Can Ultra’s Increased Activity Reverse Green River Basin Declines?

A few months ago we wrote about Ultra Petroleum’s (Nasdaq: UPL) drilling plans following their emergence from bankruptcy. Ultra Petroleum was a top independent E&P a decade ago, but experienced financial troubles when the shale boom created a natural gas glut that drove prices to the ground. Today, a successful restructuring has revitalized the company, and Ultra is once again positioned to grow production in the Green River Basin, where the company operates about 0.8 Bcf/d of the basin’s total 4.2 Bcf/d.

Ultra laid out a plan to increase activity in the Green River in the company’s 2Q earnings call. The plan involves increasing operated rig counts in the Green River to an average of 8 by September, up from 4.5 in the first half of 2017, and increasing the number of estimated wells to sale to 97 in 2H’17 from 69 in 1H’17. The company also announced an exploratory horizontal drilling program which will use one of their 8 active rigs. But can Ultra’s higher levels of activity change the basin’s trajectory from the constant decline we’ve been seeing to flat or even increasing?

Ultra’s long standing presence in the Green River is rooted in their program’s low well costs and stronger than average IP rates. The company’s most recent cost estimates are $2.6 MM for vertical wells as of August 2017 and their 30-day average IP from 2012- 2017 is close to 3.5 MMcf/d, more than 1 MMcf/d higher than other active producers in the basin.

Ultra’s proposed activity ramp could have implications for the future of the play. Drilling activity had been consistently declining since 2014, but since Henry Hub prices have climbed to average $3.00/MMbtu 2017 YTD and Ultra has emerged from bankruptcy, we’ve seen that trend reverse.

Ultra has been the catalyst of this reversal, with an average wells-drilled per month increasing to 14.5 in 2017 from 6.5 in 2016. If we assume that Ultra brings to sales 16 operated wells per month for the balance of 2017, and all other operators maintain current activity levels, what would this mean for the basin’s future?

In this scenario, total Green River gas volumes will fall by approximately 0.2 Bcf/d by EOY 2018. However, Ultra has indicated that drilling activity may change if prices fall significantly below $3.00/MMbtu. BTU Analytics believes lower Rockies realizations are likely during the next 18 months as competition from Appalachia pressures Midwest differentials.