Ultra Petroleum Q3 2010 Earnings Call Transcript

Ultra Petroleum (UPL)

Q3 2010 Earnings Call

November 04, 2010 11:00 am ET

Executives

Michael Watford - Chairman, Chief Executive Officer and President

Kelly Whitley - Investor Relations Manager

William Picquet - Vice President of Operations and Vice President of Operations for Rocky Mountains

Douglas Selvius -

Brad Johnson -

Marshal Smith - Chief Financial Officer

Analysts

Brian Singer - Goldman Sachs Group Inc.

Subash Chandra - Jefferies & Company, Inc.

David Tameron - Wells Fargo Securities, LLC

Marshall Carver - Capital One Southcoast, Inc.

David Heikkinen - Tudor, Pickering & Co. Securities, Inc.

Noel Parks - Ladenburg Thalmann & Co. Inc.

Nicholas Pope - Dahlman Rose & Company, LLC

Presentation

Operator

Compare to:
Previous Statements by UPL
» Ultra Petroleum Q2 2010 Earnings Call Transcript
» Ultra Petroleum Q1 2010 Earnings Call Transcript
» Ultra Petroleum Corp. Q4 2009 Earnings Call Transcript

Good day, ladies and gentlemen. Thank you very much for your patience, and welcome to the Third Quarter 2010 Ultra Petroleum Corporation Earnings Conference Call. My name is Bill, and I will be your conference coordinator for today. [Operator Instructions] I would like to turn the call over to our host for today's conference, Ms. Kelly Whitley, Manager of Investor Relations. Please proceed, ma'am.

Kelly Whitley

Thank you, Bill. Good morning, ladies and gentlemen. Welcome to Ultra Petroleum's Third Quarter 2010 Earnings Conference Call. On the call with me this morning to discuss our third quarter results are Mike Watford, Chairman, President and Chief Executive Officer; Mark Smith, Chief Financial Officer; Bill Picquet, Vice President, Operations; Brad Johnson, Director, Reservoir Engineering; and new to the Ultra team, Doug Selvius, Director, Exploration.

Before turning the call over to Mike, I'd like to cover a few administrative items. First, earlier this morning, we filed our 10-Q with the SEC. It is available on our website or you can access it using the SEC's Edgar System.

In addition, this call will contain forward-looking statements that involve risk factors and uncertainties detailed in our SEC filings. Please refer to our 10-Q regarding the selected financial information provided in this call. Also, this call may contain certain non-GAAP financial measures. Reconciliations and calculation schedules for the non-GAAP financial measures are also on our website.

Second, Ultra will be participating in several conferences over the next few weeks. We will be at the Jefferies Energy Conference in Houston on December 1, Capital Line Energy Conference in New Orleans on December 7, and Wells Energy Conference in New York on December 8. Please visit our website for updated webcast. Now let me turn call over to Mike.

Michael Watford

Thank you, Kelly. Good morning. Joining me today is a little larger contingent of the Ultra team to share more of our management depth with you. These are interesting times with the current investment view towards natural gas producers, one would think there's no money to be made in the business. No margins, no profits and no returns. And for 95% of our competitors, that is probably true. In times like this, we are reminded of our differences. Primary one being that we've always focused on returns first and growth second. Because of that and our mix of assets and people, we make money throughout the commodity price cycle. In fact, for the third quarter of 2010, Ultra Petroleum's earnings actually increased when compared to the third quarter of 2009. Earnings are also up on a sequential basis over the second quarter of 2010, and are up again for the nine-month period in 2010 versus 2009. A trifecta. It's the same for cash flow, up for all three of the comparable time periods. And yes, Ultra Petroleum is still highly profitable with a net income margin for the quarter of 33% and cash flow margins of 71%. Our return on equity was 42% and return on capital, 17%. Yes I know, we're the only company that talks about margins and returns before production. Such is our focus. The third quarter of 2010, we increased our production over the third quarter of 2009 establishing a new record. And we also increased it sequentially over the second quarter of 2010. And again, on a nine-month basis grew production over 2009 similar time period, consistent and sustainable growth. Surprisingly for many, our unhedged natural gas price realization for the third quarter 2010 was up over 30% when compared to 2009, and up almost 40% in the year-to-date comparisons.

We still enjoy the lowest cost in the business. We don't mask any gathering of transportation costs in a midstream segment. Natural gas price that Ultra needs to receive to break even on a corporate net income level is $2.39 in Mcf. That's not a field level or well level but on a fully loaded all in corporate cost level. That's why our margins and returns of $5 gas, equal or exceed other companies of $75 to $80 oil. We're just different. Our cash flow breakeven natural gas price is as you would expect a much lower $1.11 per Mcf.

I think we are alone in our industry in sharing these basic financial metrics. But we want to provide clarity that our individual project returns translate directly to our corporate returns, and we believe margins matter.

On the operating side, our tight gas development project in Wyoming continues to impress with improving efficiencies and increased productivity. We will participate in over 230 wells in our 2010 with an additional 5,400 to drill in the coming years. Our shale gas opportunity in Pennsylvania is in a different place. We are in our first full calendar year of assessment with numerous evaluations occurring across the 470,000 gross acres. We are very positive with early time results and realized we lack the depth of data we are accustomed to in our Wyoming project area. We also take note of that billions of dollars sent and committed by Shell and Mitsui to build a position consistent with Ultra's, welcome them as our partners in our mutual goal of long-term value creation. To that, we see an expanding inventory of future drilling locations, well in excess of 5,100 wells to be drilled in a joint acreage. We're trying to participate in 115 horizontal wells in 2010. On the debt side, we continue to be underlevered. Only 100% of our corporate debt is fixed rate long term at very attractive rates. I think we are rather well positioned and very mindful of where we are in the business cycle. Mark, you want to talk about the finances?

Read the rest of this transcript for free on seekingalpha.com