Ultra Petroleum is a 'Strong Buy' - Here's Why - Analyst Blog

On May 22, Zacks Investment Research upgraded Houston, Texas-based predominantly natural gas producer Ultra Petroleum Corp. UPL to a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

Ultra Petroleum's focus on profitable growth, disciplined capital allocation and future rebalancing initiatives make it a great stock to own.

Detailed Analysis

Ultra Petroleum is noted for growing its reserve base through balanced acquisitions, as well as through development and exploration programs. This has been supplemented by successful drilling activities, which helped the company boost its year-end 2013 proven reserves by 18% to 3.61 trillion cubic feet equivalent.

Ultra Petroleum controls substantial acreage in and around the prolific Jonah natural gas field and the Pinedale Anticline area in the Green River Basin. Both of these areas are endowed with rich natural gas reserves, which have remained largely untapped to date.

However, concerned by the continuing volatility in gas prices of late, Ultra Petroleum has aligned its capital program more toward growing oil production. In the first quarter of 2014, the company achieved oil production of 658,049 barrels, representing a whopping 145% year-over-year increase. The recent purchase of high-return oil-rich acreage in Utah's Uinta basin will is expected to further drive Ultra Petroleum's liquids volumes.

The acquired properties consist of 38 operating wells that generate roughly 4,000 barrels of oil each day. Management anticipates strong earnings from the assets even if there is a drop in oil prices to below $75 per barrel.

Finally, Ultra Petroleum maintains a very competitive cost structure, which contributes to the consistency of its growth and returns throughout the business cycle. During 2013, the company reported all-in operating costs of $2.86 per thousand cubic feet equivalent – one of the best in its peer group. As a result of Ultra's low cost base, it was able to achieve a 55% cash flow margin and a 28% net income margin amid low natural gas prices.

Other Stocks to Consider

Apart from Ultra Petroleum, investors interested in the energy industry may consider stocks like Athlon Energy Inc. ATHL, Encana Corp. ECA and Clayton Williams Energy Inc. CWEI. All these stocks carry a Zacks Rank #1 (Strong Buy).
 

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