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Hi guys,
Thanks for the rising star articles. Not sure where you want comments/questions, so I've copied the article comment here too.

On UPL: if they have such good cash flow, why the enormous issuance of debt? Long term debt is up about 5x over the last 5 years, while revenue and reserves are up only ~2x. So all that capex seems poorly allocated.

They spent $5.6B in capex over the last 5 years or so. Looking at PV10 below, that means that they increase PV10 by $0.50 for every $1 capex they spend. Of course, the low gas price takes much of the blame, but still... looks like they're on a hamster wheel.

Also, the PV10 in the last annual report is $3.5B based on a $4 price of natural gas. Using the current $3 value gives a PV10 of $2.6B which means the company is trading at a 73% premium to its proven 2010 value (do you have the 2011 number?). How come you feel they will go up?

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Hey tj,

As of the end of 2010 (when the debt was racked up), management remarked that the debt issuances increased the weighted average cost of 5.6% and average maturity of 9 years. 5.6% is not a high rate for an oil and gas company of this size.

Ultra's degree of valuation depends almost entirely on the price of natural gas. I strongly believe $3 gas will not persist indefinitely. PV-10 is based on constant pricing, and $3 gas will not persist if it costs almost every company more than that to pull it out of the ground. At an all-in cost of $2.61 per mcfe in 2010, Ultra is one of the low-cost leaders in the industry. They're not just "another natural gas producer."

There are a few things that can happen:

- Fewer companies drilling for natural gas due to low returns projects. They're looking for oil or natural gas liquids instead. This will eventually lower supply.
- Many companies have been drilling just to preserve leaseholds, since it's often use-it-or-lose-it. If they stop, that lessens supply (eventually).

- In general, natural gas consumption isn't rising very quickly. However, if there is a new normal, more uses will be found (natural gas power plants, what have you) and demand will slowly catch up.
- More and more fueling stations are being built. I've seen plenty of city bus fleets that use natural gas, and this shift will continue if there's more infrastructure for it.
- There are some projects in the works to be able to export liquefied natural gas in the future. Gas is very low in the US, but the prices are much higher in the rest of the world.

Plenty of smart people are on both sides of the natural gas debate. I side with the bulls on this one. The commodity price is too low and I believe both supply and demand will eventually force the price up. It may take a while, and I admit it sure does look ugly right now. Then again, that's why the stock is beaten down (making me interested in it).

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I agree with your demand analysis. The steel, chemical and fertilizer companies are having a swell time switching to it. But on the supply side there was very strong production growth for 2011. Seems 2012 will be the same way. And those use-it-or-lose-it leases aren't going away quickly enough...

I do agree that production economics are not sustainable, but right now we're not seeing that in the actual numbers yet.

I guess its smart to buy the low cost producer because they can survive the longest. I'm just not sold on UPL's value creation for shareholders... Of course, if you can time the turnaround then the more leveraged companies will do better (like playing gold with FCX in early 2000's).

Thanks for the post.
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