Ultra Petroleum Corporation

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Ultra Petroleum Corporation

363 N. Sam Houston Parkway East, Suite 1200
Houston, Texas 77060
U.S.A.
Telephone: (281) 876-0120
Fax: (281) 876-2831
Web site: http://www.ultrapetroleum.com

Public Company
Incorporated: 1979
Employees: 31
Sales: $258.03 million (2004)
Stock Exchanges: American
Ticker Symbol: UPL
NAIC: 211111 Crude Petroleum and Natural Gas Extraction

With its headquarters in Houston, Texas, Ultra Petroleum Corporation is an independent oil and gas company focusing on two core properties: southwestern Wyoming and Bohai Bay, China. Ultra holds interests in more than 100,000 acres in Wyoming, intersecting the Jonah natural gas field and the Pinedale Anticline region, where since 2000 the company has enjoyed tremendous success drilling for gas, leading to a dramatic rise in the valuation of the company's stock. Ultra also is developing properties in the shallow waters of Bohai Bay, an area with excellent prospects and one that the company's management team likens to the Gulf of Mexico in the early 1960s. The production of oil from nine already discovered fields in Bohai Bay are expected to represent an increasing percentage of the company's reserves and production in the years to come. Given the potential for even more discoveries in Bohai Bay, and China's growing demand for oil, it is little wonder that investors have taken notice of a company that for most of its history has been little more than a bit player in the energy industry. Ultra is a publicly traded company, listed on the American Stock Exchange.

Company Origins Dating to 1970s' Canada

Ultra was incorporated in Canada in 1979 and was listed later on the Vancouver Stock Exchange, but by 1990 was nothing more than a corporate shell. At this point some real estate developers made use of Ultra for three years, then turned it over to another management team, which reorganized it as an oil and gas investment vehicle, bent on achieving growth in reserves through the drill bit rather than acquisition. The company was based in both Vancouver and Granbury, Texas, although its production focus was in the United States—in Texas, New Mexico, and Louisiana. In the first couple of years under its new regime, Ultra enjoyed modest oil and gas production. The only property that offered much hope was the Cedar Creek Field in east Texas, in which Ultra held a 50 percent working interest.

Ultra reached a major turning point in 1996 when it became involved in the Rocky Mountains for the first time. The president of Consolidated Natural Gas Co. (CNG), Jerry Albertus, chose to take early retirement and informed Ultra, which was looking to expand its efforts beyond east Texas, about assets in Wyoming that CNG was interested in divesting. Ultra bought 130,000 acres in the Rockies and named Albertus the company's new president. According to a Denver Post company profile in 1998, "The land position involved sections in Jonah Field, a prolific natural gas play, and plenty more acreage reaching into the Pinedale Anti-cline area in Sublette County. Ultra took the deal, then leased the acreage it could in the play, spudded some wells and hooked up with service giant Halliburton Co. Halliburton funds the majority of the costs of drilling, taking its payment out of cash flow generated from the well drilled."

Wyoming's Pinedale Anticline was an unconventional gas deposit because of the area's geography. It possessed great potential but for decades had frustrated all attempts to tap into its vast reserves. Pinedale was part of the Green River Basin, composed of different layers of gas-charged sand and shale, deposited eons ago by a major river system that flowed from the highlands of Idaho. The thickest section of these gas-rich sands lay beneath the Pinedale Anticline. Although the area possessed an abundance of gas deposits, it was virtually impossible to establish wells that could produce enough gas to make the process economically viable. Normally, gas and oil flow from an underground reservoir to a well because of the difference in pressure, but natural gas located in dense formations like the Pinedale had difficultly flowing to the wells. As early as the 1960s wells had been drilled here, but they produced a trickle of natural gas rather than a stream and did not justify the cost of constructing a pipeline needed to move the product to market. According to a 2005 article on the Pinedale in Oil & Gas Investor, "For decades dating from the 1960s to the mid-1990s, operators in western Wyoming's Pinedale Anticline wrestled with the problem of which technology to apply to uncork the anticline's huge natural gas production and reserve potential. One operator in the 1970s actually considered nuclear stimulation as a way to shake loose the anticline's treasure-trove of tightsands gas." In the neighboring Jonah Field, in the meantime, producers began to enjoy success by employing multi-frac technology to unlock gas deposits trapped in that play's Lance formation of sand deposits, coupled with new horizontal drilling techniques. In essence, multi-frac technology fractured dense structures all along a horizontal wellbore, creating much shorter distances for the gas to travel before being pumped to the surface.

Successfully Tapping Pinedale in 1997

In 1997, operating under a farm-out agreement with giant energy company Questar Corp., Ultra became the first independent oil and gas company to apply multi-frac technology to the entire length of the Lance formation at Pinedale, an area that had seen only six wells dug in the previous 30 years. Ultra was so pleased with its success, that it exercised the right to buy back additional interests in the play, and completed other deals that allowed it to dominate the area. By the end of 1998 Ultra had dug nine wells in an identified sweet spot, 12 miles long and 2 miles wide. The company also was waiting on an environmental impact statement for as many as 700 surface wells on its Wyoming acreage, representing a great deal of future potential.

But before Ultra could take advantage of its Wyoming holdings, it had to get its house in order. The company was burdened with debt and spending excessively, much to the distress of investors. In January 1999 a new chief executive officer was installed, Michael D. Watford, the former CEO of Houston's Nuevo Energy Company from 1994 to 1997, and a 20-year veteran of the oil and gas business. Upon taking over at Ultra, he decided that for the company to succeed in the long run, it would have to shrink before it could grow. "In his first 90 days with Ultra," according to Oil & Gas Journal, "Watford cut the payroll from 36 people in three offices to 13 people in one office, he sold some properties to raise cash and worked to regain the confidence of investors and creditors." He did not, however, sell off all of the company's position in the Pinedale Anticline, which he determined should be Ultra's long-term focus.

By mid-2000 Ultra's finances were stable enough to allow the resumption of growth. The first significant act was to reduce the spacing of wells in the Jonah Field, from 80 acres per well to 40, effectively doubling the size of the company's reserves. Next, Ultra was able to take advantage of the long-awaited environmental impact statement for drilling in the Pinedale area. After two years of waiting, Ultra finally was able to start drilling development wells, using a 75-square-mile 3-D seismic survey of the anticline. Ultra also was able to take the experience gained in drilling additional wells in the Jonah Field and apply it to the company's program in Pinedale. As a result Ultra enjoyed a 100 percent success rate in its Wyoming drilling for the next year and longer. The company's drilling program was further strengthened in 2001 with the acquisition of a new 100-square-mile 3-D seismic survey covering the west flank on the Pinedale Anticline, information that would be received over the course of the next year. Armed with data that covered most of the company's Pinedale Anticline acreage, Ultra was well positioned to maintain its sterling success rate in drilling.

Wholly dependent on the U.S. natural gas market, Ultra in 2001 took advantage of an opportunity to become involved in an oil play on the other side of the world to achieve some diversity. In January 2001, Ultra acquired Houston-based Pendaries Petroleum Ltd. in a $40 million stock swap. Pendaries was a small independent but it held interests in three concessions in China's Bohai Bay, covering 766,000 offshore acres. Such concessions were granted by the China National Offshore Oil Company, with a maximum term of 30 years divided into three periods: exploration for seven years, development with no time limit, and a production period of no more than 15 years, although extensions might be negotiated. Through Pendaries, Ultra inherited interests in three blocks, ranging from 10 percent to 18.2 percent. At the time Ultra became involved, three oil discoveries had been made on the blocks, all of which were undergoing evaluation, aided by a recently acquired 3-D seismic survey that covered the area.

Company Perspectives:

Ultra Petroleum is a publicly traded (AMEX - UPL), rapidly growing independent exploration and production company focused on its core properties in the Green River Basin of southwestern Wyoming and the shallow waters of Bohai Bay, China.

Soaring Stock Price in 2001

Investors took notice of Ultra's potential and began bidding up the price of the company's stock. At one time trading under $2 a share in 1999, by mid-2001 the stock topped the $11 mark. Although prospects in China were intriguing, the company's continued success in the Pinedale Anticline remained Ultra's greatest selling point to investors. In January 2001, Ultra's stock gained a listing on the American Stock Exchange, making it more readily available to institutional investors and equity analysts, who in turn brought it to the attention of individual investors. What they saw in 2001 was a great deal of success, especially in Ultra's Wyoming interests. Over the course of the year, the company participated in the drilling of 32 new wells, all but one of which were successful. That one failure was due to a mechanical error. Of these wells, 24 were located on the Pinedale Anticline. The company hoped to deliver 300 billion cubic feet equivalent (Bcfe) of natural gas and crude oil and liquid gas of proved reserves from its combined operations in Wyoming and China, but by year-end it had reached reserves of 445 Bcfe, a significant increase over the 168 Bcfe achieved at the end of the previous year. Moreover, this was accomplished with the results of Wyoming alone, as the company elected to defer the booking of the reserves of its China drilling program. For the year Ultra recorded $38.2 million in revenues and net income of $17.9 million.

Ultra continued to enjoy success with the drill bit in 2002. In Wyoming it participated in 26 new and successful wells. Since acquiring its initial 3-D seismic data in 2000, Ultra had been involved in the drilling of 82 out of 83 successful wells. In addition, in 2002 the company participated in the drilling of five wells and the discovery of two new fields, for a total now of seven discovered fields. The China National Offshore Oil Company also granted permission to begin the development of the first two fields, allowing Ultra and its partners to drill development wells in 2003. The company again delivered more than it promised in 2002, exceeding its year-end target of proved reserves, which now totaled 700 Bcfe, a 58 percent increase over the prior year. Ultra's successful year was not fully reflected on the balance sheet in 2002, due to a drop in natural gas prices. As a result, revenues were flat, increasing to just $38.5 million, while net income fell to $8 million.

Ultra enjoyed another record-breaking year in 2003, with reserves increasing some 50 percent to more than 1.03 trillion cubic feet equivalent (Tcfe) of natural gas and crude oil and liquid gas, a goal that management had hoped to achieve in 2004. Again, Wyoming production led the way, but the Bohai Bay efforts were gaining increasing importance. Ultra and its partners began building production platforms on two approved sites, and pipelines were laid in anticipation of productions. Additional exploratory drilling took place, and two new fields were discovered. Two earlier finds also were getting set to enter the development phase. With a rebound in Wyoming natural gas prices, Ultra was able to post revenues of $121.6 million in 2003, as well as net income of $45.3 million.

The two Bohai Bay fields drilled their first wells in July 2004, initially producing some 30,000 barrels of oil a day with expectations that the level would increase to 65,000 barrels in 2005. All told in 2004, Ultra increased its production through the drill bit by more than 70 percent. Coupled with higher oil and gas prices, the company also experienced an exceptional year financially, posting revenues of $258 million and net income of $109.1 million. With hundreds of drilling sites identified in Wyoming and the Bohai Bay properties just beginning to produce oil—and a rising demand for oil from the rapidly growing Chinese economy—Ultra Petroleum was well positioned to enjoy continued success for years to come.

Principal Subsidiaries

UP Energy Corporation; Ultra Resources, Inc.; Sino-American Energy Corporation.

Principal Competitors

Apache Corporation; BP p.l.c.; Cabot Oil & Gas Corporation.

Key Dates:

1979:: The company is incorporated in Canada.
1996:: Wyoming interests are acquired.
1999:: Michael Watford is named CEO.
2001:: Bohai Bay interests are acquired.
2003:: Ultra exceeds the Tcfe (trillion cubic feet equivalent) mark in reserves.