hub. Year end net debt is estimated at $84 million, higher than our prior estimate of $71 million.
UPDATING ESTIMATES We are introducing quarterly EPS estimates for 2005 and updating our full-year 2005, full-year 2006, and 2007-2010 normalized EPS estimates. Our updated estimates reflect a higher diluted share count and higher interest expense than we had previously been assuming. Our 1Q 2005, 2Q 2005, 3Q 2005, and 4Q 2005 EPS estimates are $0.40, $0.38, $0.48, and $0.56, respectively. Our new full-year 2005, full-year 2006, 2007 normalized, 2008 normalized, 2009 normalized, and 2010 normalized EPS estimates are $1.83 (up from $1.80), $2.19 (down from $2.23), $1.81 (down from $1.85), $2.04 (down from $2.09), $2.33 (down from $2.38), and $2.62 (down from $2.66), respectively.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Brian Singer, Arjun Murti. |
