January 21, 2015 Ultra Petroleum Corp. Current Recommendation Prior Recommendation Neutral Date of Last Change 11/16/2014 Current Price (01/20/15) $13.57 Target Price $12.00 SUMMARY DATA UNDERPERFORM 52-Week High $30.60 52-Week Low $11.69 One-Year Return (%) -35.99 Beta 1.17 Average Daily Volume (sh) 2,369,584 Shares Outstanding (mil) 153 Market Capitalization ($mil) $2,079 Short Interest Ratio (days) 10.45 Institutional Ownership (%) 94 Insider Ownership (%) 3 Annual Cash Dividend $0.00 Dividend Yield (%) 0.00 5-Yr. Historical Growth Rates Sales (%) 4.0 Earnings Per Share (%) -2.1 Dividend (%) N/A using TTM EPS 5.8 using 2015 Estimate 7.9 using 2016 Estimate 7.9 Zacks Rank *: Short Term 1 3 months outlook 5 Strong Sell * Definition / Disclosure on last page SUMMARY Risk Level * (UPL-NYSE) Concerned by the current demand-supply imbalance for natural gas, we are maintaining our Underperform recommendation on Ultra Petroleum shares. While natural gas output keeps setting monthly records on a regular basis, the commodity s demand has failed to keep pace. This translates into a bearish near- to medium-term outlook for natural gas-weighted companies like Ultra. We also remain worried over UPL s ever increasing balance sheet leverage and low hedge percentage. Finally, the company lacks geographic diversification, which somewhat hampers its competitive positioning. Therefore, we expect Ultra to perform below its peers and industry levels in the coming months. We believe there are other companies in the natural gas E&P group that offer better exposure to the sector. Above Avg., Type of Stock Mid-Growth Industry Oil-Us Exp&Prod Zacks Industry Rank * 243 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 226 A 261 A 221 A 225 A 933 A 2014 326 A 296 A 289 A 294 E 1,205 E 2015 297 E 295 E 304E 339 E 1,235 E 2016 1,461 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.38 A $0.47 A $0.37 A $0.42 A $1.64 A 2014 $0.87 A $0.52 A $0.53 A $0.53 E $2.45 E 2015 $0.36 E $0.31 E $0.33 E $0.72 E $1.72 E 2016 $1.71 E Projected EPS Growth - Next 5 Years % 13 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Houston, Texas-based Ultra Petroleum Corp. (UPL) is an independent energy firm engaged in the acquisition, development, exploration and production of oil and gas properties. The company s operations are focused on the Green River Basin of southwest Wyoming, mainly covering the Pinedale and the Jonah fields. Ultra also holds impressive acreage in the north-central Pennsylvania area of the Appalachian Basin and the Uinta Basin in northeast Utah. As of year-end 2013, Ultra Petroleum had 3.61 trillion cubic feet equivalent (Tcfe) in proved reserves, of which more than 94% was natural gas and about 53% was developed. Production averaged 232.1 Bcfe during 2013, comprising 97% gas and 3% crude oil/ liquid hydrocarbons. REASONS TO SELL Ultra Petroleum currently generates substantially all of its revenue, earnings and cash flow from the production and sale of natural gas and oil from its Pinedale and Jonah fields in Wyoming. Consequently, any significant downtime related to pipelines or processing plants in the region could adversely affect the company s results. Ultra Petroleum s high natural gas exposure raises its sensitivity to gas price fluctuations, compared to its more-diversified independent peers with higher oil production. The company, which derives around 95% of its reserves/production from natural gas, has seen its sales and income fluctuate wildly in recent quarters on the back of sharp volatility in gas prices. A significant portion of Ultra Petroleum s production growth in the last few years has come from asset acquisitions, exposing it to acquisition-related risks. The company may find it difficult to complete accretive transactions in the future, which may negatively impact its growth rate. Ultra Petroleum s operations are conducted primarily in the Rocky Mountain region of the U.S (specifically southwest Wyoming). The weather in this area can be extreme and can cause interruption in the company s exploration and production operations. We remain concerned about Ultra Petroleum s balance sheet, which continues to get heavier. With the latest acquisition being debt financed, the company expects to end the year with net debt of around $3.4 billion, clearly on the higher side. Coupled with Ultra Petroleum s light hedge position, the company becomes vulnerable to near-term commodity-price fluctuation. RISKS Ultra Petroleum s results are heavily levered to changes in the overall energy price environment, which are inherently volatile and subject to complex market forces. Realized prices could differ significantly from our estimates, thereby affecting the company s revenues, earnings and cash flows. This may present a potential risk to our recommendation. The overall picture for natural gas remains gloomy, with production setting monthly records on a regular basis, while the commodity s demand has failed to keep pace with this rapid supply surge. This growing demand supply imbalance pressurizes price. However, a quicker-than-expected rebound in gas prices will adversely affect our recommendation. Equity Research UPL Page 2
In the scenario that exploration and production spending rebounds at a faster rate than our expectation, it will positively impact Ultra Petroleum s cash flows and earnings. Our recommendation will most likely underperform in such an environment. RECENT NEWS Third Quarter 2014 Results On Oct 30, 2014, Ultra Petroleum reported stellar third-quarter 2014 results on Oct 30 on the back of higher production and improved natural gas realizations. The company reported adjusted earnings of $0.53 per share, surpassing the Zacks Consensus Estimate of $0.51 per share. The bottom line was also substantially higher than the year-ago quarter adjusted earnings of $0.37. Total operating revenue of $288.6 million not only beat the Zacks Consensus Estimate of $273 million but was also higher than the third-quarter 2013 level of $221.2 million. Production Production during the reported quarter increased year over year to 62.6 billion cubic feet equivalent (Bcfe) from 57.5 Bcfe. Natural gas volumes accounting for approximately 91.1% of the total increased 2.3% to about 57 Bcf. Oil production rose to 927,320 barrels in the reported quarter from 297,329 barrels a year ago. Realized Prices Ultra Petroleum's average realized price on natural gas (excluding commodity derivatives realized gain or loss) increased over 8% to $3.72 per thousand cubic feet (Mcf). However, the average oil price for the reported quarter was $82.77 per barrel, substantially lower than the third-quarter 2013 figure of $100.06 per barrel. Costs, Expenses & Margins Total lease operating costs increased over 29% from the prior-year quarter to approximately $67.1 million. Ultra Petroleum reported all-in costs of $3.18 per Mcfe, 13.6% higher than the comparable quarter last year. Total operating expenses came in at $169.7 million, reflecting a 24.4% increase from $136.4 million in the year-ago period. Ultra Petroleum s adjusted operating cash flow margin came in at 57%, compared with 54% in the yearago quarter. Moreover, adjusted net income margin improved to 29% from 26% in the year-ago quarter. Balance Sheet As of Sep 30, 2014, the company had cash and cash equivalents of $1.4 million and long-term debt of $3.4 billion. Equity Research UPL Page 3
Guidance Ultra Petroleum anticipates production of 68.8 71.8 Bcfe for the fourth quarter. For 2014, production was guided in the 247 250 Bcfe range. Ultra Petroleum expects total operating cost per Mcfe of $3.37 $3.55 for the fourth quarter. The company expects full-year capital spending of $1,500 million. VALUATION Despite Ultra Petroleum s industry-leading production and reserve-growth prospects and its impressive exposure to the high-return Marcellus Shale play, we expect the company to continue to struggle unless the outlook for natural gas prices improves. This is corroborated by our continued Underperform recommendation. Ultra Petroleum s trailing 12-month P/CF multiple is 4.4, compared to the 9.6 average for the peer group and 15.9 for the S&P 500. The company s trailing 12-month EV/EBITDA multiple is 9.5, compared to the industry average of 4.9. Our $12 price objective reflects a multiple of 3.9X trailing twelve-month cash flow. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Ultra Petroleum Corp. (UPL) 7.9 7.9 13.0 4.4 5.8 24.7 5.6 Industry Average 34.1 28.5 10.6 9.6 17.3 126.0 20.6 S&P 500 16.1 15.1 10.7 15.9 18.6 19.4 12.0 Halcon Resources Corp. (HK) 23.5 10.0 0.9 8.6 184.0 12.7 Oasis Petroleum Inc. (OAS) 8.5 10.7 4.0 2.5 5.7 265.5 6.9 Rosetta Resources Inc. (ROSE) 17.5 10.3 17.2 2.5 6.4 73.4 7.6 W&T Offshore Inc. (WTI) 0.9 23.5 44.0 6.5 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Ultra Petroleum Corp. (UPL) 388.5 686.7 1.7 76.0 640.8 0.0 9.5 Industry Average 5.1 5.1 5.1-32.7 5.8 3.2 4.9 S&P 500 5.1 9.8 3.2 24.8 2.0 Equity Research UPL Page 4
Earnings Surprise and Estimate Revision History Equity Research UPL Page 5
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of UPL. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1114 companies covered: Outperform - 15.6%, Neutral - 77.9%, Underperform 5.9%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research UPL Page 6