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Ultra Petroleum (UPL) Plunges 32% Over a Month: Here’s Why


Shares of Ultra Petroleum Corporation UPL have tumbled 31.6% in the past month, underperforming the broader industry’s fall of 5.6%.

In fact, the stock has plunged 87.3% on a year-to-date basis, faring much worse than the industry’s decline of just 2.1%.

Ultra Petroleum, a Zacks Rank #3 (Hold) stock, has a market cap of roughly $230 million and the average volume of shares traded in the past three months is around 3,631.4K. The company’s 2018 earnings and sales are expected to decline 61.08% and 8.94% year over year, respectively.

Let’s delve deeper to analyze what’s pulling the stock down.

Disappointing Q2 Results

Weaker-than-expected earnings in the second quarter has been a major cause of the stock’s dismal run on the bourses in the past month. The company came out with quarterly earnings of 17 cents per share, missing the Zacks Consensus Estimate of 18 cents. This also compares much unfavorably with the profit of 28 cents a year ago. Further, the upstream explorer posted revenues of $190.1 million in the quarter ended June 2018, missing the Zacks Consensus Estimate by 6.24%. The top line also declined from the year-ago figure of $212.66 million.

Lower-than-expected output volumes contributed to the poor show in the last reported quarter. The company generated total output of 70.9 billion cubic feet equivalent (Bcfe) in the quarter, lagging the consensus mark of 73 Bcfe. Weak performance from the horizontal wells of Wyoming’s Pinedale region impacted the results. Rising administrative and general expenses added to the woes. With natural gas prices not picking up strength, the company’s gas realization came in at $2.11 per Mcf, missing the Zacks Consensus Estimate of $2.28. The figure was also below the year-ago level of $2.85.

Unclear Growth Prospects and Elevated Leverage

Notably, Ultra Petroleum posted strong first-quarter results on the back of improved horizontal well results in its Pinedale gas formation. Post first-quarter results, the company took the bold decision to abort drilling vertical wells and only concentrate in completing its horizontal wells. This certainly increased the risk profile of the firm and was not a very prudent move, as the company was still in the early stages of testing the impact of drilling horizontal wells in the Pinedale field. Now, with the latest wells failing to meet producers’ expectations in the second quarter, the company has again confounded the investors by retracing its steps.

As part of its current strategy, Ultra Petroleum now plans to run 3 rigs instead of 4. Out of the 3 rigs, two will focus on drilling vertical wells. These abrupt strategic shifts by the company underscore its unclear growth prospects.

Ultra Petroleum, which emerged out of bankruptcy last year, still carries a considerable debt burden of more than $2.1 billion. Because of its high leverage metrics along with increasing expenses involved with horizontal drilling, the company is aggressively resorting to asset sales. Just a couple of months back, the company sold its Utah assets for $75 million, which it had acquired for around $650 million in 2013.

Bleak 2018 Guidance

The company has trimmed down its production guidance, It now expects its 2018 output within 273-283 Bcfe, lower than the prior forecast of 285-295 Bcfe. While the company boasts vast resources in Wyoming, it has still not been able to figure out a clear way to develop and exploit the resources, eroding investors’ confidence. On top of that, in spite of dropping one rig, it maintained its 2018 capex intact at $400 million.

Bottom Line

As outlined above, poor second-quarter show, gloomy guidance, massive debt load and indecisive management have dampened investors’ optimism surrounding the stock. Also, the company, which is predominantly a natural gas producer, is bearing the brunt of low prices and the situation is not likely to alleviate soon.

Stocks that Warrant a Look

While Ultra Petroleum is a Ranked #3 stock, investors interested in the energy sector can opt for some better-ranked stocks like McDermott International, Inc. MDR, Subsea 7 S.A. SUBCY and Helix Energy Solutions Group, Inc. HLX, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

McDermott’s top line for 2018 is likely to improve 145% year over year.

Subsea delivered an average positive earnings surprise of 318.6% in the trailing four quarters.

Helix Energy’s bottom line surpassed estimates in three out of the last four quarters, with an average of 66.7%.

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