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Ultra More Than Doubles Oil, Condensate Production in 1Q2014

Ultra Petroleum Corp. ramped up production of crude oil and condensate during the first quarter, keeping its sights trained on oil targets in Wyoming's Pinedale Anticline and Utah's Uinta Basin while continuing to spin down its activity in the Marcellus Shale.

Last Thursday, Houston-based Ultra reported it had increased crude oil production by 145% from 268,256 bbl in the preceding first quarter to 658,000 bbl for 1Q2014. During the same time frame, natural gas production fell 7.7%, from 57.7 to 53.3 Mcf.

"We had a very good quarter," CEO Michael Watford said during a conference call to discuss 1Q2014 earnings. "And for us, after two years of decreasing capital expenditures [capex] in response to lower natural gas prices, we are growing again, albeit in a measured manner with a continued focus on returns."

Ultra plans to continue increasing capex in the Pinedale and Uinta, at the expense of the Marcellus. The company expects to produce 59-61 Bcfe during 2Q2014, an amount that confirms its annual production guidance of 243-253 Bcfe.

"We shifted our investment focus away from Pennsylvania and first the Wyoming, and then Utah as we moved through the year," said CFO Marshall Smith. "As a result, we expect the first quarter natural gas volumes will represent our inflection point, and then we'll see increasing natural gas volumes as we move through 2014, driven by higher-value Wyoming production."

Smith added that Ultra sees its "mix of oil production growing well with the natural gas due to our emphasis on growth and our high returning Utah asset base. We think this [will result] in the 2Q2014 production mix of roughly 9% of volumes and 24% of revenues.

"We [also] see growth in our Wyoming natural gas volumes far outpacing the natural settle in our Pennsylvania volumes due to our reallocation of capital through our higher-returning Wyoming asset base. As a result, we see Wyoming production volumes increasing from 71% of our natural gas volumes in the first quarter to roughly 75% of our natural gas volumes in the second quarter."

During the first quarter, Ultra and its partners drilled 30 gross (18 net) wells targeting the Pinedale and placed 38 gross (22 net) wells into production, with the company's net share of production averaging 436 MMcfe/d. Brad Johnson, vice president for operations, said during the conference call that a newbuild drilling rig arrived in the Warbonnet area of the play in mid-February and began drilling. He said the company now has four rigs deployed in the Pinedale and will keep them there for the rest of the year.

"As we look forward into the remainder of 2014, our plan of increased investment in Wyoming is on track," Johnson said. "Our four-rig program has been at full-speed since early March and our production is now increasing in the field. We expect our production in Wyoming to grow from about 430 Mcfe/d at this quarter to an average of 530 Mcfe/d in 4Q2014, or about 23% growth in 2014."

In the Uinta, Ultra drilled and placed into production 12 gross (12 net) wells during the quarter and net production averaged 4,524 boe/d. Last October, Ultra acquired a 100% working interest in operated assets -- specifically, net production of 4,000 b/d from 38 producing wells and net risked reserves of at least 90 million bbl -- from an undisclosed seller for $650 million (see Shale Daily, Oct. 22, 2013).

"Since taking over operations...Ultra has been focused on three things: maintaining the continuity of operations, implementing efficiencies and advancing our understanding of the sub-surface properties that drive the outstanding well performance of this field," Johnson said.

In the Marcellus, Ultra drilled three gross (two net) wells and placed one new well into production during 1Q2014. Production averaged 173 MMcfe/d during the quarter.

Watford conceded that Ultra "missed the exit" with gas on an absolute basis, a veiled reference to the "train wreck" performance by the company in 2012 and its efforts to rebound (see Shale Daily, Nov. 6, 2013; Feb. 20, 2013).

"We're trying not go there again," Watford said. "I'm not debating that there's not good resource up there [in the Northeast], but we just have a view that it's more constructive that the West is going to suffer from lower supplies. [With] our Rockies production, which is very low cost, we have thousands of drillable locations [that are] going to serve us well. If we can reallocate capital there, we're better off."

According to Ultra's website, the company at the end of 2012 held more than 84,000 gross (49,000 net) acres in Wyoming's Green River Basin, including the Jonah and Pinedale gas fields, and an inventory of more than 5,000 gross (2,900 net) possible drilling locations. Ultra also held 500,000 gross (260,000 net) acres in the Marcellus at that time, including 60,000 net operated acres and 200,000 net acres in an area of mutual interest (AMI) with two joint venture (JV) partners: Royal Dutch Shell plc and Anadarko Petroleum Corp. (see Shale Daily, May 8, 2012). The Marcellus position holds 1,700 net possible drilling locations.

Kent Rogers, vice president for drilling and completions, said drilling activity in the Marcellus for the rest of the year is expected to all be done by Shell in the AMI.

"Of course, we would like them to stop, but three or four months ago they were planning 35 wells for the year," Rogers said. "They have reduced that to 23 as of this morning. We have only elected to participate in five of those [wells]...we may modify that some going through the year, but the activity levels are dropping.

"[Shell is] going to take the rig out of the AMI for three months to drill some Utica wells directly offsetting our leasehold, which is a good thing, in our mind. We'd like to learn something about that resource...so activity is going to be modest for the rest of year and our participation level is going to be a fraction of what Shell actually drills out there."

Watford added that Ultra's other JV partner, Anadarko, had no plans to drill in the AMI in 2014, and would probably not drill there in 2015, either.

Ultra reported adjusted net income of $135.4 million (87 cents/share) for the first quarter on May 1, a 131.4% increase over the $58.5 million (38 cents/share) the company earned in the preceding first quarter. Revenues for 1Q2014 were $326.3 million, which included $271.5 million from natural gas sales and $54.8 million from oil sales. Total revenue for the quarter was 44.6% above the $225.6 million brought in during 1Q2013, of which $202.2 million was from gas sales and $23.4 million was from oil.

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