Ultra Petroleum (UPL): Raised production guidance seems low;deep test a summer catalyst - Goldman Sachs - May 07, 2008
News
Ultra reported 1Q 2008 EPS of $0.64 versus First Call consensus estimate of $0.59 and our estimate of $0.63. Production was 374 MMcfe/d versus our estimate of 369 MMcfe/d. Operating cash flow was $201 million, above our estimate of $187 million. Management raised its production guidance for full-year 2008, 2009 and 2010 to 142.5 Bcfe from 137.5 Bcfe, 187.5 Bcfe from 172.5 Bcfe and 212.5 Bcfe from 202.5 Bcfe, respectively.
Analysis
We believe Ultra’s strong quarter and raised production guidance are positive, although we continue to believe guidance is conservative, especially considering recent results from delineation drilling in Pinedale. We are assuming 146 Bcfe for 2008 (28% organic growth), above the top end of company guidance range. We believe further upward guidance revisions for 2008 and beyond are likely, especially if the Supplemental Environmental Impact Statement is approved that would allow for production acceleration in 2009. Regulatory permission that allows for Ultra to begin completing its deep Pinedale Anticline exploration well is positive, and we expect results likely around the 2Q 2008 conference call.
Implications
We continue to rate Ultra Buy relative to our Attractive coverage view. While Ultra shares trade at a premium to peers on an EV/debt-adjusted cash flow basis, that premium has narrowed and is expected to continue to narrow due to a superior combination of production growth, returns and free cash flow. We believe Ultra shares afford little to no value to deep Pinedale exploration potential as well as any potential from the company’s Marcellus Shale acreage in Pennsylvania. We see 32% upside to a $118 12-month discounted cash flow based target price versus 25% upside for E&P stocks. Key risks include commodity price volatility, drilling results, cost pressures and government pronouncements. |
