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Ultra Petroleum Corp. (UPL), Chesapeake Energy Corporation (CHK), Rosetta Resources Inc. (ROSE): The Low Cost Gas Drillers

Natural gas prices remain at depressed levels, but appear to be heading higher of late. With prices in the mid-$4 range lately, some drillers are already in a position to make money. Investors should be looking at Ultra Petroleum Corp. (NYSE:UPL)Chesapeake Energy Corporation (NYSE:CHK), and Rosetta Resources Inc. (NASDAQ:ROSE).

Ultra Petroleum Corp. (NYSE:UPL)

The Big Fall

New drilling methods greatly increased the supply of natural gas over the last decade. Without an export market, the U.S. needed to absorb the increased supply. It couldn’t do it and prices plummeted to all-time lows.

Since that drop, however, the number of rigs drilling for natural gas has fallen, utilities have increasingly switched from coal to natural gas, the country is slowly moving toward exporting natural gas, and natural gas is being used in fleet vehicles. In other words, demand has picked up. Gas prices have responded by inching slowly higher. Some industry analysts are calling for $5 natural gas.

What it Costs

Getting gas out of the ground isn’t free, which is why some driller simply stopped drilling when prices got too low. According to Ultra Petroleum Corp. (NYSE:UPL), the average drilling cost for bringing natural gas out of the ground is over $7. However, that covers a range from around $3 for Ultra to over $10 for Midstates Petroleum Company Inc (NYSE:MPO).

With gas prices in the four dollar range, Ultra, Chesapeake Energy Corporation (NYSE:CHK), and Rosetta Resources Inc. (NASDAQ:ROSE), which all have costs at or near $4, are set to benefit sooner than competitors who need higher prices to turn a profit.

The Cheapest

Ultra Petroleum Corp. (NYSE:UPL) is an independent oil and gas driller. The company operates in southwest Wyoming and Pennsylvania. At the end of 2012, the company owned approximately 49,000 net acres in Wyoming and 261,000 net acres in Pennsylvania.

Like most drillers, Ultra Petroleum Corp. (NYSE:UPL)’s top and bottom lines jump around a lot. Last year, however, looked particularly brutal, with a loss of over $14 a share. That loss was largely due to an asset write down. From the 2012 10k: “As a result of low gas prices during 2012, we were required to record a $2.9 billion non-cash, ceiling test write-down of the carrying value of our oil and gas properties.”

That write down is likely to be reversed in the future as natural gas prices recover. Moreover, the write off was non-cash, so it didn’t impact the company’s underlying business. With low drilling costs, Ultra Petroleum Corp. (NYSE:UPL) will be one of the first to benefit from higher prices.

No Stones Here

Rosetta Resources Inc. (NASDAQ:ROSE) is also an independent exploration and production company. Its business is primarily located in South Texas, where it owns 72,000 net acres. The company’s main focus is on the Eagle Ford area, which represented 96% of the company’s total production last year.

Rosetta Resources Inc. (NASDAQ:ROSE) has been selling off less desirable lands and allowing land leases to expire so that it can focus all of its efforts on the Eagle Ford. While keying in on a good region has helped the company to grow its top and bottom lines over the last three years, there is some risk in having such a limited business scope.

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