Darrell Royal, the revered former head coach for the University of Texas football team, used to explain his team's success by borrowing a line from a 1920s song, "You dance with the one that brung ya." Ultra Petroleum Corp., which has stuck with natural gas while others have moved along, is discovering that gas can be one expensive date.

The Houston producer's management team might have liked to have told analysts that it's changed jitterbug partners for this year. Things appear less frenzied going forward, but it will require some adjustments, CEO Michael Watford said during a conference call last Friday.

"2012 was a train wreck," he told analysts during a conference call. "We're glad it's over. It was a tumultuous year, one where we sailed through some stormy seas to eventually find ourselves in calmer water..."

The operator posted a loss of $472 million (minus $3.09/share) in 4Q2012, versus a profit of $131.8 million (86 cents) in 4Q2011. The latest numbers included a one-time noncash charge of $496.5 million related to a drop in the value of gas and oil properties on low gas prices. For 2012, Ultra had a total of $3 billion in ceiling test impairment charges related to low gas prices. Excluding the one-time items, Ultra earned 51 cents/share, which was one penny off of Wall Street's average estimates. Revenue in 4Q2012 dropped 20% from a year ago to $217.2 million from $270.8 million.

"These noncash charges say little about the long-term value of our assets, but they wreak havoc on our 2012 financial statements," Watford said. "We have some similarly unique issues with our 2012 proved reserves -- proved reserve reporting that speaks little to the long-term value of our natural gas resource."

For 2013 Ultra is modeling a $3.50/Mcf gas price, with $100 million of spending, $415 million of capex and cash flow of about $515 million.

Ultra is working to flatten its gas production. The producer cut in half its capex and its gas rig count in 2012 but those reductions didn't "immediately impact production," with a new all-time annual production record of 257 Bcfe, Watford said. "There's a lag effect, which we are just now experiencing, as is the rest of our industry. Natural gas production is declining. This time last year, we had a monthly production rate of about 23 Bcf [Bs] a month; now in the first quarter of 2013, we're down to something over 19 Bs a month."

This year spending will be cut in half again -- the capex plan is about $415 million. Production is expected to decline to 228-238 Bcfe.

"Our extended plan for 2014 through 2016 is...growing production by 40%, cash flow by 120% and net income by 200%, while maintaining capex equal to or less than cash flow. We think this forecast is very conservative because we don't see natural gas prices remaining at current market levels."

Going forward, Ultra expects to have more gas output from Wyoming than from its Marcellus Shale operations in Pennsylvania. It's "tight gas as opposed to the Marcellus asset," said Watford. "We also think that, that'll give us some pricing benefit too. Because if you look at pricing now, the Rockies prices are above Marcellus. And I think most folks see that continuing for a good number of years because Rockies production is declining. Clearly, it's declining, and the Marcellus is not. So I think growth reduction in the Rockies, that'll just help us from a revenue standpoint too."

From a leasehold standpoint, "we're really in good shape," said Senior Vice President Doug Selvius. "Fifty-six percent of our leasehold is held by production. We've got 7% expirations this year, less next year."

Reservoir engineering chief Brad Johnson said because of the writedown in gas reserves, Ultra recorded total proved reserves in 2012 of 3.1 Tcfe, a 38% decline from 2011. Based on Securities and Exchange Commission (SEC) rules to calculate prices, Ultra's proved reserves "were estimated using a relative price of $2.63/Mcf," said Johnson. "Compared to year-end 2011, the gas price was down 35%, and at levels where some of our undeveloped locations in our portfolio are not economic using a PV-10 cutoff," which is the present value of estimated future revenues, net of direct expenses, discounted at an annual rate of 10%. "As a result, the company's reported proved reserves are down year-over-year."

Asked if Ultra might consider selling some of its gassy assets, Watford said the scenario would be more likely at $5.00 gas prices versus $3.00.

"Right now, we don't want to encourage any more natural gas development. We think it's the wrong answer. We don't understand why anyone is growing natural gas production. It makes no sense. So again, if we think that natural gas prices are much stronger 18 months from now, then that will be the right time to think about those kind of considerations."

Operationally, well completions resumed in the gassy Pinedale Anticline of Wyoming in mid-November. Ultra had suspended work there until gas prices improved. It now has 18 operated wells online with average initial production (IP) rates of 10.9 MMcf/d. For the year it placed 44 net wells on production.

In the Marcellus Shale, gas activity is slow to nil.

Ultra brought five net wells online in 4Q2012 with average IP rates of 6.9 MMcf/d. Only three net new horizontals were drilled in 4Q2012 through a joint venture (JV) area with an affiliate of Royal Dutch Shell plc. Meanwhile, in the Marcellus JV with Anadarko Petroleum Corp. "we have not drilled a well since July, and there are no activity plans for 2013," said Watford. "While our partner Shell has been slower to respond, they are also unwinding activity in our joint venture and will be down to one active drilling rig in March through the balance of 2013..."

Results in the Denver-Julesburg Basin of the Niobrara "have been disappointing," and there are "no immediate plans" for exploration in the area, said Watford. "Although our core and log data indicate the presence of oil in the rocks, the petroleum system is immature, under-pressured and not commercial."

Ultra, he said, has grown output since 1999 through last year. Now the company wants to ensure it remains cash positive, said the CEO. "We want to continue that going forward, or at least we have a plan that continues that going forward with just following the futures curve...in terms of pricing, gas prices...We have plenty of opportunity at very low development cost. So if we just apply our internally generated cash flow to that, we start growing production again in '14, '15 and '16. And we get to some very large numbers that -- where the strip is in terms of pricing."

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