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Ultra Petroleum Management Discusses Q2 2012 Results - Earnings Call Transcript

Primarily due to dramatically reduced trailing 12-month natural gas prices, we recorded a full cost ceiling test write-down of $1.1 billion net of taxes at the carrying value of our natural gas and oil properties. Oil and gas property accounting rules do not allow us to increase the carrying value of our properties when commodity prices improve. Said in another way, it's a one-way street.

As you are probably aware, the 2 primary reserve accounting standards for E&P companies are full cost and successful effort methods. Impairment tests for the successful effort methods are subjective and differ from the full cost method in 3 primary ways. First, the successful efforts impairment test is based on expected future commodity prices as opposed to trailing 12-month average pricing for full-cost companies. Second, successful efforts impairment test are valued on 3P reserves, whereas full-cost companies are limited to proved reserves alone. Finally, future cash flows are measured on an undiscounted basis for successful efforts companies, compared to future cash flows discounted 10% for full-cost companies. As a result, successful-effort companies are less susceptible for ceiling test impairments during periods of low prices.

For the quarter, our all-in costs were $3.16 per Mcf, about the midpoint of our guidance range. Our industry-low cash costs were $1.40 per Mcf, resulting in a cash flow breakeven of an impressive $1.30 per Mcfe. Our focus on low costs allows us to defend our margins even during low points of the commodity price cycle. Our net income margin was 19% and our cash flow margin was 67% for the second quarter.

Looking at our CapEx investments for the first half of 2012, we've already invested about 2/3 of this year's $825 million budget, which as a reminder, is half of our 2011 capital program. Our activity and capital spend rate will slow further as we correctly respond to the price signals. Adjusted for the expected midstream asset sale, our net CapEx for the year is $625 million. We produced 133 Bcfe in the first 6 months of 2012 with an expected 122 Bcfe combined production plan for the third and fourth quarter of 2012. Production lags capital spending, which is why we haven't seen a volume reduction on a year-over-year basis, but it is imminent not only for all throughput for the rest of the prudent natural gas producers that have cut spending. Our recent industry production data shows flat volumes, but production declines will soon be evident.

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