Ultra Petroleum Corp. managed to increase its natural gas-directed organic production by 22% in 3Q2007, despite voluntarily shutting in about 12% of its production from wells in the Green River Basin of southwestern Wyoming. Now with the “probable likelihood” of an early start-up for the Rockies Express Pipeline Ltd. (REX), the company is readying to build on its growing reserves.

CEO Michael Watford said the company curtailed about 3.6 Bcfe in Wyoming, but last week during a conference call with analysts to discuss quarterly earnings, he declined to disclose how much gas the company may still be shutting in. He said the shut-ins followed the “unimaginably low gas prices” in the past few months. EOG Resources Inc. disclosed last week that it shut in 50-140 MMcf/d of its Rockies production “on any given day” in September and October, and it plans to shut in gas in the Rockies for the first half of November (see related story).

“The third quarter was largely impacted by Rocky Mountain takeaway capacity,” said Watford. “We voluntarily curtailed production volumes, and then there was a fire on the Cheyenne [Plains Gas Pipeline], which took out 150 MMcf/d, and there were unrelated maintenance outages by others. Despite the voluntary shut-ins, production was up 22%, with Wyoming up 26% year-over-year.”

Ultra overcame the Rockies basis differentials to produce a total of 28.7 Bcfe, ahead of the 23.6 Bcfe in 3Q2006. In the quarter, Ultra’s production included 25.7 Bcf of domestic natural gas, 199,500 bbl of domestic condensate and 301,100 bbl of crude oil from properties in China (that have since been sold). Domestic natural gas prices realized for 3Q2007, including the effects of hedging, were $4.04/Mcf, a decrease from $5.68 in 3Q2006.

“Despite the confluence of events that drove Rockies natural gas prices to unimaginable levels, we achieved margins and financial returns equal to or above our peer group,” said Watford. “We maintained our industry-leading cost structure even while shutting in over 12% of our available production for the quarter.”

The independent has other properties in the United States, but it is only focused on the Pinedale and Jonah fields, Watford said. In mid-October, Ultra completed the sale of its properties in the Bohai Bay of China, which were its only overseas assets.

“We’re so delighted with what’s going on in Wyoming…we have large amounts of capital to reinvest for decades,” Watford said.

Ultra controls more than 147,000 gross acres (79,566 net acres) in and around the prolific 90-square-mile Pinedale Field and the 36-square-mile Jonah Field in the Green River Basin. It estimates these areas alone hold more than 35 Tcfe of gross recoverable reserves. However, Watford said the biggest thing holding the company back is the ramp-up of REX, which has been scheduled for Jan. 1.

However, the CEO disclosed in the conference call that REX may ramp up a bit earlier. Ultra will be one of the anchor shippers on REX; it has committed to firm capacity of 200 MMcf/d.

“We are ever so much nearer to strategic start-up of REX,” he said. “REX is expected to be in service on Jan. 1, 2008, with a probable likelihood of interim service starting in December 2007, according to Kinder Morgan, the REX operator.” Watford added, “We’re aware purchases of line fill have already begun.”

He said that currently, more than “75% of the REX pipeline has been welded, with 65% of the pipeline having been lowered and back-filled, while good progress continues with the compressor station construction.”

The new pipe will “significantly increase the takeaway capacity for natural gas in the Rockies by approximately 27%, allowing Ultra to diversify away from West Coast markets,” he said. “The increased capacity represented by REX to the Midwest and eventually the Northeast will have a positive impact on Wyoming natural gas prices as evidenced by current forward price quotes.”

It won’t affect Ultra’s drilling plans in 2008, but the company also is preparing for what it hopes will be a positive Record of Decision (ROD) by the Wyoming office of the Bureau of Land Management next year (see NGI, Sept. 3). If the ROD is favorable, Ultra would be able to “gain more access year-round” in its core acreage, which would allow it to accelerate development of the Pinedale Field. It also plans to speak with state officials in December about some additional five-acre pilot projects.

Even with the shut-ins and the asset sale, which has already been completed, Watford said Ultra will maintain “our 27% increased production target of 116.5 Bcfe for the year, 29% on a per share basis…”

Earnings in the quarter fell to $37.4 million (24 cents/share) from $52.5 million (33 cents) for the same period in 2006. Operating cash flow from continuing operations was $81.7 million (52 cents/share), versus $92.6 million (58 cents) in 3Q2006. Year-to-date for total operations, Ultra achieved a net income margin of 33% and a cash flow margin of 71%. All-in costs were $2.65/Mcfe; $2.46/Mcfe for U.S. operations.

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