Shares of Ultra Petroleum (NASDAQ: UPL) have slumped for the last year. After another awful performance in May, in which the company actually increased its full-year 2018 production guidance, investors have a right to be frustrated. The stock price dropped over 26% last month, according to data provided by S&P Global Market Intelligence.
Turns out, there was good reason for the slide. When Ultra Petroleum announced first-quarter 2018 results, it delivered solid profits and spent less than expected. But it also announced a somewhat risky plan aimed at increasing production in the second half of the year. It prompted one analyst downgrade and angst among investors at large.
The dismay over the new production strategy stems from management’s desire to abandon the previous plan in which the company’s engineers would drill new vertical and horizontal wells. Now, Ultra Petroleum will only complete horizontal wells, as they’re more profitable than the alternative well type.
That will have the near-term effect of lowering production in the second quarter of 2018, but it promises to lift production — and profits — enough in the second half of this year that management decided to raise full-year production guidance. One big problem with all of that: Ultra Petroleum is embarking on this new plan with minimal data in hand from its exploratory horizontal drilling program. Put another way, there’s no guarantee the strategy will work, and the company could be left with less production and higher costs if things don’t pan out.
The devil is in the details for Ultra Petroleum shareholders. While the expectation is that the company will produce even more oil and gas than previously expected, the fine print says there’s a little more risk involved with that strategy. Although it could pay off, the oil and gas driller ended March with nearly $2.2 billion in long-term debt on the balance sheet. In other words, there isn’t any room for error.
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