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Deep In Unsecured Debt, Ultra Hanging on For $3 NatGas

Ultra Petroleum Corp. is trying to make the most of its assets and the unsecured status of its lenders to push its way through bankruptcy and make it to $3 natural gas. If it does, there will be thousands of economic wells to drill, CEO Mike Watford told analysts Thursday.

Houston-based Ultra is wending its way through an in-court reorganization and eyeing, in particular, gathering, processing and transportation agreements. There are no first or second lien holders, and with all debt unsecured, the company has more leverage with lenders. “We get to run the company,” Watford told analysts.

Ultra filed for Chapter 11 last April (see Shale Daily, May 2). At the end of the quarter the company was in the hole by nearly $3.8 billion. If the value of the enterprise is more than that, “...then I guess the definition is solvent,” Watford said.

The company is currently seeking an extension of the Aug. 29 deadline by which it has the exclusive right to propose its own reorganization plan. Ultra said it is “confident” one will be granted.

"We have been successful in retaining the service providers and suppliers necessary to operate our assets and maintain our capital program, and we have not experienced any interruptions to our operations," the company said in its earnings release.

"The company is now concentrating on utilizing the bankruptcy process to maximize the value of its business enterprise for the benefit of all stakeholders...A particular focus is being placed on gathering, processing and transportation agreements, as well as oil sales contracts. Several of our counterparties have already made proposals to restructure existing agreements that we are evaluating."

In a recent note, East Daley Capital’s Justin Carlson, vice president of research, noted comments made by Tallgrass Energy Partners executives during that company’s earnings conference call.

Tallgrass management expressed confidence “in their ability to recover a substantial amount of their $303 million claim” in the Ultra Petroleum bankruptcy (see Shale Daily, Aug. 4). The claim largely represents the unpaid reservation fees for the remainder of Ultra’s contract with Tallgrass’s Rockies Express Pipeline.

“The comment is unusual,” wrote Carlson, “given that long-haul pipeline contracts are commonly deemed executory in bankruptcy and thrown out, often with little or no compensation to the counterparty. However, the Ultra bankruptcy appears to be unique.

“Since Ultra filed for bankruptcy at the beginning of May natural gas prices are up about 50% and court-filed financials show Ultra is operating at a significant profit. Additionally, the company is still operating two rigs in the Jonah-Pinedale and in July drilled 10 wells.”

During Thursday’s conference call Watford said there are no asset sales planned by Ultra.

For the second quarter Ultra posted net income of $14 million (9 cents/share) compared with a net loss of $24.67 million (minus 16 cents/share) in the year-ago quarter.

Production of natural gas and oil was 70.8 Bcfe, composed of of 66.4 Bcf of natural gas and 735,400 bbl of oil and condensate. Ultra's average realized natural gas price was $1.76/Mcf. The average realized oil and condensate price was $40.54/bbl.

During the second quarter, Ultra and its partners drilled 25 gross (18 net) Wyoming Lance wells and placed on production 18 gross (15 net) wells. The second quarter average initial production (IP) rate for new operated wells brought online was 8.6 MMcfe/d. The company produced a total of 65.5 Bcfe in Wyoming, averaging 719 MMcfe/d.

The company averaged 8.1 days to drill an operated well in the second quarter, as measured by spud to total depth (TD), a decrease of 11% compared to 9.1 days in the second quarter of 2015. Total days per well, measured by rig-release to rig-release, averaged 9.9 days in the second quarter, which compares to 11.6 days in the same quarter of 2015.

The average cost to drill and complete a well was $2.6 million, which is a 16% decrease compared to $3.1 million to drill and complete a well in the second quarter of 2015. Assuming well costs of $2.6 million per well, estimated ultimate recovery of 5 Bcfe and wellhead prices of $3.00/Mcf and $42.63/bbl, the expected return for Pinedale wells is 58%.

During the second quarter net production in Utah averaged 3,205 boe/d. In Pennsylvania the company averaged 40 MMcf/d production during the second quarter.

For 2016 the company's original capital budget was $260 million, reflecting the low commodity price environment. The budget was raised during the second quarter to $295 million. "We anticipate using the additional capital in our increased budget to drill additional development wells in Wyoming and complete some of our drilled but uncompleted wells in Utah," the company said.

Production for 2016 is expected to range between 277 and 284 Bcfe. The realized natural gas price is expected to average 5-9% below the Nymex price due to differentials. Realized pricing for oil and condensate is expected to be about 6-10% below the average Nymex price.

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