Ultra Petroleum Reports a Mixed Bag

Natural gas producer Ultra Petroleum Corporation ( UPL - Analyst Report ) reported mixed second quarter results based on higher production volume offset by higher operating expenses.

Earnings per share, excluding special items, came in at 36 cents, beating the Zacks Consensus Estimate of 33 cents.

However, compared with the year-earlier period, Ultra Petroleum’s adjusted earnings per share declined 45.5% from 66 cents, hurt by a weak natural gas price scenario.

Total operating revenue, at $170.3 million, was well below the Zacks Consensus Estimate of $271.0 million and year-ago level of $280.6 million.

Production

Production during the quarter increased 10.1% year over year to 65.1 billion cubic feet equivalent (Bcfe), reflecting the company’s successful drilling activities. Natural gas volumes — accounting for approximately 97.0% of the total — were up 10.5% year over year to 63.1 billion cubic feet (Bcf). Oil production remained flat year over year to 332,512 barrels.

Realized Prices

Ultra Petroleum's average realized price on natural gas fell 49.1% to $2.23 per thousand cubic feet (Mcf). Including commodity derivative gains/losses, average realized natural gas price for the quarter was $4.04 per Mcf, down 21.9% from the prior-year level. The average oil price for the quarter, at $88.52 per barrel, was down from the second quarter 2011 level of $92.35 per barrel.

Costs, Expenses & Margins

Lease operating expense rose 10.1% from the prior-year quarter to $12.2 million. During the second quarter of 2012, the company reported all-in costs of $3.16 per Mcfe, up 11.7% from the comparable year-ago quarter. Ultra Petroleum’s competitive cost structure enabled it to achieve a 67% cash flow margin and a 19% net income margin.

Balance Sheet

As of June 30, 2012, the company had cash and cash equivalents of $15.7 million and long-term debt of $2.1 billion.

Production Guidance

Ultra Petroleum expects its full-year 2012 production in the range of approximately 250–260 Bcfe, implying an increase of 2% to 6% from the 2011 level. For the third quarter, the company is looking to produce 60–62 Bcfe.

Our Take

Another natural gas firm Cabot Oil & Gas Corporation ( COG - Analyst Report ) reported weak second quarter 2012 results of 5 cents, below the Zacks Consensus Estimate of 7 cents due to lower gas prices and higher operating expenses.

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 being adversely affected in recent quarters by a sharp drop in gas prices.

Ultra Petroleum currently retains a Zacks #3 Rank (short-term Hold rating).