Quarterly / Earnings Reports | Second Quarter (2Q) Update

Ultra Petroleum Talks Q2 2019 Results

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   |    Friday,August 09,2019

Ultra Petroleum Corp. announces financial and operating results for the quarter ended June 30, 2019.

Financial and Operating Highlights:

• Second quarter production was 62.5 billion cubic feet equivalent (“Bcfe”), above guidance,
• The Company brought 26 gross (26.0 net) operated vertical wells online with average 24-hour initial production (IP) rates of 6.3 Million cubic feet equivalent per day (“MMcfe/d”),
• Second quarter vertical well cost averaged $3.2 million,
• The Company continues to move forward with its 2-string wellbore design pilot program and successfully drilled and completed 8 wells at an average cost of $2.6 million,
• Total controllable cash costs, which is the summation of LOE per Mcfe and cash general and administrative costs per Mcfe, was $0.34 per Mcfe, at the low end of guidance,
• Subsequent to quarter end, the Company decided to drop to one operated rig and expects positive free cash flow beginning in the third quarter of this year,

“Production exceeded guidance for the quarter and controllable cash costs were on the low end of guidance, driven by a significant beat in LOE at $0.25/mcfe. These results were accomplished by a focused and dedicated team and highlights our ability to continuously achieve incremental improvement to our Pinedale operations,” said Ultra Petroleum’s Chief Executive Officer Brad Johnson.

Capital Investment Update

In May 2019, the Company elected to decrease its operated rig count from three to two rigs, in response to natural gas price forecast at the time. The impact to full year production was somewhat muted in that the Company improved the drilling time for new wells and enjoyed a higher working interest in the wells drilled in the first half of the year.

In the third quarter, the Company plans to reduce its operated drilling program to a single rig. This will further reduce the level of total capital investment in 2019 to approximately $260 - $290 million, a reduction of approximately $60 million, or 18%, from the midpoint of the Company’s initial full year capital investment guidance.  With this revision, the updated production guidance for the full year 2019 is slightly reduced to 238 to 244 Bcfe, a reduction of 4 Bcfe, or less than 2%, from the midpoint of the Company’s initial production guidance.  With these changes, and in spite of forecast strip pricing for natural gas, the Company expects to generate free-cash flow in both the third and fourth quarters of 2019.

“Moving to a one-rig operated drilling program is a prudent decision in the current natural gas price environment. We will continue to exercise capital discipline and adjust our investment levels accordingly.  Additionally, our Pinedale asset continues to deliver large-scale production with strong operating margins delivered from our long-lived low-decline asset,” said Mr. Johnson.

Pinedale Vertical Program

During the second quarter, the Company brought online 26 gross (26.0 net) vertical wells in Pinedale. The average 24-hour IP rate for new operated vertical wells brought online in the quarter was 6.3 MMcfe/d.  The Company also participated in 10 gross (3.3 net) non operated vertical wells in Pinedale.

The average cost of vertical wells drilled in the quarter was $3.2 million, which included 15 wells drilled with a 3-string design and 11 wells designed with 2-strings of casing. The Company delivered 8 successful 2-string design wells at an average cost of $2.6 million per well. Three additional 2-string design wells required a 3-string contingency option.  Overall these results reflect an increasing success rate for the 2-string design to 73%, up from 50% last quarter.  Additionally, the successful 2-string designs reduced cost by $0.5 million, 20% more than the $0.4 million savings recorded last quarter.  All-in average well costs in the second quarter for the eleven wells designed for 2-strings program was $2.9 million.     The continued execution of the vertical 2-string wellbore design pilot program is providing incremental support for the potential economic improvement using this drilling design.

Pinedale Horizontal Update

The Company continues to evaluate its horizontal program including data and advanced technical evaluations from Pinedale horizontal wells drilled to date. The technical work is providing a benefit to the understanding of the horizontal well potential and is also demonstrating it has applications to enhance the predictability of the Company’s vertical well program.

Second Quarter Financial Results

During the second quarter of 2019, total production volumes were 62.5 Bcfe, a 0.3 Bcfe uplift from the first quarter production volumes of 62.2 Bcfe. Production was 12% lower than the 70.9 Bcfe recorded in the same quarter of 2018. Continued operational efficiency allowed the Company to produce above its expected guidance even as it reduced overall capital investment to optimize cash flow and liquidity in the face of a challenging regional gas pricing.  Second quarter 2019 production was comprised of 59.8 billion cubic feet (Bcf) of natural gas and 449.2 thousand barrels (MBbls) of oil and condensate. Natural gas production was 11% lower and oil production was 33% lower than the comparable period in 2018.

Total revenues decreased 18% to $155.4 million as compared to $190.1 million during the second quarter of 2018 based on lower production in the second quarter of 2019 and lower oil pricing. The net realized price in the quarter ended June 30, 2019 was $2.45 per Mcfe, excluding derivative settlements, and $2.51 per Mcfe, including the effect of derivatives.  Realized pricing was $2.60 per Mcfe, excluding derivative settlements, and $2.70 per Mcfe including the settlements of derivatives. Total derivative settlements during the second quarter of 2019 were $3.4 million compared to $6.6 million in the same period of 2018.

During the second quarter of 2019, Ultra Petroleum’s average realized natural gas price was $2.17 per Mcf, which includes realized gains on derivative settlements. Excluding the realized gains from derivatives, the Company’s average price for natural gas was $2.11 per Mcf, flat as compared to the second quarter of 2018. The Company’s average realized oil and condensate price, including derivative settlements, was $59.65 per barrel (Bbl) for the quarter ended June 30, 2019 as compared to $58.24 per Bbl for the same period in 2018.

Ultra Petroleum’s reported net income was $57.1 million, or $0.29 per diluted share.  Ultra reported adjusted net income⁽¹⁾ of $4.1 million, or $0.02 per diluted share for the quarter ended June 30, 2019.

Year-to-Date Financial Results

Year-to-date revenues from natural gas and oil sales, including processing credits, increased to $426.9 million for the six months ended June 30, 2019, as compared to $415.5 million in 2018.  During the six months ended June 30, 2019, production of natural gas and oil was 124.7 Bcfe, which was comprised of 119.4 Bcf of natural gas and 886 MBbl of oil.

During the six months ended June 30, 2019, Ultra’s average realized natural gas price was $2.47 per Mcf, including derivative settlements. Excluding the derivative settlements, the Company’s average price for natural gas was $3.12 per Mcf compared to $2.39 per Mcf for the same period in 2018. The Company’s average realized oil price, not including derivative settlements, was $57.30 per Bbl for the six months ended June 30, 2019, as compared to $62.97 per Bbl for the same period in 2018.

For the six months ended June 30, 2019, total capital expenditures were $176.8 million. During this period, the Company turned to sales 53 gross (52.5 net) operated vertical wells and 1 gross (0.9 net) horizontal well.  Additionally, there were 16 gross (5.3 net) vertical wells operated by others that were turned to sales in the Pinedale field in Wyoming.   

Ultra’s reported net income for the six months ended June 30, 2019, was $97.8 million, or $0.49 per diluted share as compared with net income of $26.9 million or $0.14 per diluted share for the same period in 2018.  Adjusted net income for the six months ended June 30, 2019, was $31.3 million, or $0.16 per diluted share, as compared to $89.3 million and $0.45 per diluted share in 2018.

Hedging Activity

The Company continued to hedge in order to provide a degree of certainty of cash flows and maintain compliance under its revolving credit facility. Management has worked to balance the ability to provide upside exposure for the Company as the increase in future commodity prices has a meaningful impact on its cash flows given its low operating costs. This is demonstrated by the Company placing new derivative contracts using predominately costless collars and deferred premium put contracts. The Company has also continued to layer in basis swaps on a methodical and prudent manner through the winter season 2019/2020.

The table below provides a summary of the hedges in place as of July 31, 2019:

(a) Represents swap contracts that fix the basis differentials for gas sold at or near Opal, Wyoming.

2019 Guidance

The following updates are provided for the full year and third quarter of 2019:

Capital Investments: The updated capital investment guidance of $260 - $290 million reflects the decision to transition to a one-rig operated drilling program in September 2019. 

Production: Considering the Company’s revised capital investment guidance, the updated production guidance for the full year 2019 is narrowed and slightly reduced to 238 to 244 Bcfe.  In the third quarter, the average daily production rate is expected to range between 635 to 655 MMcfe/d.

Expense: The following table presents the Company's expected per unit production expenses for full year and the third quarter of 2019. Production tax guidance assumes a $2.22 and $2.70 per MMBtu Henry Hub natural gas price and a $55.57 and $56.09 per Bbl NYMEX crude oil price in the third quarter and full-year 2019, respectively.