Ultra Petroleum Inc.’s Wyoming unit on Friday agreed to sell a liquids pipeline system and gathering facilities and certain associated real property rights in the Pinedale Anticline in Wyoming for $225 million. The buyer is Pinedale Corridor LP, a newly created unit of CorEnergy Infrastructure Trust, and the deal is expected to close later this month.
In anticipating the midstream sale on a 3Q2012 conference call last month, Ultra CEO Mike Watford said proceeds from the sale would allow the company to shrink its capital spending this year to around $600 million, compared to $1.5 billion last year.
Watford boldly declared on the call that Ultra is dramatically “decelerating” its cap/ex spending, dropping its rig count from 900 to 400 this year, and generally preparing for what he called a “two-year window” in which there will be a steady decline in U.S. gas production because of the lingering low prices.
Under the sales agreement, Ultra Wyoming Inc. will enter what the company called “a customized long-term triple net lease agreement” with Pinedale for the use of Ultra’s pipeline and gathering system, in what is basically a sale/lease-back deal. “The base rent [for Ultra] during the lease agreement is $20 million, adjusted annually for changes based on the consumer price index,” an Ultra spokesperson said.
Ultra said the closing of the deal is subject to Pinedale successfully getting its financing, and it said the proceeds will be used to lower its outstanding debt.
Wells Fargo Securities Senior Analyst David Tameron said the deal “makes sense from the standpoint that the proceeds give [Ultra] optionality and shore up liquidity in a challenging gas macro environment.”
While Tameron said that Ultra has consistently delivered “industry leading metrics” from its prolific Pinedale and Jonah field operations and large acreage position in the Marcellus Shale, the company’s increasing pull back and accompanying nonperforming assets could be problematic, “driving shares to perform in line with peers.”
On the 3Q2012 call, Watford said Ultra spent more on capital investment last year than it wanted to when in hits $1.5 billion in cap/ex, and ramping down took longer than it should have this year. “We have chosen the rationale economic path of withdrawing capital from the business,” he said. “We were earlier and more aggressive than most, but almost all of the industry has followed suit.
“We want to be cash flow positive in this environment, and we want to under-invest, and we don’t think with gas at $2[/Mcf] and oil at $100[/bbl] that it made sense to aggressively pursue oil projects even though we knew that gas would rapidly climb to $4 and oil would drop to $80.”
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