Quarterly / Earnings Reports | Debt | Fourth Quarter (4Q) Update | Reserves | Financial Results | Capital Markets | Capital Expenditure | Capital Expenditure - 2020 | Financial Trouble - Going Concern
Ultra Petroleum Reports Fourth Quarter 2019 Results
Ultra Petroleum Corp. reported its fourth quarter and full year 2019 results.
2020 Capex Details
As previously announced, the Company's capital investment program is expected to be approximately $10 - $20 million for 2020, reflecting Ultra's decision to suspend drilling and focus on free cash flow generation. Additionally, the Company is confirming its 2020 production guidance of 182 to 192 Bcfe. In the first quarter, the average daily production rate was 554 MMcfe/d.
Cost Guidance
The following table presents the Company's expected per unit of production expenses for the first quarter and full year 2020. Production tax guidance assumes forward NYMEX prices for the remainder of the year and realized prices for the periods reported to date. The Company has previously disclosed that the unit costs are expected to increase as compared to 2019 based on a combination of PDP-only production profile and the reduction of certain costs being capitalized toward its now-suspended development drilling program. The Company has incorporated cost savings into its 2020 guidance of approximately 16% for G&A items and approximately 3 percent for LOE items on a gross basis. The net effect, after the impact of reduced capitalization to the full cost pool in 2020 and the reduced production profile, is as reflected below. Additionally, the Company renegotiated certain midstream and marketing agreements in the fourth quarter of 2019. The effect of these renegotiated agreements removes a processing credit previously applied to net gathering expenses and provides for an incremental uplift in realized gas prices. The net effect is an increase to cash margin by $0.03 - $0.04 per MMBtu.
2020 Expenses (per Mcfe) | 1Q20 Guidance | Full-Year 2020 Guidance |
Lease Operating Expense | $0.34 0.39 | $0.36 0.42 |
Facility Lease Expense | $0.10 0.13 | $0.11 0.14 |
Production Taxes | $0.25 0.31 | $0.19 0.25 |
Gathering Fees, gross | $0.32 0.36 | $0.32 0.36 |
Gathering Fees, net | $0.31 0.35 | $0.31 0.35 |
Transportation Charges | $0.06 0.10 | $0.04 0.08 |
Cash G&A | $0.14 0.19 | $0.15 0.20 |
DD&A | $0.82 0.88 | $0.72 0.78 |
Cash Interest Expense | $0.65 0.70 | $0.69 0.74 |
Q4/Full Year 2019 Highlights:
- Fourth quarter and full-year 2019 production were within guidance at 55.4 billion cubic feet equivalent ("Bcfe") and 240.2 Bcfe, respectively,
- During 2019, Ultra turned online 71 gross (70.3 net) operated vertical wells prior to suspending its drilling program in September,
- The Company's average unhedged price for natural gas was $2.78 per Mcf in the fourth quarter of 2019 and reflects that first-of-month Rockies basis was positive to Henry Hub by $0.27 per MMBtu in the fourth quarter,
- During the fourth quarter of 2019, the Company had cash flow from operating activities of $19.8 million and generated positive free cash flow(8) of $56.4 million.
CEO Brad Johnson said: "We continue to execute on our plan of focusing on free cash flow generation and reducing our debt levels. Ultra's low-cost, low-decline and predictable operations resulted in free cash flow generation of approximately $56 million for the fourth quarter, allowing us to continue to reduce indebtedness on the trajectory we have forecast."
Fourth Quarter 2019 Financial Results
Ultra's reported net loss for the quarter ended December 31, 2019 was $1.3 million, or $0.01 per diluted share. The Company reported adjusted net income (1) of $22.6 million, or $0.11 per diluted share, for the quarter ended December 31, 2019. Net income was $39.7 million or $0.20 per diluted share in the quarter ended 2018, with adjusted net income for the same period at $27.4 million or $0.14 per diluted share.
During the fourth quarter of 2019, total revenues excluding hedging settlements were $170.9 million as compared to $273.2 million during the fourth quarter of 2018. Derivative settlements during these periods were a loss of $2.2 million and of $82.4 million, respectively. The Company's production of natural gas and oil was 55.4 Bcfe, a decrease from 64.3 Bcfe in the same period of 2018. The decrease in production was based on the Company's decision to reduce and then suspend drilling in the third quarter of 2019 in response to weak commodity pricing. This decision allowed the Company to generate cash flow from operating activities of $19.8 million and free cash flow of $56.4 million in the fourth quarter of 2019. The Company reported Adjusted EBITDA(5) of $100.6 million for the quarter ended December 31, 2019 compared to $110.8 million for the fourth quarter of 2018. Ultra's fourth quarter production was comprised of 53.1 billion cubic feet ("Bcf") of natural gas and approximately 378,000 barrels ("Bbls") of oil.
During the fourth quarter of 2019, Ultra's average realized natural gas price was $2.72 per thousand cubic feet ("Mcf"), which included derivative settlements, as compared to $2.58 per Mcf in the fourth quarter of 2018. Excluding the derivative settlements, the Company's average price for natural gas was $2.78 per Mcf in the fourth quarter of 2019, compared to $3.95 per Mcf for the fourth quarter of 2018. Rockies natural gas basis, measured by first-of month Inside FERC Northwest Rockies ("NWROX") compared to Henry Hub, was positive in the fourth quarter of 2019 by $0.27 per MMBtu. The Company's average realized oil price was $60.53 per Bbl, including derivative settlements, for the quarter ended December 31, 2019, as compared to $61.74 per Bbl for the same period in 2018.
Full-Year 2019 Results
Ultra's reported net income for the year ended December 31, 2019, was $108.0 million, or $0.55 per diluted share as compared with net income of $85.2 million or $0.43 per diluted share for the same period in 2018. Adjusted net income for the year ended December 31, 2019, was $69.1 million, or $0.35 per diluted share, as compared to $149.7 million and $0.76 per diluted share in 2018.
During the year ended December 31, 2019, revenues from natural gas and oil sales, including processing credits, was $742.0 million as compared to $892.5 million in the year ended December 31, 2018. During the year ended December 31, 2019, production of natural gas and oil was 240.2 Bcfe, which was comprised of 230.1 Bcf of natural gas and 1.7 million barrels of oil.
During the year ended December 31, 2019, Ultra's average realized natural gas price was $2.50 per Mcf, including derivative settlements. Excluding the derivative settlements, the Company's average price for natural gas was $2.77 per Mcf for both 2019 and 2018, with volatility through each period. The net basis differential between NWROX and Henry Hub, using first of month pricing was negative $0.04 per MMBtu for the full year 2019 as compared to negative $0.46 in 2018. The Company's average realized oil price, including derivative settlements, was $59.97 per Bbl for the year ended December 31, 2019, as compared to $59.44 per Bbl for the same period in 2018.
For the full year 2019, total capital expenditures were $241.1 million. During this period, the Company participated in 94 gross (78.5 net) wells that were turned to sales, including operated and non-operated wells in the Pinedale field in Wyoming.
Proved Reserves
Year-end 2019 proved reserves were 1,990 Bcfe, consisting entirely of Proved Developed Producing ("PDP") reserves. Given the decision to suspend the drilling program in the third quarter, citing a need for higher natural gas prices in order to justify capital development, the Company had revisions that transferred out all 570 Bcfe of its Proved Undeveloped ("PUD") reserves as of December 31, 2019. For the 20th consecutive year, Netherland, Sewell & Associates, Inc. ("NSAI"), prepared a full reserve report for the Company. The highlights below summarize the year-end 2019 reserve results:
- Year-end 2019 proved reserves were 1,990 Bcfe, all of which are in the PDP category, and by volume are comprised of 96 percent natural gas and 4 percent oil,
- The year-end 2019 PV10 valuation for proved reserves using pre-tax estimated future net cash flows was $1.7 billion(9), and
- The PV10 valuation of Ultra's year-end reserves was calculated based on reference prices for natural gas of $2.58 per MMBtu and oil of $55.85 per Bbl in accordance with the rules of the Securities and Exchange Commission ("SEC"). Applying regional market differentials along with appropriate adjustments for quality, our marketing contracts, energy content, transportation charges, and adjustments for basis over same historical 12-month period, the average prices for the Company's proved reserves were $2.44 per Mcf for natural gas and $55.36 per Bbl for oil, computed in accordance with the rules of the SEC.
Financials, Default, Debt, Etc.
The report of the Company's independent registered public accounting firm that accompanies its audited, consolidated financial statements in our Annual Report on Form 10-K contains an explanatory paragraph regarding the substantial doubt about the Company's ability to continue as a going concern. The failure to deliver audited, consolidated financial statements without a going concern or like qualification or explanation results in a default under each of the Credit Agreement and Term Loan Agreement as of April 14, 2020. We expect that we will be precluded from making additional draws on the Credit Agreement unless a waiver is obtained. If we do not obtain a waiver or other suitable relief from the lenders under the Credit Agreement and the Term Loan Agreement before the expiration of a 30-day grace period, an event of default under each of the Credit Agreement and Term Loan Agreement would occur, which would allow the lenders to accelerate the loans outstanding under the Credit Agreement and Term Loan Agreement. At this time, we do not expect to obtain a waiver of this requirement and we do not currently have sufficient liquidity to repay such indebtedness were it to be accelerated.
Liability Management Update
In February and March 2020, the Company entered into confidentiality agreements and commenced discussions with certain holders of the Company's long-term debt and their legal and financial advisors. The Company previously engaged with certain debtholders regarding a potential out-of-court restructuring, but as previously disclosed on March 5, 2020, such negotiations are no longer occurring. Negotiations and discussions with certain other debtholders and their advisors are now ongoing regarding a potential in-court restructuring, although as of the date of this filing no definitive agreements have been reached regarding any amendments, restructurings or other transactions relating to the Company's indebtedness.
There can be no assurance that our efforts will result in any agreement or what the terms of any agreement will be. If an agreement is reached and we pursue a restructuring, it may be necessary for us to file a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code or the Canadian Bankruptcy and Insolvency Act in order to implement the agreement through the confirmation and consummation of a plan of reorganization approved by the bankruptcy court in the bankruptcy proceedings. We also may conclude that it is necessary to initiate Chapter 11 proceedings to implement a restructuring of our obligations even if we are unable to reach an agreement with our creditors and other relevant parties regarding the terms of such a restructuring. We discuss these matters in further detail under, among other places, in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K.
Hedging Activity
The Company will continue to evaluate hedging opportunities in order to provide a degree of certainty of cash flows along with being opportunistic in a strengthening natural gas and Rockies basis market. Management also works to balance the ability to provide upside exposure for the Company as the increase in future commodity prices has a meaningful impact on our cash flows on unhedged volumes given our low operating costs. The Company remains complaint with its hedging requirements under the terms of its revolving credit facility. As previously disclosed, these hedging requirements phased out completely as of April 2020.
The table below provides a summary of the hedges in place for the first quarter and as of March 31, 2020:
Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | Q1 2021 | ||||||||||||||||||
Natural Gas Swaps: | ||||||||||||||||||||||
Volume (MMBtu/d) | 260,220 | |||||||||||||||||||||
NYMEX ($/MMBtu) | $ | 2.76 | $ | $ | $ | $ | ||||||||||||||||
Natural Gas Collars: | ||||||||||||||||||||||
Volume (MMBtu/d) | 36,374 | 236,000 | 175,000 | 215,000 | 80,000 | |||||||||||||||||
NYMEX Floor ($/MMBtu) | $ | 2.76 | $ | 2.32 | $ | 2.41 | $ | 2.44 | $ | 2.46 | ||||||||||||
NYMEX Ceiling ($/MMBtu) | $ | 3.19 | $ | 2.83 | $ | 2.85 | $ | 2.92 | $ | 3.05 | ||||||||||||
Natural Gas Puts: | ||||||||||||||||||||||
Volume (MMBtu/d) | 35,593 | 80,000 | 30,000 | |||||||||||||||||||
NYMEX Strike Price ($/MMBtu) | $ | $ | 2.28 | $ | 2.29 | $ | 2.26 | $ | ||||||||||||||
Oil Swaps: | ||||||||||||||||||||||
Volume (Bbl/d) | 2,750 | 1,700 | 1,000 | |||||||||||||||||||
NYMEX ($/Bbl) | $ | 60.38 | $ | 59.66 | $ | 60.00 | $ | $ | ||||||||||||||
Natural Gas Basis Swap Contracts: | ||||||||||||||||||||||
NW Rockies Volume (MMBtu/d)(a) | 328,187 | |||||||||||||||||||||
Price Differential ($/MMBtu) | $ | (0.06 | ) | $ | $ | $ | $ |
(a) Represents swap contracts that fix the basis differentials for gas sold at or near Opal, Wyoming.
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