All,
What follows is a five-page interview between Michael Watford, Ultra's CEO, and David Pescod, editor of the Canadian newsletter Late Edition, from mid-July. I think you will find it very interesting (NOTE -- The Pinedale Record of Decision WAS signed on July 27 and is now in effect):
<<"This is Mike Watford with Ultra Petroleum. David has been kind enough to ask me a few questions, and I’ll just read the questions and answer them.
1. While you’ve made the tough decisions of having to sell assets to pay debt and lay off 80% of the team, you have been helped by the price of natural gas. Are you bullish on natural gas prices, as most Analysts are? Could the coal bed methane that is coming from your area of the world (Wyoming) affect natural gas prices?
Am I bullish on natural gas prices? Yes, I am. I think that rarely do you have the high oil and natural gas prices. Certainly, this is one of those opportunities. But more importantly, I think there’s a clear disconnect between natural gas prices and oil prices right now, and that’s caused by the increased demand for electricity in North America.
All of the new plants being built are natural gas fired. So it’s not a question of whether fuel oil or coal or something else will displace that demand because all new capacity is fueled by natural gas. I think you’re going to see increased demand for natural gas for the electric industry, and that’s what’s driving this. Also, in the U.S. you’ve had an increase in gas supply originating from the shallow waters of the Gulf of Mexico. Well, that supply is declining rapidly, probably not to be replaced. Early on there was thought that the deep Gulf would replace it – that’s not going to happen because it’s largely oil. A lot of oil is going to be produced there, but not gas. So I think many of the onshore fields in the U.S., especially the Rocky Mountain areas that have been under-explored and under-exploited are going to have their day now, and you’re going to see robust gas prices for a handful of years. And, certainly, the additional supplies that come on, whether they’re from the tight gas formations we have in southwestern Wyoming, or whether they’re from the coal bed methane players, are going to temper gas prices. But I think you’re going to see all that gas supply used on the demand side.
2. The Jonah field has received the O.K. for infill drilling, giving Ultra 22 locations. We hear that at least 15 of those 22 should be gimmes. Any comments?
Yes. Clearly, I think these are all proved undeveloped locations, as identified by Netherland and Sewell, our 3rd party reservoir engineering firm. I think that probably 18 of the 22 locations are very low risk. The other 4, it’s a question of where the actual fault is, and we’re working on trying to get access to the 3-D in the Jonah area to get a handle on that. But I think that for at least 18 of these wells we’ll be shooting fish in the barrel, as they say.
3. Ultra’s pizzaz is still its huge land holdings. Which of the areas do you feel most confident on, and how many wells could you see down the road if you were allowed to arm wave?
Well, I don’t think I’m going to arm wave. But certainly right now Netherland and Sewell has given us over 100 probable locations. Basically those are just some offsets to the handful of producing wells up and down the anticline. Most of the anticline has not been explored, let alone developed. And if you compare the anticline to Jonah and go back three years in Jonah, there were just about 30 wells, 40 million cu. Ft. a day of production, and growing activity. Their EIS and Record of Decision was just being finalized. Shortly thereafter the activity took off, and now you have probably 170 wells in Jonah, and over 300 million cu. Ft. per day of production. It’s a three TCF field. Well, the same thing is just happening in the anticline now. You have the Pinedale EIS and Record of Decision which we’ve been told is scheduled to be signed July 27th, and then you’ll see a great deal of drilling activity occur on the anticline (much as occurred in Jonah), and you’ll see the level of knowledge increase as we clearly identify the sweet spots. And much like in Jonah where there were clearly sweet spots, and the right side of the fault to drill on, and the wrong side to drill on, we’re going to go through that on the anticline, but I think ultimately we’ll have 2 or 3 other Jonah-sized fields.
4. Some people have suggested that some of your joint ventures are very much dependent on the plans of Questar and Anschutz. Any thoughts?
We have partners up and down the anticline, and Questar and Anschutz are our partners on the northern part of the anticline, but that’s also the part where we had to sell down some interest to help turn around the company last year, and where our net interest is anywhere from 21% to probably 33%. And, yes, the activity there is dependent upon those folks moving forward. And right now, Questar, in particular, is very aggressive because it’s one of the few growth areas they have in their gas resource base. But we have a much larger working interest – 64% to 85% - in the southern part of the Pinedale Anticline where our partners are Western and McMurry oil. McMurry sold their Jonah assets to AEC, but the McMurry folks are bright and they retained their Pinedale assets. I’m sure they plan to participate in several more Jonah-size fields. What’s going to happen on the southern part where we have more working interest and where we think there may even be more productivity, is that we are going to be able to have a much larger say in what happens there, and because of our large working interest we’ll benefit more.
5. You’ve currently changed from being a Canadian company based in the Yukon to an American company based in Delaware. That should attract more American shareholders down the road. Do you see that situation, and do we see an American listing any time soon?
We went out and asked our shareholders to provide us with approval to become a U.S. company, and they did. But what happened was our stock price increased rapidly with natural gas prices moving up – to where, in order for us to leave Canada and move to the U.S. we would incur a large tax liability. Canadian taxing authorities treat the move as an asset sale, so the value of the business at the time that the move takes place needs to be less than your taxable basis or else there’s a taxable gain. Prior to the run up in gas prices the market value of our company and the PV-10 of our reserves was less than what our tax basis was in Canada so we could leave without paying a tax. Once the run up occurred in early May, and we weren’t able to get shareholder approval until the first week in June, than it essentially precluded us from making the move without having to pay a large amount of taxes to the Canadian authorities, and it’s just not worth it. Since all our assets are in the U.S., we thought it would make more sense to be a U.S. company, and that way in the long term we wouldn’t have to comply with both the Canadian and U.S. security regulations. But we’re not going to pay millions of dollars in taxes to do that, so for the time being we’re going to remain a Canadian company.
6. You’ve suggested that, in accordance with SEC regulation S-X, using US$3.90 gas prices, that the present value of Ultra’s proved reserves are roughly (on a Canadian per share basis) US$2.48/share or CDN$3.70/share. And if you want to look at 2P proved plus probable, it increases the per share value to US$4.54/share or CDN$6.78/share. Are these kind of stock prices one could forecast down the road with any comfort.
Absolutely. I think that’s the reason that we shared these numbers in a press release – to try to provide some guidance as to where we think the stock price of this company should trade and will trade in a short period of time. We’re a company that has very little production at this point in time, very little cash flow and earnings, but a great deal of net asset value, or value in terms of roved reserves. And we are in the process now, with the drilling that started in Jonah here in late June, of turning those reserves into production, cash flow and earnings. The PV-10 value on proved reserves at gas prices which are less than today’s was CDN$3.70/share and we wanted to establish a floor price because we should sell at a premium to net asset value with all of our upside. The CDN$6.78/share proved plus probable value is a guidepost to where we are headed over the next year to 18 months. Another way of providing direction on value would be to share where cash flow and earnings are heading. But since we’re going from miniscule earnings and cash flow last year to very significant numbers this year and next, it’s hard for anyone to forecast where we’re going. It’s not like we’re a firm that’s had a fair amount of production for an extended period of time, and we talk about a 10% production increase that’s easy to model. Yet we’re talking about 3 and 4 fold increases in production over the next six months. So we’re looking at going from zero cash flow, zero earnings, in calendar 99 to approximately $12 million (U.S.) to $14 million of cash flow in calendar year 2000, and double that in calendar year 2001 just from the 26 wells we have scheduled on this year’s drilling program that we’ve already initiated drilling on. So I think we have significant production increases and outstanding cash flow and earnings just around the corner.
7. With Alberta Energy Corporation buying out the McMurry family business, it certainly brought attention back to the Green River plays. There are still rumors that Alberta Energy is looking for further acquisitions in the area, and that Ultra may be on the menu.
I’ve heard those rumors. Alberta Energy has not contacted me, so I can’t tell you whether they are interested or not. They certainly have our phone number, because they went through the data room in April of last year when we were selling down the half interest in the three townships, or 8% of our net acreage in order to be able to raise enough funds to pay off debt and get some working capital to move forward. So they came through the data room, they’re familiar with what we have, I think they have plenty to chew on now with the McMurry assets, and when they’re ready I’m sure they’ll give us a call. And we’d be glad to talk to them.
8. One of the other rumors going around is that Ultra Holdings, who owns roughly 13 million shares of Ultra, may have an agenda of their own. Anything you could make a comment on there?
Ultra Holdings is a company that on a fully diluted basis has over 14 million shares outstanding, if I remember right. They own about 13 million shares of Ultra. That’s their only asset, I believe. They are our largest single shareholder. I think their goals and ours are aligned, and that we’re trying to increase shareholder value. If they have some other agenda besides increasing shareholder value, I don’t know what it is. Perhaps you should just visit with them.
9. As we go into the winter, will you be able to drill this year throughout the winter season? This is something that hasn’t occurred lately.
Yes, we will be able to, because in Jonah you can drill year ‘round, and in the southern part of the Pinedale Anticline you can drill year ‘round. The northern part, or from the midpoint up, you can’t drill on the Pinedale Anticline because of some winter big game restrictions. And last year, because of the restrictions while the EIS and Record of Decision were underway, we had to drill mile and a half offsets – it just didn’t make sense to drill many locations. Now you can drill closer to existing wells and benefit from the recent 3-D’s.
10. We’ve left question #10 open for you to come up with something – hopefully on Mesa or the EIS report.
I think a fair question would be "When are we going to be able to start drilling on the anticline, and why is that important?"
It’s important because that’s where the majority of Ultra’s assets are. I mean, Ultra is a company much like McMurry Oil, but it’s 3 or 4 years behind them. Most of McMurry Oil’s ownership or land position was in Jonah, and they’ve done a great job in 3 or 4 years of developing that and then optimizing and selling it. We are much like Jonah except that most of our ownership is on the anticline. We are the single largest landowner on the anticline, and we own a small piece of Jonah. So our plans are to take the knowledge gained in Jonah where we have a small ownership and apply that on the anticline where we have a very large ownership. And with that in mind, we participated in a 3-D on the northern part of the anticline last January that we finally received in early march. And we just last week signed a deal with Veritas to acquire the 3-D they shot on the southern part of the anticline, that only BP Amoco and McMurry have. So now we have a 3-D on the complete anticline, which is the primary tool that helped in deciding where to drill the wells in Jonah.
The Pinedale Anticline Record of Decision (ROD) is to be signed on July 27th, 2000 allowing 700 locations to be drilled on the anticline. We expect to start drilling with our partners in early August.
The fun is about to start.>>
Gerry Atwater |
