Ultra Petroleum (UPL): Underperformance overdone; multiple positive catalysts ahead - Goldman Sachs - April 03, 2008
What's changed
We believe recent 5%-10% underperformance in Ultra shares versus most other gas-levered E&Ps over the past month is unwarranted, as we see multiple positive catalysts over the next weeks and months. In the immediate term, recent data has boosted momentum regarding deep potential at the Pinedale Anticline, and we believe this will increasingly be reflected in Ultra shares. We reiterate our Buy rating and $104 12-month target price. We expect a near- and medium-term rebound in the shares.
Implications
Potential near and medium term catalysts include:
(1) above consensus 1Q 2008 earnings. We see consensus EPS estimate of $0.57 as too low, and based on a recent review of our forecasts we are confident that Ultra will deliver EPS in excess of $0.60 (our current estimate is $0.64).
(2) Pinedale deep test. Ultra will begin completion of its deep Pinedale exploration well in May (pending approval) or August. We believe there is minimal value in Ultra shares for deep Pinedale potential, and we see this as a free option. Management recently shifted to an increasingly bullish tone, which we expect to carry through to upcoming industry conferences.
(3) Approval of Supplemental Environmental Impact Statement for Pinedale this summer. We expect that Ultra will receive federal approval this summer to accelerate Pinedale drilling. Fears of SEIS delay appear already discounted.
(4) Marcellus Shale. Ultra has 250,000 acres in northern Pennsylvania, for which we believe minimal value is in the stock.
Valuation
We see 34% upside to our $104 DCF based target price for Ultra versus 26% upside for E&Ps. We continue to rate Ultra Buy relative to our Attractive coverage view.
Key risks
Commodity volatility, drilling results, cost pressures, and government pronouncements (especially related to the SEIS). |
