On March 15, 2015, Ultra Petroleum (OTCMKTS:UPLMQ) released a press release that communicated that the company's bankruptcy exit plan had been approved by the court. According to the agreement, $1.3 billion in debt and common stock would be converted into equity in the new business entity. The Wall Street Journal wrote a piece about the case that you can find here.
We became very interested in the reaction of this communication and the reorganization plan right after we saw the capital appreciation of the stock:
Restructuring news and some valuation figures
In March, the bankruptcy court issued an order, accepting the plan of reorganization of Ultra. The total value of the plan, according to the court, is worth $6.0 billion. This is the new development of the company, which is trying to continue its normal operations after it had to file for chapter 11 on April 29, 2016. If everything goes well, the company will obtain the financing to fund this reorganization this month.
We believe that the market reacted positively to the negotiations with debt holders last year and this uptrend may not stop if the company continues to deliver good news about this restructuring process.
Investing in companies exiting from a reorganization process may have some risks, but it may also be quite profitable. Companies in this phase make many changes in the organization to be able to obtain financing and please shareholders. To sum up, the process is normally good for the share price.
In this case, we believe that the share price has room to rise. The company has an enterprise value of $4.37 billion, and $1.02 billion of market capitalization. Out of these figures, the company has $414 million of cash on the balance sheet, which represents $2.7 cash per share, and $3.76 billion of market debt. The book value per share is -19. These figures will change in the following month once the company obtains the financing for the restructuring process, but we believe that it is good that the readers get to know these numbers. Once the company reduces its debt levels and increases the amount of equity holding in the balance sheet, the amount of risk that the equity holders will have will be reduced and the share price could increase reacting to this event.
In addition, the company is trading at 10.27 times EBITDA, which we believe is not a very expensive multiple if we compare it to those of other competitors. Finally, readers should take a look at the profitability ratios of the company, since its profit margin is 8.62% and its operating margin is 46.12%.
Short Ratio
According to this website, short sellers are shorting 20.50% of the float, which we believe is quite high. Readers should understand that there is large amount of investors believing that the company may not be able to survive to the reorganization process. It is also true that if the company delivers good news and the share price rises dramatically, these short sellers may have to close their position and this process, denominating short squeeze, could make the share price rise even more.
The oil price
We should note that this company may be affected by oil price. Part of the dramatic rise of the share price that we saw last year was caused by the increase in the oil price owing to the decision of the OPEC to cut oil production in 2017. If OPEC is able to continue cutting production and the total supply of crude oil decreases, the oil price may increase in the near future. This uptrend in oil prices is very good for the business of Ultra Petroleum and will make the share price increase. If the opposite occurs and the oil production increases in 2017, the company may suffer from a collapse in oil prices and it will be in a lot of trouble.
The company highlighted this risk in its last annual report. We believe that readers should have a look at this disclosure as it is noted in the document:
"Oil and natural gas prices are subject to a variety of additional factors beyond our control, which include, but are not limited to: changes in the supply of and demand for oil and natural gas; market uncertainty; weather conditions in the United States; the condition of the United States economy; the actions of the Organization of Petroleum Exporting Countries; governmental regulation; political stability in the Middle East and elsewhere; the foreign supply of oil and natural gas; the price of foreign oil and natural gas imports; the availability of alternate fuel sources; and transportation interruption. Any substantial and extended decline in the price of oil or natural gas could have an adverse effect on the carrying value of our proved reserves, borrowing capacity, our ability to obtain additional capital, and the Company’s revenues, profitability and cash flows from operations.
Volatile oil and natural gas prices make it difficult to estimate the value of producing properties for acquisition and divestiture and often cause disruption in the market for oil and natural gas producing properties, as buyers and sellers have difficulty agreeing on such value. Price volatility also makes it difficult to budget for and project the return on acquisitions and development and exploitation projects." Source
Conclusion
Ultra Petroleum seems to be exiting successfully from bankruptcy. The share price already discounts that the company will survive. If everything goes well, the company may continue to deliver fantastic returns to the investors, since the current valuations show that the company is cheap. However, the current amount of debt of the company, the amount of short sellers in this name and the risk delivered from oil prices should be a warning for readers.
Readers should obtain more information from the annual report or contact their financial advisor for more assessment about this company. In addition, if you want to receive new analysis about it and more news update, we will be updating our subscribers as soon as we know more. For the latest updates on UPLMQ, sign up below!
Disclosure: We have no position in UPLMQ and have not been compensated for this article.
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