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Ultra Cheered by Production Record, REX-East

Houston-based Ultra Petroleum Corp. stepped up production in the second quarter and set a company record, while a focus on controlling costs preserved margins in the ongoing low commodity price environment, the company said last Tuesday.

"We grew our production by 30% while decreasing per unit all-in costs by 29% to an industry low $2.43/Mcfe," said CEO Michael D. Watford. "While enduring lower commodity prices during the quarter, we were able to maintain a 34% net income margin. These values compare favorably with year-ago margins earned at markedly higher commodity prices."

Natural gas and crude oil production was a record 44.5 Bcfe as compared to 34.3 Bcfe during the second quarter of 2008. The company's production for the second quarter was comprised of 42.5 Bcf of gas and 329,800 bbl of condensate. During the second quarter Ultra's average realized gas price was $5.04/Mcf, including realized gains and losses on commodity derivatives. The average price was $2.71/Mcf excluding realized gains and losses on commodity derivatives. The realized condensate price in the second quarter was $46.27/bbl.

Ultra charted a net loss of $25.5 million (minus 17 cents/share) in the second quarter due to a noncash unrealized mark-to-market charge of $159.9 million ($103.8 million after-tax) on financial commodity contracts versus profit of $116.9 million (74 cents/share) in the year-ago quarter. Adjusted net income was $78.3 million (51 cents/share) versus $115.2 million (73 cents) in the year-ago quarter. Operating cash flow was $168.5 million versus $222 million in the year-ago quarter.

Per unit all-in costs of $2.43/Mcfe, down 29% from the same period in 2008.

Ultra shares closed up 2.34% last Tuesday at $47.70 following the earnings release.

Ultra is among those producers who have enthusiastically greeted the arrival of Rockies Express Pipeline's (REX) eastern segment, REX-East. At the end of the second quarter, the first phase of the REX-East commenced service from Audrain County, MO, to Lebanon, OH. Currently REX provides capacity of 1.8 Bcf/d. Ultra is realizing gas prices that are generally referenced to Lebanon Hub, the company said. The final phase of REX from Lebanon to Clarington, OH, is expected to be in service on Nov. 1. Gas delivered to the final phase in Clarington is expected to generally receive prices referenced to Dominion South pricing, Ultra said.

"Rockies basis has been decreasing since 2005 and now is poised to increase significantly for the balance of 2009 and more so in 2010 and 2011. Dominion South basis is forecast to moderate a bit. With our 2010 and 2011 natural gas sales targeted at 50% sold into each market, Ultra's effective basis to Henry Hub pricing will be 94 to 95%," said Watford.

And he's excited about the prospect of another 2 Bcf/d or so of capacity coming online in 2010 and 2011, he said.

"We're finally going to have some positives happening to Rockies producers, or at least to those that can make money in this gas price environment," Watford told financial analysts during an earnings conference call. "You have enough pipeline capacity to take all the gas to market and have extra pipeline capacity and you still have commitments to build additional pipe, about 2.1 Bcf/d, which comes on in 2010 to 2011. All of those projects still have the green light to go forward."

With the additional infrastructure in the offing, Watford said doesn't anticipate pipeline constraints on Rockies production on the horizon. Going forward, capacity constraints will afflict other plays, particularly the shale plays, though, he said.

"What we've enjoyed in the Rockies for about thee or four years is about to happen to the other players," Watford said. "I wish them well. It just means that more infrastructure has to get built..."

In Wyoming during the second quarter, Ultra placed on production 64 Pinedale-Lance wells, including 23 that it operates. The average initial production (IP) rate for the 23 Ultra-operated Pinedale wells was 11,675 Mcf/d. The average of all Ultra-interest wells was 8,529 Mcf/d while the average of the Ultra nonoperated wells was 6,720 Mcf/d.

The average IP for an Ultra-operated well increased from 2008 as the company gained year-round access to development areas in a larger part of the Pinedale field where the wells are more productive, leading to larger average per-well reserve estimates, the company said. Year-round access was granted in the September 2008 record of decision (ROD) from the Bureau of Land Management (BLM) (see NGI, Nov. 10, 2008). "Since the ROD was issued in September 2008, Ultra has been able to move and keep rigs in areas previously not accessible year-round. This has resulted in fewer rig moves, leading to more efficient operations while drilling in the better parts of Pinedale," said Watford.

Second quarter average drilling days for Ultra-operated wells as measured by spud to total depth was 21 days. In the second quarter well costs decreased to $5.25 million, as compared to $5.7 million in the year-ago period.

During the second quarter Ultra drilled and completed five horizontal Marcellus Shale wells. All five tested greater than 5,300 Mcf/d. First production began in mid-July with two wells placed online with combined production exceeding 13,000 Mcf/d. Ultra said it expects to drill more than 32 horizontal Marcellus Shale wells by year-end. The company has secured four pipeline interconnects with total capacity of 80 MMcf/d growing to more than 300 MMcf/d by year-end.

The total volume of commodity derivative contracts for the remainder of 2009 is 51.9 Bcf at an average price of $5.80/Mcf. In 2010 the total is 98.3 Bcf at an average price of $5.49/Mcf and in 2011 the total volume is 69.4 Bcf at an average price of $5.56/Mcf. "Our large hedge position for 2010 and 2011 underpins our excellent economics in Wyoming. Our hedged volumes along with our 73 Bcf of annual firm transportation on Rockies Express, that will access Northeast markets by the end of this year, creates a solid foundation for financial success," said Watford.

Ultra reaffirmed its production guidance for 2009 of 172 to 177 Bcfe. Production for 2009 is expected to be 18-22% more than 2008's record annual production of 145.3 Bcfe.

Due to accelerated exploration efforts in Pennsylvania, capital expenditures (capex) for the second half of 2009 are estimated to be $352.6 million. This compares to the first half of the year capex of $382.4 million. Total 2009 capex is estimated at $735 million. In Pennsylvania the company increased the number of wells it expects to drill to 35 from 23.

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