Ultra Petroleum (UPL)

Q2 2010 Earnings Call

July 30, 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

Marshal Smith - Chief Financial Officer

Analysts

Brian Singer - Goldman Sachs Group Inc.

TJ Schultz - RBC Capital Markets

Ronald Mills - Johnson Rice & Company, L.L.C.

Subash Chandra - Jefferies & Company, Inc.

Raymond Deacon - Pritchard Capital Partners, LLC

Brian Corales - Howard Weil Incorporated

Noel Parks - Ladenburg Thalmann & Company

David Tameron - Wells Fargo Securities, LLC

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

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

Joseph Allman - JP Morgan Chase & Co

Michael Bodino - Global Hunter Securities, LLC

Nicholas Pope - Dahlman Rose & Company, LLC

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Quarter Two 2010 Ultra Petroleum Corp. Conference Call. My name is Jeff, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Ms. Kelly Whitley, Manager of Investor Relations. Please proceed.

Kelly Whitley

Thank you, Jeff. Good morning, ladies and gentlemen. Welcome to Ultra Petroleum's Second Quarter 2010 Earnings Conference Call. On the call with me this morning to discuss our second quarter results and our continued strategy of profitable growth are Mike Watford, Chairman, President and Chief Executive Officer; Mark Smith, Chief Financial Officer; and Bill Picquet, Vice President, Operations.

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 risks 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. Reconciliation and calculation schedules for the non-GAAP financial measures can be found on our website also.

Second, Ultra will be participating in several conferences over the next few weeks. We will be at the Tudor, Pickering, Holt Energy Conference in Houston on August 11, EnerCom in Denver on August 24, Raymond James North American Equities Conference in London on September 15 and Barclays Energy Conference in New York, also on September 15. Please visit our website to review updated presentations and webcast.

Now let me turn the call over to Mike.

Michael Watford

Thank you, Kelly, and welcome back. Good morning. Joining me today on our conference call is Mark Smith, who will update us on the financial affairs; and Bill Picquet, who will take care of the operating issues for us.

Ultra Petroleum continued its consistency of profitability and growth through the first half of 2010. We established new production records for both the six-month period and the second quarter of 2010. Cash flow and adjusted earnings for both periods increased when compared to year-ago values. And most importantly, we delivered exceptional returns with a year-to-date return on equity of 44% and 19% return on capital.

We continue to execute on the profitable growth strategy and by that, we mean, we make money first and we grow second. We maintained our low cost and enjoyed increasing unhedged natural gas prices. We continue to gain operationally in Wyoming with the results of lower well costs. In Pennsylvania, we are gaining traction with early time production volumes on target and clear visibility on the second half production ramp up.

Now let me ask Mark to share the financial comments.

Marshal Smith

Thank you, Mike, and good morning. As you've seen from our press release, we had another very good quarter operationally with record production, continuing improvement in drilling efficiencies and reduced costs. Ultra's realized corporate natural gas price before the effective hedges was up significantly year-over-year as well as sequentially.

As we've previously discussed, a very positive impacts of REX-East and a 1.8 Bcf per day of increased takeaway capacity out of the Rockies. The quarter Opal first-of-month price has averaged 89% of Henry Hub. Further, Ultra's corporate realized gas price before hedges for the quarter was equal to the average Henry Hub price for the period.

From a financial perspective, we continue to be very well positioned. As of June 30, we had $8.3 million of cash and cash equivalents on hand and just under $1.2 billion in outstanding senior debt. Our total debt capacity is in excess of $2.5 billion, providing us with over $1.3 billion in unused senior debt capacity. I believe, most importantly, we again demonstrated strong organic growth, while generating industry-leading returns.

For the second quarter, our Wyoming production was up 18% on a comparable year-over-year basis to a record 52.4 Bcfe. Once again, our quarterly production was an all-time high for the company. You'll hear more about this from Bill in a minute.

Natural gas prices, excluding the effect of hedging for the second quarter, were $4.09 per Mcfe, an increase of 51% over prior-year level. This was due primarily to the completion of the REX-East Pipeline segment last year. Condensate prices registered $67.64 per barrel for the quarter, largely as a result of our increased production levels. Revenues for the quarter, including effects of our hedges, measured $266 million.

Corporate lease operating expenses for the quarter increased year-over-year to $0.89 per Mcfe as a result of higher severance and production taxes due to higher commodity prices. This was partially offset by reductions in our unit operating costs and gathering expenses.

Looking at our cash costs in Wyoming, excluding severance taxes or our field level costs, it decreased 6% year-over-year on a unit basis to $0.46 per Mcfe. Our transportation costs, which represent our charges in association with [ph] REX amounted to $16.5 million this quarter or $0.32 per Mcfe on our total production volumes. Our DD&A rate for the quarter registered $1.08 per Mcfe. General and administrative expenses decreased on a unit basis year-over-year to $0.12 per Mcfe, while interest costs were flat at $0.22 per Mcfe.

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