Bull
Nice write-up on UPR in Barron's On-line...
Their concentration on debt reduction would seem to make another play for PZE unlikely..
May 25, 1999
Bulls Expect UPR's Stock to Rise as Debt Falls
By Vito J. Racanelli
Union Pacific Resources has taken a lot of lumps over the past year.
With the collapse in energy prices last year, shares of this large, independent oil and gas
producer slumped badly. But UPR stock fell much harder than its peers did because of
its high debt level, the result of a $2.6-billion cash purchase of Canada's Norcen Energy
in March 1998.
Its timing could not have been worse: UPR was saddled with an
86% debt-to-capitalization ratio just as commodity prices began
their slide to levels not seen in decades. The stock plummeted, too,
to the single digits from over 20 a year ago.
UPR stock hasn't participated much in the group's recent recovery, either. Though it has
rebounded from its low, at Tuesday's closing price of 14 3/16, it remains some 30% off its
52-week high of 21 and more than 50% off its all-time high of 31 -- a much bigger
discount than some of its peers get.
But the tide may be turning for Union Pacific Resources.
Lately, some analysts and investors say the fallout from the Norcen deal is obscuring
some good news for the company -- changes that some bulls say could propel UPR
stock 30%-50% higher over the next year or so, once investors take notice.
First and foremost, the company is whittling down its debt to more manageable levels.
But UPR is also hard at work cutting oil and gas finding costs sharply, which should
boost earnings faster than the Street expects. That could help extend its streak of three
consecutive quarterly upside earnings surprises.
The bulls also say higher energy prices are sustainable, and they have been raising their
estimates on UPR's earnings and cash flow for this year and next. The price recovery
makes UPR's financial leverage far less of a concern than it was a year go, they maintain.
That's why Wall Street has turned more favorable on UPR in recent months. Merrill
Lynch and Bear Stearns, for example, have raised their ratings to Long- Term Buy and
Attractive, respectively. Meanwhile, Credit Suisse First Boston initiated coverge, and
Morgan Stanley Dean Witter and Salomon Smith Barney have increased their price
targets and cash flow estimates for UPR.
Improved debt reduction and the company's strict financial discipline should finally get
UPR out of Wall Street's "penalty box," and allow investors to focus on its "great
assets," says Paul Korus, an analyst at Denver, CO energy investment boutique Petrie,
Parkman & Co.
The company's first-quarter sale of UPFuels,
a gas gatherer and marketer, for $1.35 billion,
is a big step forward, says Thomas Driscoll,
an analyst at Salomon Smith Barney. That
sale cut UPR's long-term debt to $3.1 billion
at the end of the first quarter, from $4.6 billion
at year end 1998. It also reduced its long-term
debt to about 76% of total capitalization.
And debt reduction doesn't end there,
Driscoll notes. As energy prices stabilize at
higher levels, UPR could pay down up to
another $800 million in debt over the next two
years, he estimates. That would cut its
debt-to-capital ratio to the 60% area, which
would cause Driscoll to boost his current target price of 22 ½ to as high as 25.
Meanwhile, the company has had some good results on the drilling front: A recent gas
discovery in the Green River Basin of Wyoming "yielded very encouraging results,"
says Korus. The data is very preliminary, but he suggests that UPR could eventually net
some 1 trillion to 5 trillion cubic feet (tcf) of gas there -- compared with total proved
reserves of 6.1 trillion cubic feet equivalent (tcfe). (Tcfe includes the energy in all forms
of hydrocarbon reserves expressed as gas reserves.)
And its costs of finding those reserves have been lower than expected. In a recent
report, Merrill Lynch analyst John Herrlin noted that now the "worst-case finding costs
for 1999 should be 90 cents [per million cubic feet equivalent](Mcfe), well below last
year's average of $1.26 and UPR's seven-year average of $1.08." Herrlin recently raised
his long-term rating on UPR stock to Buy from Accumulate.
Given all this, higher energy prices are gravy for UPR.
Harris Kaplan, president of Eastgate Management, says that with gas drilling and
production down significantly over the last 12 months and the U.S. economy expanding
briskly, the balance will tighten. That could boost gas prices to as high as $3.00 per
million cubic feet (mcf) this winter from about $2.20 now, he says. And UPR "has got a
bunch of good properties," he adds.
As investors become more confident in higher energy prices and management's
commitment to repaying debt, UPR's share price should bounce back as much as -- or
even more than -- it fell, predicts Mark Baskir, who runs the Strong Limited Resources
Fund.
"UPR isn't [just] a gas play, but a recovery-of-the-walking-wounded play," he muses.
UPR stock, which once sold at or just above the industry's multiple, now trades at a
considerable discount to its peer group. UPR trades at roughly five times year 2000
EBITDA estimates of analysts we contacted, while the group trades at over six times
EBITDA. (EBITDA represents earnings before interest, taxes, depreciation and
amortization.)
Citing UPR's deep discount to its peer group, both Kaplan and Baskir have been buying
more shares this spring, "The value is there," says Kaplan, whose price target on the
stock is 22.
No doubt UPR has paid dearly for its ill-timed purchase of Norcen. But as energy prices
hold firm and the company continues to pay down debt and cuts costs, investors might
begin to focus on UPR's brighter future and forget its checkered past.
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