---
title: "Natty and UPL"
url: https://independentstockanalysis.com/natty-upl/
description: "Peter Brandt touched off a conversation with his “Generational Bottom” post this morning on natural gas. So, what is the financial instrument to play it?…"
published: 2012-06-19
updated: 2012-06-19
---

# Natty and UPL

Published 2012-06-19

Posted on

by

J.J. Butler

[Peter Brandt](http://peterlbrandt.com/at-last-a-bottom-in-natural-gas/) touched off a conversation with his “Generational Bottom” post this morning on natural gas. So, what is the financial instrument to play it?

1. UNG? With the negative roll, I’ve never seen a crappier product.
2. Futures? Premiums over today’s price get large next winter and bigger further out the strip.
3. Equities? Let’s consider [Ultra Petroleum](http://www.ultrapetroleum.com/Home-3.html).

UPL is among the lowest cost producers, with a ginormous asset base, and in spite of their name they are a gasser. The depressed gas prices led UPL to slash capex for 2012 so production will only grow slightly. Give them a decent gas price and they will drill their brains out. Gas at $6 gets them 100% internal rates of return in the Pinedale and Marcellus.

UPL’s market cap is $3.3 billion. Given them a $5 gas price and their proved PV-10 is $8.9 billion. With $6 gas *P3* PV-10 balloons to $18.7 billion. Hedges are supporting realized cash flow: $5.05 gas got them $1.03 billion in 2011 EBITDA and $4.00 gas would get them $840 million in 2012 EBITDA. Remember, UPL is a growth story in a ‘normalized’ pricing environment.

As for the generational bottom, I am believer. The $1.90 was the tail end of a bear market driven by the shale gas land grab, punctuated by a really warm winter. Electricity generation switching will take care of most of the current storage glut this summer. As for natural gas over-production, supply is down 5 bcfd since November and headed lower based on the gas [rig count](http://www.haynesvilleplay.com/2012/06/us-rig-count-13-to-1971.html).

But do not color me bullish. Natty production is still in over supply and production needs to fall further. The coal switching will end at $3 and $4 gas. Gas production associated with booming oil production will continue. And a host of producers like UPL will be chomping at the drill-bit to ramp production again. That’s what gassers do.