Ultra Petroleum (IL/A): Pinedale, China catalysts ahead; IL/A Goldman Sachs April 27, 2005
Ultra Petroleum remains best in class due to its leverage to the Pinedale Anticline, and we believe the stock can get to our estimated $60 peak value if the company receives approval for 10-acre downspacing in the Pinedale and concerns abate over the sudden departure of the company's CFO. Exploration success from deeper zones within the Pinedale or of new fields in China could provide additional positive catalysts for the stock. We continue to prefer Questar Corp. (OP/A) due to greater upside, though Ultra shares have cheapened recently. We rate Ultra In-Line relative to an Attractive coverage view.
KEY UPCOMING CATALYSTS
(1) Greater comfort regarding CFO departure. We believe that much of the underperformance of Ultra shares during March and early April can be attributed to concerns regarding the sudden departure of CFO Fox Benton on February 25. Ultra's lean staff and overall corporate culture will continue to make CEO Michael Watford the main public face of the company, though we believe it could be a catalyst when the company hires a credible CFO. That being said, the Ultra business model is itself relatively simple, and since we do not see any corporate malfeasance as the reason for Mr. Benton's departure, we believe the selloff is overdone.
(2) 10-acre downspacing in Pinedale. The Wyoming Oil and Gas Conservation Commission will hear and likely decide on May 10 Ultra Petroleum's request for 10-acre downspacing which would encompass most of the Pinedale Anticline (not solely Ultra's operated acreage, as reported in our April 21 note). We believe that geologic issues will not stand in the way of Ultra's request being approved, and we are already assuming 10-acre spacing in our estimated trough, mid-cycle and peak estimates for Pinedale players. Ten-acre spacing would likely increase proved undeveloped reserves for Pinedale players, though would not in itself speed up drilling.
(3) Exploration in Pinedale, China. In May, Questar is expected to resume drilling its deep Pinedale exploration test, which was postponed last October due to drilling and seasonal issues. Results are expected during the third quarter. The key determination of value is the additional recovery versus the additional drilling expense. Because the current exploration well is over budget (already $10 million versus $5 million for a normal Pinedale well), it may still be unclear as to what normal drilling costs will be. We should, however, get more clarity on reserve potential. Assuming $7 million in total drilling with a 50% increase in reserve potential would add $14-$20 per share to our estimated mid-cycle and peak values for Ultra. Ultra's management is more confident in an exploration well currently drilling on Block 04/36 in China's Bohai Bay, which could add an additional field to the company's existing development.
REPORTED EPS ABOVE OUR ESTIMATE, CONSENSUS
Ultra reported 1Q 2005 EPS of $0.46, higher than our estimate and consensus of $0.43. Even though production came in lighter than we thought at 28.3 MBOE/d versus our 30.8 MBOE/d, realized prices came in stronger across all areas, especially U.S natural gas at $5.58 versus our $5.12. This resulted in EBITDA of $70.2 million versus our $67.7 million, and operating cash flow of $69.4 million versus our $66.0 million. Total unit costs were lower than expected at $11.48/bbl versus our $11.13/bbl, due to lower production costs. Estimated net debt/tangible capital is at 17%.
UPDATED ESTIMATES
We are updating our full-year 2005 EPS estimates following reported 1Q 2005 results. Our new estimate is $2.09 ($2.04 previously). There are no changes to our 2006E, 2007 (normalized), 2008N, 2009N, and 2010N EPS estimates.
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. |
