Ultra Petroleum (IL/A): Positive outlook with drilling acceleration in Pinedale Anticline - Goldman Sachs - October 26, 2005
We continue to believe companies significantly exposed to the Pinedale Anticline like Ultra Petroleum will show superior growth and returns over the coming years. Ultra is having success at accelerating drilling at Pinedale, which has further improved expected growth in the coming two years. However, we see more upside from other stocks in the near-to-medium term, in part because we see more catalysts in the Mid-Continent, East Texas and the Piceance Basin and in part due to relative valuation. Key catalysts for Ultra include results from exploration in Pennsylvania, further approvals on Pinedale spacing and results from both Questar's Pinedale deep test and Ultra's deep test now proposed for summer 2006. We rate Ultra In-Line relative to an Attractive coverage view.
KEY NEAR-TERM CATALYSTS
(1) Pace of drilling/spacing in Pinedale Anticline. We believe the key driver other than natural gas prices that would increase the present value of probable and possible reserves in the Pinedale Anticline is faster-than-expected drilling/completions. Ultra is having success at accelerating drilling at Pinedale and we now expect 39 net Pinedale wells in 2006 and 44 in 2007. We now expect 2006 production growth of more than 30% and believe Ultra could achieve another 30% growth in 2007. We view the timing of drilling as a more important catalyst versus how many proved undeveloped reserves Ultra books. We believe results from initial 10-acre pilots on Ultra-operated acreage will be available in mid 2006 which could prompt acreage-wide 10-acre spacing approval. The combination of potential success at EnCana Corp.'s 5-acre wells at the Jonah field with increased estimates for natural gas in place at Pinedale has given Ultra greater confidence in potentially pursuing 5-acre pilots in future years.
(2) Results from Pinedale deep tests. Due to delays during the early stage of completing the deep test in the Pinedale Anticline and seasonal restrictions that prohibit drilling beginning November 15, we no longer expect results from initial zones until 2Q/3Q 2006, although Ultra indicated that Questar Corp. could provide some sense of an initial flow rate prior to shut-in on its conference call on October 26. Previously, we had expected initial zones could be completed by November 15 with a production rate that would be more meaningful. We remain optimistic on the potential from the well and believe it could add $12 to traditional peak values for Ultra and $12 per share for Questar Corp. Ultra has decided to drill its own deep test on its operated acreage beginning in 2Q 2006, a positive sign in our view.
(3) Pennsylvania exploration well. Ultra continues to complete and test its exploration well in Appalachia. The company is acquiring further acreage, a positive sign, but has not provided much detail. We do not believe that there is much in Ultra's share price for success in Appalachia.
REPORTED EPS ABOVE OUR AND CONSENSUS ESTIMATES
Ultra reported 3Q 2005 EPS of $0.38, higher than our estimates of $0.36 and consensus estimate of $0.33. Production was 203.1 MMcfe/d, lighter than our estimate of 213.8 MMcfe/d driven by lower net China oil production of 3.3 Mb/d versus our estimate of 6.1 Mb/d. This was offset by higher-than-expected Wyoming production and higher-than-expected realized commodity prices. Total costs were generally in-line, with lower-than-expected production and SG&A costs being offset by higher-than-expected production taxes.
UPDATED ESTIMATES
We have updated 4Q 2005 and full-year 2005 estimates to reflect increases in production, capital spending, and other minor company adjustments. We now estimate 4Q 2005 and full-year 2005 EPS of $0.47 ($0.46 previously) and $1.37 ($1.35 previously) respectively. Our 2006 and 2007 estimates are now $2.02 ($1.85 previously) and $2.75 ($2.45 previously) respectively. Our 2008-2010 (normalized) estimates are $1.40 ($1.22 previously), $1.59 ($1.37 previously) and $1.78 ($1.52 previously). Exhibit 1 shows our summary financial model for Ultra.
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.
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Previous Goldman Sachs Comments on Ultra Petroleum:
Ultra Petroleum (IL/A): Pinedale Anticline continues to show strong results Goldman Sachs July 27, 2005
Message 21548143
Pinedale Anticline: 10-acre visibility delayed, with no change to upside for UPL, STR, WGR Goldman Sachs May 10, 2005
Message 21312935
Ultra Petroleum (IL/A): Pinedale, China catalysts ahead; IL/A Goldman Sachs April 27, 2005
Message 21271455
Pinedale Anticline: Positive potential catalysts for Questar, Ultra, Western Goldman Sachs April 21, 2005
Message 21255271
Ultra Petroleum (IL/A): Remain positive on Pinedale though Questar shares are preferred February 09, 2005 Goldman-Sachs
Message 21035330
Adding two unconventional gas companies with Questar as OP/A and Ultra as IL/A Goldman-Sachs January 20, 2005
Message 20966502 |
