Ultra Petroleum (UPL) is a "good" natural natural gas exploration and production company. That said, we are posting this short idea to occupy a complementary position in a basket of natural gas production company shorts; similar (if different) to XCO which was posted earlier as an over valued security. Different, in that UPL and XCO are at opposite ends of the spectrum as far as quality and terminal outcome, though XCO's two largest holders make shorting the name anxiety inducing for some. We believe UPL offers a liquid way to express a short in natural gas prices generally, and that the company in particular is overvalued based upon industry comps.
Ultra Petroleum; key points
YE 2011 Reserves: 4.978 Tcfe; 96% Natural Gas: 58% of nat gas is PUD
The pre-hedge pricing is essentially flat to a very slight premium vs Henry Hub, which indicates reserves are primarily dry gas. We know many buyers (and some lenders) are assigning a (0) value to dry gas PUDs, and we are doing likewise here and elsewhere.
UPL does possess 110k net Niobrara. While we are bullish on this play, we don’t see the immediate impact this will make given the dominance of gas on their books. Other than the Niobrara, there are no oily or liquid plays in the works that could materially change the story.
UPL recently announced a 50% cut in development capex, while their credit statistics remain solid. This is not a terminal short by any stretch.
With 184 bcf hedged in 2012 at $4.43, this would equate to a $260 + mm gain if 2012 spot averaged $3/mcf. As of now, there are no hedges in 2013.
Assuming PDPs are valued at $1.25 to $1.50/mcf (based upon recent activity), and PUDs are completely ignored, UPL stock could trade into the mid-teens later in 2012. With shoulder season nearing, the gas storage situation will come front and center again.
Besides our harsh view of natural gas PUDs, the valuation of the UPL Niobrara acreage is also a driver of our short thesis. To wit, if you valued the Niobrara at recent transaction activity of approximately $5,000/acre, the stock would be worth $13.29 to $16.49 at EV/PDP mcf of $1.25-$1.50 right now. Assuming the market is currently valuing the Niobrara at $5,000/acre, to get to the present market price, you would have to assume an EV/PDP mcf of about $2.00 to $2.15. Recent PDP deals have been going for as little as $1/mcf, while PUD deals are just not happening best we can see.
Said yet another way, if the market is valuing PDPs correctly in this instance (low 1's), then you’d need to assume about $15,000 to $20,000/acre in the Niobrara to get to current stock price, or 3- 4x recent deal activity.
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UPL Fair Value/Share
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EV/Mcfe (PDP only)
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13.29
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0.75
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1.00
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1.25
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1.50
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1.75
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2.00
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Niobrara $/acre (110k aces)
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2,500
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$5.11
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$8.31
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$11.51
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$14.70
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$17.90
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$21.10
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5,000
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$6.89
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$10.09
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$13.29
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$16.49
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$19.68
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$22.88
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7,500
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$8.68
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$11.87
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$15.07
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$18.27
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$21.47
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$24.66
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10,000
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$10.46
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$13.65
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$16.85
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$20.05
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$23.25
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$26.45
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12,500
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$12.24
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$15.44
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$18.63
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$21.83
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$25.03
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$28.23
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15,000
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$14.02
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$17.22
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$20.42
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$23.61
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$26.81
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$30.01
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% Nat Gas
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96.0%
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% Nat gas PUD
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58.7%
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If you believe gas prices will reamin weak, and that the recent transaction activity in the private market for land and reserve purchases is "accurate", then UPL looks like a good short.
Continued weakening of natural gas going into the shoulder months. Dismal PUD valuations in the market place.