MICHAEL D. WATFORD - ULTRA PETROLEUM CORP. - (UPL)
CEO Interview - published 03/12/01

DOCUMENT # LAT622

MICHAEL D. WATFORD is Chairman, President and CEO of Ultra Petroleum Corp. Mr. Watford was named Chief Executive Officer and President of the company in January 1999 and was named Chairman of the Board on March 30, 1999. Prior to joining Ultra, Mr. Watford served as President, Chief Executive Officer, Chief Operating Officer and a member of the Board of Directors of Nuevo Energy Company from 1994 to 1997. During his tenure he orchestrated a tripling of Nuevo’s assets and a 400% increase in cash flow and a five-fold increase in market capitalization to $1 billion. Prior to joining Nuevo, Mr. Watford held a number of increasingly more responsible positions at Torch Energy Inc., Meridian Oil Inc., Superior Oil Co., and Shell Oil Co. During his 25 years in the oil and gas business, Mr. Watford has become quite familiar with virtually every aspect of the industry, holding senior management positions in marketing exploration and production and corporate finance. Mr. Watford earned a Bachelor of Science degree in Business Administration from the University of Florida in 1975 and went on to earn his Master’s in Business Administration from the University of New Orleans in 1978. Mr. Watford has been a Director of Bellwether Exploration Company and a Director of Southern Minerals Company. He has also served in several civic and professional organizations.

Sector: Independent Oil & Gas

TWST: Could you provide us with a brief overview of the company?

Mr. Watford: I joined Ultra in late January 1999. The company was in a wide, deep ditch. They had a lot of problems and let’s just say that it was a turnaround situation. After I stepped in it took about a year to fix the company. We closed offices, reduced staff, changed out staff, settled lawsuits, sold off some properties to pay outstanding debts, negotiated a new bank line and basically repositioned the company to enter it’s growth stage. I guess that is the best way to phrase it. After that first year, at the beginning of 2000, we were positioned to grow the company after fixing all the ills of the past. There were a couple of regulatory hurdles to be cleared, including an environmental impact statement on our core property in Southwestern Wyoming on the Pindedale Anticline. Those hurdles were overcome by mid-year 2000 and we embarked on a significant and very successful drilling program for our company. Ultra’s outlook has improved dramatically. The stock was trading on the Toronto Stock Exchange for about C$0.80 a year ago and now I think it closed yesterday at C$4.70. Within the last few weeks we began trading on the AMEX (symbol UPL) at US$3.12. We have done very well. The US market cap was about $35 million a year ago and it’s over $220 million currently so we have enjoyed a six-fold increase in valuation of the company. Shareholder value has been created through dramatically increased reserves, production, cash flow and earnings over the past year. We are a truly successful turnaround story with accelerating growth.

TWST: It has just been the refocusing of attention that has created this change?

Mr. Watford: No. I think there were many problems with the way the company was run in the past and we were able to turn that around.

TWST: What is the business today and what is the strategy going to be for the next couple of years?

Mr. Watford: We have two asset bases. The primary one is our long life natural gas resource base in Southwestern Wyoming in the Green River Basin. We have extensive land holdings in and around the Jonah Field. Jonah is a three TCF (trillion cubic feet) natural gas field which came into its own about three years ago. We are a relatively small owner of Jonah but we control around 200,000 net acres in the adjacent acreage, the Pinedale Anticline, which most folks in the industry believe to be very similar to Jonah in terms of its productive capability. Essentially we have gone to school in learning what works with Jonah in terms of drilling and completing these wells and putting them on production. We are taking the knowledge that has been gained by industry and applying it on the Anticline where we are the largest land owner. The recent growth in reserves, production, cash flow and earnings has been focused in Wyoming and that will continue for the next few years. We believe we can deliver compounded annual growth from Wyoming in excess of 50% over the next three years. We just recently added another leg to the stool, by acquiring a company called Pendaries Petroleum. They owned non-operated working interests in two very large blocks in Bohai Bay, China, that we believe have tremendous exploration upside. There is not a basin high in Bohai Bay that doesn’t have at least 500 million barrels of discovered oil. The Haizong High, where our blocks are located, is the most under-explored, with just a handful of wells. We’ve discovered three fields so far and have an aggressive drilling plan for this year to further delineate the fields and test some high potential prospects. Kerr McGee is the operator, and we own 18% of one block and 15% of another. We expect that over the next handful of years you will see minimally 500 million barrels of gross reserves discovered in these two offshore blocks. We are very excited about our recent growth, and our prospect for future growth, both in Wyoming and Bohai Bay.

TWST: What are your drilling plans in Wyoming?

Mr. Watford: In calendar year 2000 we participated in 25 wells: 14 wells in the Jonah field which were largely in field wells, all successful, and 11 wells on the Pinedale Anticline which were all exploration wells and which were also all successful. We achieved a 100% success rate in the year 2000, which we’re very proud of. Our capital budget was $24 million and we were able to increase our production significantly. Year-end reserves in calendar year 1999 were about 75 BCFE. We are forecasting that at year-end 2000 they will be 150 BCFE, which is a 100% increase. Let’s go forward into 2001: we’re looking at participating in approximately 40 wells on the Pinedale Anticline and about 15 wells in Bohai Bay. Therefore we are looking at a total capital budget of about $47 million in 2001 which is double that of 2000.

TWST: Do you have the cash flow to support that?

Mr. Watford: Yes. Gas prices and production increases have been very good to us. The company never experienced any positive cash flow or earnings until the year 2000. We are estimating that our 2000 cash flow will be about $13 million with earnings of about $10 million. For 2001, we are forecasting that our production will double, our reserves will double and our cash flow and earnings will triple. That would take us up to a cash flow target of $38 million, which we think we can achieve. We also have a bank line with a borrowing base that has grown from $18 million to $28 million currently, so I believe that we have plenty of capital availability to carry us through 2001.

TWST: So capital is not going to be an issue for you?

Mr. Watford: No, not for 2001.

TWST: Why the step from Wyoming to China?

Mr. Watford: The simple answer is opportunity. Let me back up. We have a unique asset in Wyoming, which is largely federal land. Accordingly, we have some environmental restrictions on a good portion of the acreage during six months out of the year through the winter. The environmental impact statement/record of decision, which was approved in July 2000, allowing up to 700 well locations, restricts us from getting into much of the area for six months out of the year. That means it’s not a situation where we can take lots of money, lots of rigs and just go at it for the next three or four years. It is more a situation where it’s probably going to take us seven to 10 years to drill up the available resource. It’s going to be more of a managed growth because of those restrictions. As we analyzed our strategic forecast, and we’re planning for success, we realized that we’re going to have excess capital availability in these upcoming years so the question was how best to use that resource. We were aware of this extraordinary opportunity in Bohai Bay. We had conversations with these folks on and off for 18 months. They were at a decision point as to how to move forward, and it seemed like a good marriage between the two of us. We can take our excess capital availability going forward and apply it to the outstanding exploration opportunities in Bohai Bay. I say exploration, but by our estimates there were 12 million barrels net to their interest proved here already. The history is that the Chinese came through and drilled 12 wells back in the early 1970s, basically inventorying the resource base with a great deal of success, drilling wells with log pay, shows and production tests and then they just left it alone. In 1996, Kerr-McGee and Pendaries came in and started drilling wells. They drilled 12 exploration wells, nine of which were successful and every time they offset an old Chinese well they enjoyed 100% success. This is a tremendous resource that will be further delineated this year. There was a recent 3-D seismic shoot which is just now being interpreted and it seems to suggest that the fields are even larger than we thought and there are still three more structures with old Chinese wells on them that have yet to be drilled. I think this is going to be a fantastic area. Phillips Petroleum has a big field to the southeast. They just received approval from the Chinese to go to full field development. I believe they are estimating approximately 800 million barrels on their field. It’s just an exciting area. There are other Western companies involved: Texaco, ARCO, Shell, Phillips, and others, so we are not unique. We thought it was just a great opportunity to acquire assets that we believe will be worth well over $200 million here in the next 24 months, for about $40 million of stock.

TWST: Why would a relatively small company like Ultra get that opportunity? Why did the big ones pass on it?

Mr. Watford: With the Bohai Bay assets, the shareholders of Pendaries weren’t interested in just selling out for cash. They think they’re at the early stage of this process, that they’ve just seen the tip of the iceberg in terms of value creation from their asset base. They wanted to stay in the game. They wanted to, if they could, marry with a company that allowed them to see the game through. They were very excited about the asset base, so just selling themselves for cash to a larger company would have given away the upside, and they would never have delivered value to their shareholders. They think, and certainly they voted this way because I understand the shareholders voted about 99% in favor of the deal, that marrying with Ultra and the big upside we have in Wyoming made sense. It made sense because we were about a 75 BCFE company last year, growing to 150 BCFE at the end of 2000. We see the opportunity to grow five-fold here in Wyoming, which is multiples from where we started 24 short months ago. It’s going to take us a good number of years to drill out those locations and prove it up, but we think the resource base is there and considering the amount of other majors interested in the area and trying to get active there, we’re not alone in our thinking. I think the Pendaries shareholders decided that if they got a piece of Ultra — and basically they are 20% shareholders in Ultra now — then they could participate in the upside of both asset bases. I think that the Ultra shareholders and the Pendaries shareholders think that both asset bases have the ability to grow at least four to five times over their current size.

TWST: Will it work out to everybody’s best interest?

Mr. Watford: That is the plan. We have to execute.

TWST: How quickly might you begin to see results out of the Bohai Bay?

Mr. Watford: There will be two rigs working in the field by the end of February, so just a handful of months. Initial production is expected to commence in 2003.

TWST: It’s not that far away then?

Mr. Watford: No, I don’t think so. It’s about two years away.

TWST: What is the market for that product?

Mr. Watford: You sell the oil on the world market. China is about the size of the US in terms of land mass, but they have one billion more people than we do. Their energy demands are growing. They happen to be the fifth largest producer of crude oil. No one really pays attention to that because they consume it all internally. China is a net importer as we are in this country. The contract allows us to sell the oil anywhere we want and at this time world market pricing is about $1.50 less than WTI prices. With its growing demand China is clearly very interested in adding energy sources. They see a strong need, and as their economy grows, their need for energy increases. We are currently seeing their government owned oil companies doing IPOs. Chinese National Offshore Oil Company, CNOOC, our partner in Bohai Bay is the most recent one. I believe they have an IPO coming out shortly. My understanding is Shell and BP Amoco have each agreed to invest several hundred million dollars into it. I think CNOOC is trying to raise well over $1 billion because they want to have the ability to fund their share of these projects and satisfy their growing energy needs.

TWST: If we put all this together what kind of growth should investors expect from you over the next two or three years?

Mr. Watford: I think that as an exploration and production company, the primary measure of our growth should be reserves and production and then the resulting cash flow and earnings. From 1999 to 2000 we’re going to double reserves. We’re forecasting that from 2000 to 2001 we’re going to double them again. We’re forecasting that our production is going to double from 2000 to 2001 and that our earnings and cash flow are going to triple in the same time period. I would think an investor would find it difficult to find another small cap energy story that has the growth prospects that we do.

TWST: What can go wrong? Where is the risk?

Mr. Watford: It’s a commodity business; you always have the risk of pricing.

TWST: What are you assuming in the way of pricing?

Mr. Watford: The wells we drill in Wyoming at $2.50/mcf gas have over 100% rate of return so obviously with $5 and $6 gas we accelerate those returns. In Bohai Bay, the early development plan — and again, I think this is going to change radically because we’re going to end up with far more reserves than what we’re currently planning for — just on developing two structures out of the three that are now proven show that at $10/Bbl oil you still make a 19% rate of return. At $25/Bbl oil obviously the returns are significantly better. We have very positive economics. We think we’re in a pricing environment for the next three to five years which is $3.50 to $4.50/mcf natural gas and $20 to $25/Bbl oil. I don’t see us falling away from that anytime soon.

TWST: Is there enough now in the China opportunity to keep you busy for a few years?

Mr. Watford: I think we’ll be drilling wells in China for the next decade and I think we’ll be drilling wells in Wyoming for the next decade also.

TWST: As we look down the road, do you have the management team in place that you need now?

Mr. Watford: I think I have a reasonably good track record. I went into a company called Nuevo Energy several years ago and grew it from a $200 million market cap company to a $1 billion market cap company in three and a half years. We’re starting with a smaller base here at Ultra and we’ve already gone from a $35 million market cap to over $200 million. While I’m not attempting to forecast the time to grow Ultra to $1 billion, I don’t think there is any lack of management talent.

TWST: From a balance sheet point of view what are your plans? Do you have the funding you need?

Mr. Watford: We talked earlier in the interview about cash flow forecast for 2001 and we talked about growing bank availability. Currently our debt is less than $18 million and you see our forecast of cash flow for 2001 is closer to $38 million. Our current debt is less than 1 times cash flow, it’s almost 0.5 times cash flow. In the E&P industry that is certainly on the low end.

TWST: How do you feel about the value the market is currently putting on the company?

Mr. Watford: I think we had to earn our way to where we are now, it took a while. The investors had to be patient while I fixed the company and I appreciate that patience. Now I think we’re returning very significant dividends.

TWST: Do you think investors understand the strength of your position today?

Mr. Watford: Ultra is just starting to appear on investor’s radar screens. With our recent turn-around, exceptional growth, and now an AMEX listing to complement our TSE listing, we are beginning to turn a few heads. If you look at the normal valuation tools for E&P companies you are typically using multiples of earnings or more likely a multiple of cash flow and separately net asset value. If we forecast 2001 cash flow at $38 million, and utilize a cash flow multiple suitable for higher growth rate companies of approximately 8 times, then our market cap would be near $304 million. On a per share basis that equates to $4.22/sh or C$6.30/sh. Using net asset value and Ultra’s 2001 reserve target of 300 BCFE yields some interesting answers. Recent transactions I’ve seen for acquisitions of oil and gas reserves have been in the $1.30 per Mcfe range for proved reserves. Multiplying 300 BCFE times $1.30/mcfe equals $390 million without including value for our low risk probable reserves or additional acreage. This equates to a minimum per share value of $5.42 or C$8.08. We enjoy significant exploration upside beyond these values. This type of analysis indicates why I think over the course of 2001 we have the ability with what we’re accomplishing to double our stock price again, taking us from a $200 million market cap company to somewhere closer to $400 million.

TWST: I think that answers the last question which is why should investors go out and buy your stock today?

Mr. Watford: I think we’re a value play with tremendous growth. We really are. It’s hard to find a comparable company with our growth rate. I think we’re in a new commodity pricing environment for the next several years, largely because there has been a definite lack of investment in the industry over the last five to seven years.

TWST: There doesn’t seem to be any rush to change that?

Mr. Watford: It just takes time. It doesn’t happen overnight. Look at California’s problems with the lack of investment in electricity over the last decade. It is just going to take time to bring it back on. If you have growth in the various world economies, especially in a place like China where they have a tremendous population and where a modest increase in growth triggers a significant increase in demand for energy. Again, I think we’re in a new pricing environment. We are a very small company with just a handful of employees and we have an opportunity to more than quadruple our size and value over the next three to five years and I don’t see many other companies with that same potential.

TWST: Thank you. (TM)

MICHAEL D. WATFORD
 Chairman, President & CEO
 Ultra Petroleum Corp.
 16801 Greenspoint Park Drive
 Suite 370
 Houston, TX 77060
 (281) 876-0120
 (281) 876-2831 - FAX
 www.ultrapetroleum.com
 e-mail: info@ultrapetroleum.com

Each Executive who is the featured subject of a TWST Interview is offered the opportunity to include an Investors Brief or other highlight material to be provided and sponsored by and for the company. This Interview with Michael D. Watford, Chairman, President & CEO, Ultra Petroleum Corp., is accompanied by an Investor’s Brief containing corporate information.

To ask a question of this or any other publicly traded company, visit QAWire.com


Copyright 2001 The Wall Street Transcript Corporation
All Rights Reserved

The Wall Street Transcript (TWST) interviews are published verbatim, and TWST does not in any way endorse or guarantee the accuracy of any information or opinions expressed herein and all opinions are subject to change without notice. Nothing herein constitutes a solicitation to buy or sell any securities. TWST interviews with CEOs may include include "forward-looking statements", which are based on factors that involve risks and uncertainties. Actual results may differ materially from those expressed or implied. TWST shall have no liability whatsoever for any trading losses arising out of use of this information. Copyright 2001 Wall Street Transcript Corporation. All Rights Reserved.