Fundamentals of Ultra as of May 8, 2007 (Ultra is “Best in Class” in almost every metric):
Overview:
§ Ultra’s principal revenue is from NG wells in the Pinedale (PDA) area of Wyoming. This is the second largest NG field in the USA and Ultra has the largest ownership. The wells in PDA are long life - about 50 plus years.
§ Ultra’s average working interest in the Green River area (Jonah, Pinedale, etc.) is greater than 50%. Their average net revenue interest in all of Pinedale (PDA) is about 40%.
§ Ultra operated gas well sites have been 100% successful.
§ Ultra operates over 60% of their gas producing lands.
§ Ultra’s expenses, including CAPEX (capital expenditures) would be funded entirely by internally generated cash flow if they were not repurchasing shares.
§ Expenses are tightly controlled; days to drill a PDA well are declining from 55 to under 30 and costs per well will move down from $6.8 million to $6.0 million.
Financial Metrics:
§ Past 5-year revenue growth is 70.4% vs. 21.8% for the sector, 30.9% for the industry, & 13.3% for S&P 500.
§ Gross margin (TTM – Trailing Twelve Months) is 80.9% vs. 36.3 for the sector, 56.7% for the industry & 45% for S&P.
§ Operating margin (TTM) is 67.2% vs. 22.5 for the sector, 29.6% for the industry & 19.8% for S&P.
§ Net Income Margin (TTM) is 42.0% vs. 14.9% for the sector, 18.9% for the industry & 13.7% for S&P.
§ Cash flow margin is 76%.
§ Lowest Asset intensity (% cash flow req’d to have prod. & reserves stay flat) at 15% vs. industry median of 58% (est.).
§ Lowest F&D Costs in the US at $1.12/Mcfe vs. industry avg. of well over $2.59/Mcfe
§ Lowest total costs of any O&G co. in the US at approx. $2.59 /Mcfe vs. $4.73 /Mcfe avg. for the industry.
§ Highest return on drilling dollars at 36.25%. The next closest is DNR at 16.25% followed by XTO at 15% and everyone else under 8%.
§ Payback on the costs of drilling a well is 1.7 years, at $7.00/Mcf ($6.45/MMBtu) gas price yielding an ROR of 61%. Ultra has been consistently hedging at $7.00/Mcf.
§ Leader in Returns and Growth. Ultra’s Production per share CAGR (Compound Annual growth Rate) of 48% and Cash Return on Capital Invested of 38% is far higher than any other O&G company. XTO is next closest at 17% and 23% respectively followed by CHK at 6% and 16.5% respectively.
§ Net income break even is achieved as low as Opal NG price of $1.94/Mcfe
§ Companies with a high ROE and low total debt to capitalization are exceptional. Ultra is excellent. UPL’s Debt to Capitalization ratio is 31% with a ROE of 40% vs. 70% and 21.2% respectively for the industry, 40% and 27.8% respectively for the sector and 70% and 20.4% for S&P respectively.
§ Companies with higher than average EBITD margin and revenue growth are doing well. Ultra dropped in 2006 due to decreased NG prices but is above average. Ultra’s EBITD TTM margin was 75.4% and their TTM revenue growth was 7.28%, while the sector was 30.3% and 10.5% respectively. The S&P was 22.9% and 14.7% respectively.
§ ROCE is 32% vs. 12.8% for the industry, 17.9% for the sector and 12.1% for the S&P
§ Return on Assets (TTM) is 43% vs. 9.7% for the industry, 14.0% for the sector & 8.1% for S&P.
§ Production CAGR is 50% (past 6 years).
Reserves metrics:
§ Highest Reserve Replacement Ratio in the industry at 501 %.
§ Proved Reserve CAGR is 40% (past 6 years). 2P Reserve CAGR is 46% (past 4 years).
§ Ultra’s proved reserve booking policy is the most conservative in the industry, considerably understating proved reserves (1 P). If industry standards were used, Ultra’s 3 P reserves would be counted as 1 P.
§ Ultra has over 4,800 gross drillable sites lined up in PDA at 5 acre spacing.
Growth:
§ Ultra is the largest landowner in the Pinedale Anticline, which appears to have at least 5 times the amount of NG as Jonah, or 65+ Tcfe GIP or 55.3+ Tcfe recoverable from the currently proved/probable productive area (80 sections). An old DOE Report estimated that Pinedale has 159 Tcf of NG in place. Ultra has stated that PDA has 48 Tcfe or more of gas in place yielding a conservative 9.9 Tcfe net or more to Ultra at 5-acre spacing (this is for the presently defined productive area with haircuts and does not include deeper zones or expansions).
§ Approval of the SEIS will permit year round drilling, which will allow the acceleration of drilling and an increase in the PV 10 value. Drilling is accelerating now primarily due to multi well simultaneous (drilling, completion and production) pad drilling which will continue without regard to the SEIS approval.
§ Probability/possibility of east-west expansion of productive areas on the PDA as well as booking reserves for the “gap” in the middle of the PDA. The gap is an area of 50 160-acre quarter sections in the BLM core area surrounded by a ½ mile buffer consisting of another 50 160-acre quarter sections. The “gap” apparently could add 3,200 5-acre locations.
§ Probability of additional, deeper pay-zones on the Pinedale. Ultra will drill their deep well this year. Ultra’s 3-D seismic data indicates that you can see the deeper interval over the whole area.
§ Continuing improvements in completion techniques have resulted in several record-breaking NG wells exceeding expectations. Average production and reserves for new wells appears to be increasing. The average pay area in the lance is presently 1,417 feet out of 4,364 feet. Core analysis shows the entire 4,364 feet to be gas saturated.
§ Three wells have been drilled in PA. Only one had been completed by March 31 and that well showed good results.
Market for NG:
§ NG supplies in US and Canada are decreasing (limited short term increase in US from more expensive marginal sources) with no near term competition or alternatives and demand is generally flat or increasing (depending on NG prices) while Ultra’s low cost production and reserves continuously increase. Worldwide demand for oil, NG and LNG is increasing particularly due to China and India. China is aggressively locking up long term O & G supply agreements with various governments including Iran, Venezuela and Canada. While Canada’s NG production is decreasing, demand is increasing especially due to oil sands production, which requires large amounts of NG to heat the sands to extract the oil. US LNG facilities were not able to operate at capacity (in 2005) since other countries were outbidding for LNG.
§ Ultra has entered into an agreement for new NG processing plants and a new pipeline to transport gas eastward to the Midwest and northeast markets in early 2008.
Other:
§ 12% of net Q2 and 9% of net Q3 production has been hedged for 2007.
§ Ultra is changing their rig fleet to new, far more efficient, built for purpose drilling rigs, contracted for multi-years at largely spring of 2005 rig rates and has entered into multi-year fracing and completion work contracts at basically mid-year 2005 pricing.
§ The Bohai asset is planned to be sold this year.
§ Ultra’s borrowing base is now $1.1 billion
§ Application for listing on the NYSE is being filed.
Valuation:
§ A traditional method is the P/E ratio, which is not a very appropriate way to value a rapidly growing company. Ultra’s P/E has ranged between 35.7 and 130.3 during the past 5 years. For the past 12 months it has averaged 43.6.
§ PEG is a slightly better method
§ NAV or PV is an attempt to assign a present net asset value per share based upon the sum of future net cash flows discounted back to the present time. The discount factor is usually exceedingly conservative as is the estimate of future prices of NG.
§ Acquisition value may be a better way to value a company with large reserves that is rapidly growing. Two uncertainties involved in this valuation are (1) Ultra’s booking PUDs, that will not be developed for more than three years, into the 2P or 3P categories instead of the traditional 1P category and (2) the very long life of the reserves. A very good argument could be made that all of Ultra’s reserves should be treated as 1P. Ultra’s 3P reserves per share as of YE 2006 equaled 62 Mcfe. |
