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Ultra Cuts Spending by 24%, but Output Could Jump 22%

Ultra Petroleum Corp. has cut its capital spending plans this year by 24% from a year ago, to $720 million, but the onshore producer still is on pace to grow its natural gas-weighted output by 18-22%, the CEO said Wednesday.

"This is the first time this combination of events has ever happened in the industry," CEO Mike Watford told energy analysts during a quarterly earnings conference call. The company's 4Q2008 net income fell 40% to $65.1 million (42 cents/share) from $110 million (70 cents) in the same period a year ago. Revenue rose 28% in the period to $207.4 million on higher natural gas sales.

For 2009, Ultra's production, now nearly all generated from the Pinedale Anticline of Wyoming, is forecast to grow to 172-177 Bcfe, compared with output of 145.3 Bcfe in 2008.

Ultra's capital spending is primarily earmarked for its holdings in the Pinedale Anticline, which has been the backbone for the company's gas output. Capital spending in Wyoming is set at $632 million, with most set aside for development drilling. In the Marcellus Shale, where Ultra has established a small leasehold, $73 million is budgeted for exploration drilling ($60 million) and a gathering system ($13 million).

Ultra plans to take a slow and steady approach this year, Watford said.

"It doesn't make a lot of sense to plow extra funds into developing resources right now at these prices," Watford said. "We control the acreage in Wyoming, and we don't have to be in a hurry. Pennsylvania is a different issue, and we're trying to be opportunistic when opportunities present themselves." However, the "Wyoming assets warrant growth and reinvestment throughout the cycle...We own long-term assets, and long-term commodity price assumptions drive value, not near-term commodity price moves."

By the end of March Ultra's rig count will fall to seven from the 12 rigs that it was running at year-end 2008. Using technology and other efficiencies, the independent has reduced its drilling days per well, and last year it brought prices down 11% even as service costs were rising, he noted. Last year development wells cost around $5.5 million each. Now the cost is around $5.3 million, and Ultra expects costs to come down as the year progresses, primarily on efficiencies, but also because service costs are dropping. By the end of this year, well costs are expected to average around $5 million each.

"It's allowed us to make money through the cycle," Watford told analysts. "If resource capital is the name of the game, then we have a winning hand."

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