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Analyst Blog

On Jun 8, 2013, Zacks Investment Research downgraded natural gas producer – Ultra Petroleum Corporation (UPL - Analyst Report) – to a Zacks Rank #3 (Hold).

Why the Downgrade?

Ultra Petroleum is generating its revenues, earnings and cash flow largely 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.

Moreover, 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 more than 95% of its reserves/production from natural gas, has seen its sales and income fall drastically in the recent quarters due to a sharp drop in gas prices.

Besides that, 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.

Additionally, 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 interrupt the company’s exploration and production operations.

Stocks to Consider

Three exploration and production companies in the energy sector, that are expected to outperform the broader U.S. equity market over the next one to three months are Encana Corporation (ECA - Analyst Report), Anadarko Petroleum Corporation (APC - Analyst Report) and EOG Resources Inc. (EOG - Analyst Report). All three firms currently retain a Zacks Rank #2 (Buy).

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