Questar results supportive of Ultra meeting production guidance - Goldman Sachs - October 29, 2007
News
Ultra shares pulled back last week after a significant outperformance since early September. We believe there is some concern that Ultra may miss production estimates for 3Q and 4Q 2007 (we expect Ultra to report on October 30 after the close). Meanwhile, Questar last week reported 3Q production from the Pinedale Anticline that was down 1% from 2Q 2007.
Analysis
Ultra’s production guidance for the quarter is 29.0 Bcfe of which, we expect China to represent about 2.6 Bcfe. The remaining 27.4 Bcfe would represent a decrease of 7% from 2Q 2007. Given Questar’s relatively flat production in Pinedale quarter on quarter (a portion of Ultra’s production comes from Questar operated wells), we believe Ultra is likely to meet its 3Q 2007 production guidance. Ultra’s 4Q production guidance, which excludes China, is 28.5 Bcfe. This implies production of about 310 MMcfe/d. We expect about 9 MMcfe/d of oil production, and we believe the company was able to lock in a contract in October for 300 MMcfe/d of Pinedale production. We thus feel comfortable with Ultra’s ability to meet its 4Q production guidance as well.
Implications
Despite this, our EPS estimates for 3Q and 4Q are slightly below consensus. We attribute this to our assumption of lower realized gas prices due to volatility in Rockies realizations. We believe the Street will forgive temporarily low Rockies gas prices with the Rockies Express pipeline expected to come online on time (January 1, 2008) or, on an interruptible basis, early. We continue to rate Ultra Buy relative to an Attractive coverage view and see 19% upside to an $80 12-month discounted cash flow based target price. Commodity price volatility, drilling results, cost pressures and government pronouncements are key risks. |
