Ultra Petroleum Corp. dipped its toe into the oil patch Monday, signing an agreement with an undisclosed seller to acquire oil-producing properties in northeast Utah, in the Uinta Basin, for $650 million, the company said Monday.
Houston-based Ultra said the deal includes a 100% working interest (WI) in operated assets, current net production of 4,000 b/d from 38 producing wells, and net risked reserves of at least 90 million bbl. The company also said it was acquiring a de-risked acreage position in the Uinta with stacked pay potential.
"This oil acquisition fits our strategy of profitable growth with exceptional returns at oil prices well below $75/bbl," Ultra CEO Michael Watford said, adding that the company plans to apply the same drilling techniques it uses in a similar geologic formation, the Pinedale Anticline in Wyoming (see Shale Daily, Aug. 11, 2011).
Ultra plans to double net production of the acquired acreage, to 8,000 b/d, by the end of 2014. According to the company, the producing wells are east of Leland Bench and Monument Butte, and are north of Natural Butte.
"The asset is cash flow positive starting in year one, and completely pays for itself in five years followed by decades of free cash flow," Watford said.
Analysts reacted favorably to the news, but there was some concern over Ultra's plans to finance the acquisition through debt at the subsidiary and parent level.
"We like the purchase from a diversification/cash flow/return standpoint, and the assets give Ultra the [option] to allocate capital towards oil instead of simply gas assets," said David Tameron, analyst with Wells Fargo Securities LLC. "Doubling the Uinta's production in 2014 would bring gas as a percent of total from 98% to 93% for FY2014E."
Ultra's stock took on a positive outlook, according to Tameron, with earnings per share (EPS) estimates of $1.66 and $2.05 for fiscal 2013 and 2014, respectively.
Canaccord Genuity analyst Robert Christensen said Ultra's acquisition "is a commendable attempt to diversify its low-cost asset base, add oil volumes to its production and extend its technical expertise in exploiting multiple thin sandstone pay zones. However, the $650 million of additional debt adds to an already high amount of financial leverage."
Christensen increased Ultra's EBITDA (earnings before interest, taxes, depreciation and amortization) estimates for 2013 and 2014, respectively, to $663 million and $860 million. EPS estimates for 2013 and 2014 were increased to $1.81 and $2.77, respectively.
"We predict the Uinta will generate an incremental $130 million of cash flow with Ultra's planned one-rig program next year, with capital expenditures of $70 million," Christensen said. "With well costs at just $1.5 million, costs are very low for an oil play and rates of return are impressive."
Tameron said Ultra was targeting the Lower Green River, which is slightly shallower than other formations in the Uinta at a vertical depth of 7,000 feet. Those targets, he said, should "[allow] for spud-to-release times around one week and $1.5 million per well costs. The transaction includes the prior operator's takeaway capacity, which Ultra believes is sufficient to handle projected volumes."