Energy Losers: Ultra Petroleum
NEW YORK (
) -- If any investor needed a reminder of how bad things are for natural gas drillers, look no further than the 2012 outlook from
Ultra Petroleum
(UPL)
.
The natural gas drilling company revised its production growth guidance down from 16% to a range of 4% to 6% for 2012, as historically low natural gas prices make incremental drilling uneconomic. Ultra will spend $650 million on development drilling in 2012, compared with $1.3 billion in 2011. Total spending will be 38% lower at $925 million in 2012.
It isn't a surprise that Ultra is curtailing some production and spending. However, the magnitude of the production growth revision caught investors by surprise. After all, Ultra Petroleum is a company that has shown production growth during the past five years of between 20% and 50% annually. "That's going over a cliff," said Morningstar analyst Mark Hanson.
Energy stock investors are slaves to production growth, and the Ultra Petroleum outlook was sobering.
It is a move supported by the economic logic linked to current pricing in the natural gas market. The last time the company provided guidance in November the price of natural gas was still near $3.50. It's fallen below $2.50 since -- as low as $2.25 -- and that is a very big difference. It's the difference between making any money and losing on every bit of (unhedged) natural gas sold.
Ultra is among the lowest cost producers among natural gas drillers, too, but guided to an average cost of drilling in the first quarter of $3 to $3.14.
Natural gas rose by 5% on Thursday, too, to $2.55.
Shares dropped by more than 6% on heavy volume on Thursday.
Energy Stock Favorites of Hedge Fund Investors
Ultra had rallied into earnings, climbing from just above $23 to close to $26 in the past five days, so the air has been let out of that recent rally. One reason for the resurgence was that Ultra shares have been so pummeled in the past year, down 51%. The share decline hasn't changed the basic Ultra story -- either the pros or the cons -- even with the stock hitting a new 52-week low of $22.85 on Thursday.
As a financial manager, Ultra is doing the right thing by not sinking money into production that isn't economic.
"They won't borrow to essentially keep production up and that's what you want to see... It's watching over shareholders money," said Morningstar analyst Mark Hanson. "Returns are terrible now," the analyst said.
Saying that Ultra is being financially prudent relative to its balance sheet is a fair argument to make, and RBC Capital Markets analyst Leo Mariani agreed that outspending cash flow and ramping up debt doesn't make sense. Yet even giving the company credit for balance sheet management, the reaction to the announcement was simple: Wall Street does not like the cutting of production estimates.
"It's fiscally prudent, but
E&P investors are growth investors, and if there is no growth, they are not interested," Mariani said, who added that he expected a production guidance cut, but of less than 5%.
Ultra, unlike many companies in the E&P space that are making the transition to liquids exploration and production, remains a true natural gas story. Contrast Ultra with
Comstock Resources
(CRK) - Get Report
, a natural gas heavy E&P with a worse balance sheet. Comstock has targeted a 92% dedication of its budget to oil drilling in 2012, and its shares are down 40% since last year, but the stock has risen since its recent earnings call, even if the jury is still out on whether it can meet its production goals in the transition to liquids exploration and production in the "hot" Permian basin.
Energy Stock Favorites of Hedge Fund Investors
For Ultra, the only bullish case is as a
long-term bet on recovery in natural gas prices.
RBC's Mariani says the big catalyst for Ultra would be a rebound in natural gas pricing next year, but that won't get many investors interested today.
"You have an asset in the ground that can be extracted at different points over time and the price you get for production will vary. It's always a question of timing," Hanson said.
Indeed, time is not on Ultra's side, at least, not in a sector like energy where investors are looking at their watch as opposed to the annual calendar.
-- Written by Eric Rosenbaum from New York.
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