Ultra Petroleum (UPLMQ) has been one of the wildest rides over the last few years. The company filed for bankruptcy and its seven subsidiaries filed for bankruptcy on April 29th, 2016. Around that time, the stock sold off to around $0.20 and the unsecured OpCo bonds were trading around 20 ($1.3BN notional) and the unsecured HoldCo bonds were trading around 10 ($2.459BN)!

Granted, energy prices had sold off very hard, with natural gas trading below $2 and crude oil trading below $40. The future looked very bleak for Ultra Petroleum and other oil and gas production companies. The future outlook for the energy market was bleak, there were potentially going to be many good assets up for sale, the total amount of GUCs was uncertain, and the capital needs of the company was unknown (would a large DIP be required to fund operations).

Fast forward to 2017, and the outlook for Ultra Petroleum has changed drastically. In fact, the equity is now trading at almost $7.

uplmq-chart

Voting on the Plan is set to conclude on March 13th, and the equity is set to own between 33.3% and 45% of the company (after a rights offering and MIP dilution). Assuming the current plan is approved, the current price of UPLMQ is valuing the company as shown below for different 12M HH strip natural gas pricing scenarios as included in the plan:

upl-reorganized

You can view the Volmanac Model for more detailed information.

We built our model with different scenarios for Operating Expenses, Capex (cost per well), Oil/Gas Curves, and production amounts. Essentially, UPLMQ equity is a levered bet on natural gas prices.

Initially we were skeptical of management’s claim to be able to drill new wells for $2.6mm, but it turns out what really moves the needle in terms of the company being able to generate cash is natural gas prices. If the natural gas curve is what management is forecasting ($3 now and $3.50 in 2019) the company will generate a lot of cash (~400mm in 2019 and $450mm in 2020, according to the model), however if gas prices stay at $3, we have cash generation roughly flat until 2018 and then the company generating ~170mm in 2019 and 2020. This is still okay, as the Pinedale property is a good asset, and the equity is essentially an option on higher natural gas prices. We don’t see the company having to drawn down the $400mm RC for real cash needs unless natural gas goes below $2.50. However, for this to really rally, natural gas needs to be higher (above $3.25 or $3.50 for a prolonged period).

The Plan used the $3.25-$3.65 $6bn valuation, and with the HoldCo bonds trading at $76 and the stock trading at $6.91, you are creating the structure at an EV of ~$4.8bn (after including the cash from the rights offering, not shown above). This is essentially the rights offering EV. Additionally, Cross Sound Management filed an objection in which they claim the plan should be using the lower valuation given the HH 12m strip price average did not include Presidents Day and it should have since there was a closing price on Presidents Day (the plan made no mention of ‘business days’). If this is the case, and there is a chance the plan could potentially use the lower valuation, the HoldCo bonds seem more attractive than the equity at these levels, given they could own significantly more of the company in the < $3.25 valuation case.

That said, for a trade we think post-emergence when opco make-whole claim/bankruptcy issues are no longer confusing investors, we could see this trade higher assuming natural gas stays flat, as it is trading 1-3 turns cheap to comps and the Pinedale assets is of high quality. But overall, we can’t really get bullish on gas with all of these producers starting to ramp up production again.

Again, more detailed information is available in Our UPL Model.