Don’t let the numbers fool you
Whenever a company needs to write its assets down, it does not mean that these assets have completely disappeared or that the company has sold them. It simply means that the current market does not make the assets commercially viable based on current technology. If prices were to go back up, the company will be able to promote those assets back to a higher status.
Despite the rough natural gas climate in 2012, and massive asset writedowns, the company did remain net cash positive from its operations. Ultra is one of the lowest-cost natural gas producers in the U.S., so it should be able to weather the storm of low gas prices even with a 100% natural gas portfolio. It will put its low-cost status to the test as it helps its operating partner in the Marcellus, Royal Dutch Shell plc (ADR) (NYSE:RDS.B), bring down its well completion costs to more manageable levels.
What a Fool believes
It may take some time for natural gas to make the rebound many investors are hoping for. Exploration and production companies in the natural gas space have tried their best to slow production captial expenditures to bring up prices. According to Watford, that may still be a while:
… [There’s] no doubt that there’s tremendous amount of capital has been redrawn. And you’ll see that as you continue through 2013, what I really think is going happen is, you’re not going to get enough gas price response throughout ’13, so you’re going to have 2014 with the same lack of capital being invested. So we’ll have 2 years of decreasing production.
The largest reasons for the long-anticipated lag time for increases in price are the time it takes to slow production and the even longer time it takes to create new markets for U.S. natural gas. Momentum for natural gas as a transportation fuel is making very slow progress; it has yet to make any real dents in demand. Also, Cheniere Energy, Inc. (NYSEAMEX:LNG) doesn’t anticipate its first liquid natural gas export until 2015, so we are at least two years away from liquid natural gas exports having any real effect either.
The article The Dollar That Means $3.8 Billion for This Energy Company originally appeared on Fool.com and is written by Tyler Crowe.
Fool contributor Tyler Crowe has no position in any stocks mentioned. You can follow him on Fool.com under TMFDirtyBird, Google +, or Twitter: @TylerCroweFool.The Motley Fool recommends Ultra Petroleum. The Motley Fool owns shares of Devon Energy and Ultra Petroleum and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, Short Jan 2014 $15 Puts on Chesapeake Energy, Long Jan 2014 $30 Calls on Ultra Petroleum, Long Jan 2014 $40 Calls on Ultra Petroleum, and Long Jan 2014 $50 Calls on Ultra Petroleum.
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