Ultra Petroleum (UPL)

Q2 2012 Earnings Call

August 02, 2012 11:00 am ET


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

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

Marshal D. Smith - Chief Financial Officer and Senior Vice President


Brian Singer - Goldman Sachs Group Inc., Research Division

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

David R. Tameron - Wells Fargo Securities, LLC, Research Division

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

Mark P. Hanson - Morningstar Inc., Research Division

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

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

Hubert Van der Heijden - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Robert L. Christensen - The Buckingham Research Group Incorporated



Good day, ladies and gentlemen, and welcome to the Second Quarter Ultra Petroleum Corp. Earnings Conference Call. My name is Lacey, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Mike Watford, Chairman, President and Chief Executive Officer. Please proceed.

Michael D. Watford

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

I'd like 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 the actual results or developments may differ materially.

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

Let me start my comments this morning by picking up where I left off last quarter. I shared a view where I thought that natural gas prices have bottomed, that production was flattening, that natural gas rigs would continue to decline and a correction in pricing was imminent. We were limiting our investments with reductions in capital while preserving our valuable long-life assets. We also anticipate a noncash accounting directed ceiling test write-down caused by unsustainably low natural gas prices. This write-down muddies our financial statement presentation going forward, but has no lasting impact on the health of our business. Today, that view expressed 3 months ago appears fairly accurate.

Now let me summarize our financial performance for the quarter. We produced 65.1 Bcfe, just above our quarterly guidance range with strong well performance and better runtimes offsetting planned reduced completions in Wyoming and a slower partner activity pace in Pennsylvania. Our hedged natural gas price for the quarter was $4.04 per Mcf. On an unhedged basis, our realized price was $2.23 per Mcf, down 49% year-over-year. We've hedged 103 Bcfe, representing over 80% of our remaining 2012 production at a weighted-average price of $4.31 per MMBtu. We generated $190.6 million in cash flow or $1.25 per diluted share and $55.1 million or $0.36 per diluted share and adjusted net income during the second quarter.

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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