“Look at one of our key export companies, Ultra Petroleum. This one a bit of a laggard lately, up only 15% since we had on the CEO…Companies like Exxon recently validated our vision on this show. Second, the company has a average working interest of 50% in Wyoming’s Pinedale Anticline, which despite of drilling delays and higher costs is moving forward.” — CNBC’s Mad Money 1/14/2010
Jim Cramer is nothing if not persistent and over the last few months he has constantly recommended stocks in the natural gas space. His natural gas investment thesis has seemed to be justified with recent price appreciation in many of these companies and additionally some huge M&A activity from the likes of Exxon Mobil (XOM). Cramer invited the CEO of Ultra Petroleum (UPL) onto his show in order to explain why the stock has lagged its competitors and how that will change soon.
Cramer expressed optimism for Ultra Petroleum’s new acquisition of a substantial amount of land in the gas-rich Marcellus Shale, and that purchase has yet to be reflected in the stock’s price. XTO was a major player in the Marcellus Shale and obviously that was a key factor in Exxon’s decision to acquire them. In addition to their growing exposure to Marcellus, they were able to increase production by 27% in the third quarter. That sort of production increase made Cramer exclaim, “That makes it a growth stock with fabulous margins.”
The biggest problem with Ultra Petroleum is the current valuation, as the company receives our Fairly Valued rating despite its lack of appreciation recently. As Cramer mentioned, UPL has been a high-flier over the past 5 years and 10 year time periods, although our price data shows far lower returns than he claimed on his show. Still the numbers are heady, as UPL has grown 3400% in the last ten years (Cramer said more than 14000%).
As we see it, the stock is still attempting to justify its former growth premium as a more mature company. Normally when a stock has been valued so richly by the market in the past, its current valuation tends to look undervalued when compared to historical valuation multiples such as price-to-sales and price-to-cash earnings. It is just the opposite for UPL and it is actually approaching overvalued territory based on our methodology. We will need to see further improvement to fundamentals like sales and cash earnings before we start to look more favorably on this company. Perhaps the new acreage in the Marcellus Shale will provide the fundamental growth that we need to see, but for now there are more attractive natural gas stocks.