Ultra Petroleum Closes Shell's Pinedale Asset Acquisition

Predominantly natural gas producer Ultra Petroleum Corp. UPL has closed its previously announced acquisition of position in the mature Pinedale acreage from SWEPI L.P. – an affiliate of European oil major Royal Dutch Shell plc (RDS.A).

Last month, Ultra Petroleum entered into an agreement with Shell to buy all of its Pinedale acreage in Wyoming, in addition to associated gathering and processing contracts. In exchange, Ultra Petroleum would pay $925 million in cash, apart from providing 155,000 net acres of its Marcellus and Utica properties in Pennsylvania to Shell.

Net production from the Pinedale assets in the second quarter was 190 million cubic feet per day (MMcf/d) of dry gas. On the other hand, net production from the properties that Ultra Petroleum is giving to Shell in Pennsylvania was 109 MMcf/d in the same time period.

The Shell transaction will help Ultra Petroleum to reposition its portfolio with a view to improve returns, augment reserves and efficient allocation of capital.

Houston, TX-based Ultra Petroleum is an independent energy firm engaged in the acquisition, development, exploration and production of oil and gas properties. The company's operations are focused on the Green River Basin of southwest Wyoming, mainly covering the Pinedale and the Jonah fields. Ultra also holds impressive acreage in the north-central Pennsylvania area of the Appalachian Basin and the Uinta Basin in northeast Utah.

As of year-end 2013, Ultra Petroleum had 3.61 trillion cubic feet equivalent in proved reserves, of which more than 94% was natural gas and about 53% was developed. Production averaged 232.1 billion cubic feet equivalent during 2013, comprising 97% gas and 3% crude oil/ liquid hydrocarbons.  

Though we like the company's portfolio repositioning initiatives – toward liquids-rich plays and away from dry natural gas development –, its low cost structure and the recent addition of high-return oil-rich acreage in Utah's Uinta basin, we believe these factors are adequately reflected in the present valuation.

Our concerns lie with Ultra Petroleum's ever increasing balance sheet leverage and low hedge percentage. The company also lacks geographic diversification, which somewhat hampers its competitive positioning.

As it is, being a natural gas-dominated producer, Ultra Petroleum is being weighed down the current weak sentiment for the commodity. The company – together with similar entities like Range Resources Corp. RRC and Cabot Oil & Gas Corp. COG – continues to suffer, as the supply glut from the shale drilling bonanza spurs natural gas production and stifles prices.
 

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