An Old Friend

Independent Stock Analysis readers know JJ Butler was promoted from piker in the rebound from the telecom bust in 2003.  Teck Resources (TCK) was an even better score as a high quality company pigeon holed with outstanding long term assets into short term debt into the teeth of the financial crisis.  Another investment success* was the booming energy market in the middle of last decade.  Today we look at an old friend.

*No, they are not all winners.  In fact, the losers are more common.  Fortunately, the best stocks can be multi-baggers.

ISA first looked at Ultra Petroleum (UPL) in June 2012.  Despite the company’s name, Ultra is unabashedly a natural gas play.  The crown jewel is the low cost Rocky Mountain Pinedale asset.  Ultra’s Marcellus is less developed, yet just as large a resource and the company’s growth engine.  Niether Mr. Market nor ISA give Ultra any credit for it’s Niobrara exploratory effort.

Last decade was characterized by the shale gas revolution.  As horizontal drilling developed several company’s found themselves landowners on valuable natural gas land on what was previously considered moose pasture.  Three big winners exploited their good fortune exceptionally well:  SWN in the Fayetteville, RRC in the Marcellus and UPL in the Pinedale.  Their stock prices outperformed even the almighty Apple until the financial crisis.

In short, if an investor is bullish on natural gas, Ultra is the play.  Natural gas may well have experienced a mostly unrecognized permanent baseline shift in elecritcity generation demand in the summer of 2012.  Basically, most of the 120 million tones of shut in coal production will not return to market.  The natural gas rig count decline accelerated this summer and after backlogs are worked off British Thermal Units will be in short supply suddenly and surprisingly.

This while sentiment could not be worse for the industry.

Ultra is 80% hedged for the balance of 2012 and unhedged thereafter.  ISA would not expect forward sales again until pricing rebounds meaningfully.  If a rebound in natural gas occurs Ultra has outstanding ability to ramp production higher.

Note Ultra’s investor relations page and chart since bottoming this summer.  CLD still looks to be ISA’s coal play, but JJ Butler expects to own shares of UPL first.  We all bet our own money and take our chances.

4 thoughts on “An Old Friend

  1. J.J.
    Great insight on UPL. What do you think the possibilities of natural gas (or propane) being used as a fuel for the auto industry is? There certainly has been some talk about it being used as an alternative source. Actually some of the utility companies are already using it in there vehicles. Also has there been any inside trading going on? Any abnormal volume in the last few months?

  2. The electrical generation market gets a lot of attention as natural gas takes market share from coal. But the transportation fuel market, dominated by oil, is an even bigger prize. T Boone’s plan and all. While I do not expect CNG (compressed natural gas) to make its way to the consumer market in any meaningfully way for a laundry list of reasons, the market for industry is real. The correct word is FLEETS. Think garbage trucks, UPS and such. For several years the news flow has been positive, however, still more time is needed.

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