Ultra Petroleum's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Ultra Petroleum (UPL)

Q4 2011 Earnings Call

February 16, 2012 11:00 am ET

Executives

Michael D. Watford - Chairman, Chief Executive Officer and President

C. Bradley Johnson - Vice President of Reservoir Engineering & Development

Analysts

Andre Benjamin - Goldman Sachs Group Inc., Research Division

Subash Chandra - Jefferies & Company, Inc., Research Division

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Noel A. Parks - Ladenburg Thalmann & Co. Inc., Research Division

Brian M. Corales - Howard Weil Incorporated, Research Division

Andrew Coleman - Raymond James & Associates, Inc., Research Division

Michael Kelly - Global Hunter Securities, LLC, Research Division

Donald P. Crist - Johnson Rice & Company, L.L.C., Research Division

Raymond J. Deacon - Brean Murray, Carret & Co., LLC, Research Division

Nicholas P. Pope - Dahlman Rose & Company, LLC, Research Division

Unknown Analyst

Kevin Berents - Wells Fargo Securities, LLC, Research Division

Michael Scialla - Stifel, Nicolaus & Co., Inc., Research Division

Marshall H. Carver - Capital One Southcoast, Inc., Research Division

Harris Arch

Eli Kantor - Jefferies & Company, Inc., Research Division

Ronald E. Mills - Johnson Rice & Company, L.L.C., Research Division

Presentation

Operator

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Good day, ladies and gentlemen. Welcome to the Fourth Quarter 2011 Ultra Petroleum Corp. Earnings Conference Call. My name is Diana, and I'll be the operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the call over to your host, Mr. Mike Watford, Chairman, President and CEO. Please proceed.

Michael D. Watford

Thank you, operator. Good morning, and thank you for joining us. With me today are Mark Smith, Senior Vice President and Chief Financial Officer; Bill Picquet, Senior Vice President, Operations; and Brad Johnson, Vice President, Reservoir Engineering and Development; and Doug Selvius, Vice President, Exploration.

I need to point out that many of the comments during this conference call are forward-looking statements that involve risks and uncertainties affecting outcomes, many of which are beyond our control and are discussed in more detail in the Risk Factors and Forward-Looking Statements section of our annual and quarterly filings with the SEC. Although we believe these expectations expressed are based on reasonable assumptions, they are not guarantees of future performance, and actual results or developments may differ materially. The SEC permits oil and gas companies in their filings to disclose proved reserves, probable reserves and possible reserves. References in this call to 3P reserves include estimates from each category of reserves are forward-looking statements. Investors can find the disclosure in our 10-K and other filings with the SEC available on our website.

Also, this call may contain certain non-GAAP financial measures. Reconciliation and calculation schedules can be found on our website.

Ultra Petroleum delivered solid results for the fourth quarter and full year 2011. We achieved double-digit growth in production, cash flow and earnings, and met or exceeded all of our targets for the year. We produced 245.3 Bcfe during 2011, a new company record, to achieve a 15% growth rate year-over-year. We also had a new production high of 616 million cubic feet per day in Wyoming and 188 million cubic feet per day in Pennsylvania, and are well on our way to exceeding 200 million a day in Pennsylvania.

Reaching these production milestones was particularly significant to us, given the operating challenges in the field we have worked to overcome this year. As you know, we have experienced longer than anticipated partner delays in getting production on in the Marcellus. Additionally, in December, a compressor station fire and subsequent extended outage in Pinedale, as well as a force majeure event on the Ruby pipeline caused by a blocked valve impacted volumes by approximately 1.6 Bcfe.

In spite of these events, our fourth quarter production rose 17% above our fourth quarter 2010 volumes. Our 2011 cash flow of $6.25 per share is an increase of 26% over the prior-year period, and our earnings of $2.52 per share is a 16% increase over the full year 2010.

We are focused on our cost structure particularly in this environment, recognizing that one of the keys to remaining profitable in a cyclical business such as ours is to maintain low-cost. Ultra's cash cost for the year were $1.47 per Mcfe, and the total cash and noncash costs was $2.88 per Mcfe. These low costs helped drive our low breakeven levels and superior returns.

Our net income breakeven is now $2.82 per Mcf, with cash flow breakeven of $1.15. Ultra generated a 73% cash flow margin, a 30% net income margin, a 31% return on equity and a 13% return on capital for 2011, all outstanding metrics regardless of the industry.

Our 2011 hedged price of $5.05 per Mcf was 125% of the average Henry Hub price for the year. We are approximately 180 Bs or 70% of production hits for 2011, which substantially insulated us from declining natural gas prices throughout the year.

Henry Hub prices decreased 20% throughout 2011, yet our $4.15 per Mcfe unhedged gas price was strengthened due to narrowing base of differentials in the West and increasing production in revenue for premium price marks in the Northeast. I should add that the corporate unhedged gas price represented 103% of Henry Hub for the year.

Just quickly looking at our 2 primary assets for a moment, in Wyoming, our fourth quarter Pinedale well results were in line with expectations, and year-to-date in 2012, we are receiving a benefit of moving to better areas of the field. The first 10 wells we have brought online so far averaged 9.4 million a day, with an average EUR in excess of 4.1 Bcfe.

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