UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

 

 

Commission file number 0-29370

 

 

ULTRA PETROLEUM CORP.

(Exact name of registrant as specified in its charter)

 

 

 

 

(281) 876-0120

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES þ     NO o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  YES þ     NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer þ     Accelerated Filer o     Non-Accelerated Filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  YES o     NO þ

 

The number of common shares, without par value, of Ultra Petroleum Corp., outstanding as of October 24, 2007 was 152,387,812.

 

 

TABLE OF CONTENTS

 

 

PART I — FINANCIAL INFORMATION

 

 

ULTRA PETROLEUM CORP.

 

CONSOLIDATED STATEMENTS OF INCOME

 

 

See accompanying notes to consolidated financial statements.

ULTRA PETROLEUM CORP.

 

CONSOLIDATED BALANCE SHEETS

 

 

See accompanying notes to consolidated financial statements.

ULTRA PETROLEUM CORP.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

See accompanying notes to consolidated financial statements.

ULTRA PETROLEUM CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(All dollar amounts in this Quarterly Report on Form 10-Q are expressed in Thousands of U.S. dollars (except per share data) unless otherwise noted)

 

DESCRIPTION OF THE BUSINESS:

 

Ultra Petroleum Corp. (the “Company”) is an independent oil and gas company engaged in the acquisition, exploration, development, and production of oil and gas properties. The Company is incorporated under the laws of the Yukon Territory, Canada. The Company’s principal business activities are in the Green River Basin of Southwest Wyoming.

 

 

The accompanying financial statements, other than the balance sheet data as of December 31, 2006, are unaudited and were prepared from the Company’s records. Balance sheet data as of December 31, 2006 was derived from the Company’s audited financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles. The Company’s management believes that these financial statements include all adjustments necessary for a fair presentation of the Company’s financial position and results of operations. All adjustments are of a normal and recurring nature unless specifically noted. The Company prepared these statements on a basis consistent with the Company’s annual audited statements and Regulation S-X. Regulation S-X allows the Company to omit some of the footnote and policy disclosures required by generally accepted accounting principles and normally included in annual reports on Form 10-K. You should read these interim financial statements together with the financial statements, summary of significant accounting policies and notes to the Company’s most recent annual report on Form 10-K.

 

(a) Basis of presentation and principles of consolidation:  The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries UP Energy Corporation, Ultra Resources, Inc. and Sino-American Energy Corporation. The Company presents its financial statements in accordance with U.S. GAAP. All material inter-company transactions and balances have been eliminated upon consolidation.

 

(b) Accounting principles:  The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States.

 

(c) Cash and cash equivalents:  We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.

 

(d) Restricted cash:  Restricted cash represents cash received by the Company from production sold where the final division of ownership of the production is unknown or in dispute. Wyoming law requires that these funds be held in a federally insured bank in Wyoming.

 

(e) Capital assets other than oil and gas properties:  Capital assets are recorded at cost and depreciated using the declining-balance method based on a seven-year useful life.

 

(f) Oil and gas properties:  The Company uses the full cost method of accounting for exploration and development activities as defined by the Securities and Exchange Commission (“SEC”). Under this method of accounting, the costs of unsuccessful, as well as successful, exploration and development activities are capitalized as properties and equipment on a country-by-country basis. This includes any internal costs that are directly related to exploration and development activities but does not include any costs related to production, general corporate overhead or similar activities. The carrying amount of oil and gas properties also includes estimated asset retirement costs recorded based on the fair value of the asset retirement obligation when incurred. Gain or loss on the sale or other disposition of oil and gas properties is not recognized, unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves of oil and natural gas attributable to a country.

 

ULTRA PETROLEUM CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The sum of net capitalized costs and estimated future development costs of oil and gas properties are amortized using the unit-of-production method based on the proven reserves as determined by independent petroleum engineers. Oil and gas reserves and production are converted into equivalent units based on relative energy content. Operating fees received related to the properties in which the Company owns an interest are netted against expenses. Fees received in excess of costs incurred are recorded as a reduction to the full cost pool.

 

Certain costs of oil and gas properties are excluded from capitalized costs being amortized. These amounts represent investments in unproved properties and major development projects. The Company excludes these costs on a country-by-country basis until proved reserves are found or until it is determined that the costs are impaired. All costs excluded are reviewed quarterly to determine if impairment has occurred. The amount of any impairment is transferred to the capitalized costs being amortized (the depreciation, depletion and amortization (“DD&A”) pool) or a charge is made against earnings for those international operations where a reserve base has not yet been established. For international operations where a reserve base has not yet been established, an impairment requiring a charge to earnings may be indicated through evaluation of drilling results, relinquishing drilling rights or other information.

 

Under the full cost method of accounting, a ceiling test is performed each quarter. The full cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule 4-10. The ceiling test determines a limit, on a country-by-country basis, on the book value of oil and gas properties. The capitalized costs of proved oil and gas properties, net of accumulated DD&A and the related deferred income taxes, may not exceed the estimated future net cash flows from proved oil and gas reserves, generally using prices in effect at the end of the period held flat for the life of production excluding the estimated abandonment cost for properties with asset retirement obligations recorded on the balance sheet and including the effect of derivative contracts that qualify as cash flow hedges, discounted at 10%, net of related tax effects, plus the cost of unevaluated properties and major development.

 

SEC Regulation S-X Rule 4-10 states that if prices in effect at the end of a quarter are the result of a temporary decline and prices improve prior to the issuance of the financial statements, the increased price may be applied in the computation of the ceiling test. At September 30, 2007, prices in effect in southwest Wyoming were temporarily low due to a confluence of the following factors: (i) a fire at a compressor station on a major pipeline that exports natural gas from Wyoming; (ii) scheduled and unscheduled maintenance on pipelines in the region; and, (iii) lack of demand due to mild temperatures in the Rockies’ region. Since September 30, 2007, prices have recovered such that the Company’s future net cash flows (as described above) are in excess of the Company’s capitalized costs of proved oil and gas properties, net of accumulated DD&A and the related deferred income taxes. If the Company had applied the price in effect at September 30, 2007 ($0.67 per Mcf), it would have recognized a ceiling test impairment of $489.5 million.

 

(g) Inventories:  Crude oil products and materials and supplies inventories are carried at the lower of current market value or cost. Inventory costs include expenditures and other charges directly and indirectly incurred in bringing the inventory to its existing condition and location and the Company uses the weighted average method to record its inventory. Selling expenses and general and administrative expenses are reported as period costs and excluded from inventory cost. Inventories of materials and supplies are valued at cost or less. Drilling and completion supplies inventory of $16.4 million primarily includes the cost of pipe and equipment that will be utilized during the 2007 and 2008 drilling programs.

 

(h) Forward natural gas sales transactions:  The Company primarily relies on fixed price physical delivery contracts to manage its commodity price exposure. The Company may, from time to time and to a lesser extent, use derivative instruments as one way to manage its exposure to commodity prices. (See Note 7).

 

(i) Income taxes:  Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the

 

ULTRA PETROLEUM CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company’s total income tax expense for the nine-months ended September 30, 2007 totaled $73.7 million from continuing operations and $10.7 million from discontinued operations. (See Note 6).

 

(j) Earnings per share:  Basic earnings per share is computed by dividing net earnings attributable to common stock by the weighted average number of common shares outstanding during each period. Diluted earnings per share is computed by adjusting the average number of common shares outstanding for the dilutive effect, if any, of common stock equivalents. The Company uses the treasury stock method to determine the dilutive effect.

 

The following table provides a reconciliation of the components of basic and diluted net income per common share:

 

 

(k) Use of estimates:  Preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

(l) Accounting for share-based compensation:  On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values.

 

The Company adopted SFAS No. 123R using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. Share-based compensation expense recognized under SFAS No. 123R for the nine-months ended September 30, 2007 and 2006 was $1.6 million and $0.7 million, respectively, which consisted of stock-based compensation expense related to employee stock options. See Note 4 for additional information.

 

(m) Revenue Recognition.  Natural gas revenues are recorded on the entitlement method. Under the entitlement method, revenue is recorded when title passes based on the Company’s net interest. The Company records its entitled share of revenues based on estimated production volumes. Subsequently, these estimated

 

ULTRA PETROLEUM CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

volumes are adjusted to reflect actual volumes that are supported by third party pipeline statements or cash receipts. Since there is a ready market for natural gas, the Company sells the majority of its products soon after production at various locations at which time title and risk of loss pass to the buyer. Gas imbalances occur when the Company sells more or less than its entitled ownership percentage of total gas production. Any amount received in excess of the Company’s share is treated as a liability. If the Company receives less than its entitled share, the underproduction is recorded as a receivable. Oil revenues are recognized when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred and title is transferred.

 

(n) Other Comprehensive Earnings (Loss):  Other comprehensive earnings (loss) is a term used to define revenues, expenses, gains and losses that under generally accepted accounting principles impact Shareholders’ Equity, excluding transactions with shareholders.

 

 

(o) Reclassifications:  Certain amounts in the financial statements of the prior periods have been reclassified to conform to the current period financial statement presentation.

 

(p) Impact of recently issued accounting pronouncements:  In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, this Statement does not require any new fair value measurements. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. SFAS No. 157 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company does anticipate that the implementation of SFAS No. 157 will have a material impact on consolidated results of operations, financial position or liquidity.

 

 

 

ULTRA PETROLEUM CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

Bank indebtedness:  The Company (through its subsidiary) is a party to a revolving credit facility with a syndicate of banks led by JP Morgan Chase Bank, N.A. which matures in April 2012. This agreement provides an initial loan commitment of $500.0 million and may be increased to a maximum aggregate amount of $750.0 million at the request of the Company. Each bank has the right, but not the obligation, to increase the amount of its commitment as requested by the Company. In the event the existing banks increase their commitment to an amount less than the requested commitment amount, then it would be necessary to add new financial institutions to the credit facility.

 

Loans under the credit facility are unsecured and bear interest, at our option, based on (A) a rate per annum equal to the higher of the prime rate or the weighted average fed funds rate on overnight transactions during the preceding business day plus 50 basis points, or (B) a base Eurodollar rate, substantially equal to the LIBOR rate, plus a margin based on a grid of our consolidated leverage ratio (0.875 basis points per annum as of September 30, 2007).

 

At September 30, 2007, we had $395.0 million in outstanding borrowings and $105.0 million of available borrowing capacity under our credit facility.

 

The facility has restrictive covenants that include the maintenance of a ratio of consolidated funded debt to EBITDAX (earnings before interest, taxes, DD&A and exploration expense) not to exceed 31/2 times; and as long as our debt rating is below investment grade, the maintenance of an annual ratio of the net present value of our oil and gas properties to total funded debt of at least 1.75 to 1.00. At September 30, 2007, we were in compliance with all of our debt covenants.

 

Other long-term obligations:  These costs relate to the long-term portion of production taxes payable, a liability associated with imbalanced production, the long-term portion of costs associated with our compensation programs and our asset retirement obligations.

 

 

Valuation and Expense Information under SFAS 123R

 

The following table summarizes share-based compensation expense related to employee stock options under SFAS No. 123R for the nine months ended September 30, 2007 and 2006, respectively, which was allocated as follows:

 

 

The fair value of each share option award is estimated on the date of grant using a Black-Scholes pricing model based on assumptions noted in the following table. The Company’s employee stock options have

 

ULTRA PETROLEUM CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

various restrictions including vesting provisions and restrictions on transfers and hedging, among others, and are often exercised prior to their contractual maturity. Expected volatilities used in the fair value estimate are based on historical volatility of the Company’s stock. The Company uses historical data to estimate share option exercises, expected term and employee departure behavior used in the Black-Scholes pricing model. Groups of employees (executives and non-executives) that have similar historical behavior are considered separately for purposes of determining the expected term used to estimate fair value. The assumptions utilized result from differing pre- and post-vesting behaviors among executive and non-executive groups. The risk-free rate for periods within the contractual term of the share option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

 

Changes in Stock Options and Stock Options Outstanding

 

The following table summarizes the changes in stock options for the nine months ended September 30, 2007:

 

 

PERFORMANCE SHARE PLANS:

 

Long-Term Equity-Based Incentives.  In 2005, we adopted the Long Term Incentive Plan (“LTIP”) in order to further align the interests of key employees with shareholders and give key employees the opportunity to share in the long-term performance of the Company by achieving specific corporate financial and operational goals. Participants are recommended by the CEO and approved by the Compensation Committee. Selected officers, managers and other key employees are eligible to participate in the LTIP which has two components, an LTIP Stock Option Award and an LTIP Common Stock Award.

 

Under the LTIP, each year the Compensation Committee establishes a percentage of base salary for each participant which is multiplied by the participant’s base salary to derive an LTI Value (“Long Term Incentive Value”). With respect to LTIP Stock Option Awards, options are awarded equal to one half of the LTI Value based on the fair value on the date of grant (using Black-Scholes methodology).

 

The other half of the LTI Value is the “target” amount that may be awarded to the participant as an LTIP Common Stock Award at the end of a three-year performance period. The Compensation Committee establishes performance measures at the beginning of each three-year overlapping performance period. Each participant is also

 

ULTRA PETROLEUM CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

assigned threshold and maximum award levels in the event that performance is below or above target levels. Awards are expressed as dollar targets and become payable in common shares at the end of each performance period based on the Company’s overall performance during such period. A new three-year period begins each January. Participants must be employed by the Company at the end of a performance period in order to receive an award.

 

For the first (January 2005 — December 2007), second (January 2006 — December 2008) and third (January 2007 — December 2009) performance periods, the Compensation Committee established the following performance measures: return on equity, reserve replacement ratio, and production growth.

 

Also in 2005, we established a Best in Class program for all employees. The Best in Class program recognizes and financially rewards the collective efforts of all of our employees in achieving sustained industry leading performance and the enhancement of shareholder value. Under the Best in Class program, on January 1, 2005 or the employment date if subsequent to January 1, 2005, all employees received a contingent award of stock units equal to $50,000 worth of our common stock based on the average high and low share price on the date of grant. Employees joining the Company after January 1, 2005 will participate on a pro rata basis based on their length of employment during the performance period. The number of units that will vest and become payable is based on our performance relative to the industry during a three-year performance period beginning January 1, 2005, and ending December 31, 2007, and are set at threshold (50%), target (100%) and maximum (150%) levels. For each vested unit, the participant will receive one share of common stock. The performance measures are all sources finding and development cost and full cycle economics.

 

For the nine months ended September 30, 2007, the Company recognized $0.4 million, $0.4 million and $0.4 million in pre-tax compensation expense related to the 2005 LTIP, 2006 LTIP and 2007 LTIP, respectively. For the nine months ended September 30, 2006, the Company recognized $0.3 million and $0.3 million in pre-tax compensation expense related to the 2005 LTIP and 2006 LTIP, respectively. The amounts recognized during the first nine months of 2007 and 2006 assume that maximum performance objectives are attained. If the Company ultimately attains maximum performance objectives, the associated total compensation cost, estimated at September 30, 2007, for the three year performance periods would be approximately $2.2 million, $2.6 million and $2.9 million (before taxes) related to the 2005 LTIP, 2006 LTIP and 2007 LTIP, respectively.

 

For the nine months ended September 30, 2007, the Company recognized $0.5 million in pre-tax compensation expense related to the Best in Class program. For the nine months ended September 30, 2006, the Company recognized $0.3 million in pre-tax compensation expense related to the Best in Class program. The amount recognized to date assumes that maximum performance levels are achieved. If the Company ultimately attains the maximum performance level, the associated total compensation cost will be approximately $3.6 million before income taxes, of which the Company has expensed $3.1 million as of September 30, 2007.

 

 

On May 17, 2006, the Company announced that its Board of Directors authorized a share repurchase program for up to an aggregate $1 billion of the Company’s outstanding common stock which has been and will be funded by cash on hand and the Company’s senior credit facility. Pursuant to this authorization, the Company has commenced a program to purchase up to $500.0 million of the Company’s outstanding shares through open market transactions or privately negotiated transactions. The stock repurchase will be funded with cash held in an Ultra Resources bank account or the Company’s senior credit facility.

 

During the nine months ended September 30, 2007, the Company repurchased 1,431,170 shares of its common stock in open market transactions for an aggregate $78.9 million at a weighted average price of $55.12 per share. Since the program’s inception in May 2006, the Company has purchased a total of 5.4 million shares in open market transactions for an aggregate $276.4 million at a weighted average price of $51.19 per share.

 

ULTRA PETROLEUM CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

In addition to the shares repurchased in open market transactions during the nine months ended September 30, 2007, the Company also acquired 82,797 shares delivered by employees for $4.9 million to satisfy the exercise price of the employees’ stock options and tax withholding obligations to satisfy tax withholding obligations in connection with the vesting of equity shares of common stock issued pursuant to the Company’s employee incentive plans.

 

In total, during the nine months ended September 30, 2007, the Company repurchased 1,513,967 shares of its common stock for an aggregate $83.8 million dollars at a weighted average price of $55.36 per share. Since the program’s inception in May 2006, the Company has repurchased 5.5 million shares of its common stock for an aggregate $282.1 million at a weighted average price of $51.18 per share.

 

 

In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, Accounting for Income Taxes. This interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company adopted the provisions of FIN 48 on January 1, 2007.

 

The Company did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations as a result of implementing FIN 48. The amount of unrecognized tax benefits did not materially change as of September 30, 2007.

 

It is expected that the amount of unrecognized tax benefits may change in the next twelve months; however Ultra does not expect the change to have a significant impact on the results of operations or the financial position of the Company.

 

The Company files a consolidated federal income tax return in the United States Federal jurisdiction and various combined, consolidated, unitary, and separate filings in several state and foreign jurisdictions. For all material jurisdictions, the Company is no longer subject to U.S. Federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 1997.

 

Estimated interest and penalties related to potential underpayment on any unrecognized tax benefits are classified as a component of tax expense in the Consolidated Statement of Operations. As of the date of adoption of FIN 48, Ultra did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor were any interest expense or penalties recognized during the nine months ended September 30, 2007.

 

The Company does not anticipate that total unrecognized tax benefits will significantly change due to the settlement of audits and the expiration of statute of limitations prior to September 30, 2008.

 

ULTRA PETROLEUM CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table summarizes the components of Income Tax Expense for the three and nine months ended September 30, 2007 and 2006:

 

 

 

The Company’s major market risk exposure is in the pricing applicable to its natural gas and oil production. Realized pricing is primarily driven by the prevailing price for the Company’s Wyoming natural gas production. Historically, prices received for natural gas production have been volatile and unpredictable. Pricing volatility is expected to continue. Gas price realizations averaged $4.76 per Mcf during the nine months ended September 30, 2007.

 

The Company primarily relies on fixed price forward gas sales to manage its commodity price exposure. These fixed price forward gas sales are considered normal sales. The Company may, from time to time and to a lesser extent, use derivative instruments as one way to manage its exposure to commodity prices. The Company has periodically entered into fixed price to index price swap agreements in order to hedge a portion of its production. The oil and natural gas reference prices of these commodity derivatives contracts are based upon crude oil and natural gas futures, which have a high degree of historical correlation with actual prices the Company receives. Under SFAS No. 133 all derivative instruments are recorded on the balance sheet at fair value. Changes in the derivative’s fair value are recognized currently in earnings unless specific hedge accounting criteria are met. For qualifying cash flow hedges, the gain or loss on the derivative is deferred in accumulated other comprehensive income (loss) to the extent the hedge is effective. For qualifying fair value hedges, the gain or loss on the derivative is offset by related results of the hedged item in the income statement. Gains and losses on hedging instruments included in accumulated other comprehensive income (loss) are reclassified to oil and natural gas sales revenue in the period that the related production is delivered. Derivative contracts that do not qualify for hedge accounting treatment are recorded as derivative assets and liabilities at market value in the consolidated balance sheet, and the associated unrealized gains and losses are recorded as current expense or income in the consolidated statement of operations. The Company currently does not have any derivative contracts in place that do not qualify as a cash flow hedge.

 

ULTRA PETROLEUM CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

At September 30, 2007, the Company had the following open commodity derivative contracts to manage price risk on a portion of its natural gas production whereby the Company receives the fixed price and pays the variable price (all prices NWPL Rockies basis).

 

 

 

 

The Company also utilizes fixed price forward physical delivery contracts at southwest Wyoming delivery points to hedge its commodity price exposure. The Company had the following fixed price physical delivery contracts in place on behalf of its interest and those of other parties at September 30, 2007. (The Company’s approximate average net interest in physical gas sales is 80%.)

 

 

 

During the third quarter of 2007, we made the decision to dispose of Sino-American Energy Corporation, which owned our Bohai Bay assets in China in order to focus on our legacy asset in the Pinedale Field in southwest Wyoming. The reserve volumes sold represent all of Ultra’s international assets and, previously, were the only results included in our foreign operating segment.

 

On September 26, 2007, Ultra Petroleum Corp.’s wholly-owned subsidiary, UP Energy Corporation, a Nevada corporation, entered into a definitive share purchase agreement to sell all of the outstanding shares of Sino-American Energy Corporation (“Sino-American”), a Texas corporation, for a total purchase price of US$223.0 million, subject to adjustments. Sino-American held all of Ultra Petroleum Corp.’s interests in oil and gas production sharing contracts in Bohai Bay, China. The purchaser is SPC E&P (China) Pte. Ltd., a wholly-owned subsidiary of Singapore Petroleum Company. For tax purposes, this transaction will be treated as an asset sale as the Company agreed to make a 338(h)(10) election in the stock purchase agreement. See Note 9 for further discussion on the completion of the sale.

 

The Company has accounted for its Sino-American operations as discontinued operations and has reclassified prior period financial statements to exclude these businesses from continuing operations. A summary of financial information related to the Company’s discontinued operations is as follows:

 

 

ULTRA PETROLEUM CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The major classes of “Assets related to operations held for sale” and “Liabilities associated with operations held for sale” on the Balance Sheet at September 30, 2007 and December 31, 2006 were as follows:

 

 

 

On October 22, 2007, the sale of Sino-American Energy Corporation closed for a total purchase price of US$223.0 million which will result in an after-tax gain on sale of properties during the quarter ended December 31, 2007 of approximately $70.5 million.

 

 

The Company is currently involved in various routine disputes and allegations incidental to its business operations. While it is not possible to determine the ultimate disposition of these matters, the Company believes that the resolution of all such pending or threatened litigation is not likely to have a material adverse effect on the Company’s financial position or results of operations.

 

 

The following discussion of the financial condition and operating results of the Company should be read in conjunction with the consolidated financial statements and related notes of the Company. Except as otherwise indicated all amounts are expressed in U.S. dollars. We operate in one industry segment, natural gas and oil exploration and development with one geographical segment; the United States. (See Note 8 for a discussion regarding the sale of our Chinese assets).

 

The Company currently generates the majority of its revenue, earnings and cash from the production and sales of natural gas and oil from its property in southwest Wyoming. The price of natural gas in the southwest Wyoming region is a critical factor to the Company’s business. The price of gas in southwest Wyoming historically has been volatile. The average realizations for the period 2003-2007 have ranged from $3.84 to $8.64 per Mcf. This volatility could be detrimental to the Company’s financial performance. The Company seeks to limit the impact of this volatility on its results by entering into fixed price forward physical delivery contracts and swap agreements for gas in southwest Wyoming. The average realization for the Company’s gas during the quarter ended September 30, 2007 was $4.04 per Mcf.

 

The Company has grown its natural gas and oil production from continuing operations significantly over the past three years and management believes it has the ability to continue growing production by drilling already identified locations on its leases in Wyoming. The Company delivered 26% production growth from continuing operations on an Mcfe basis during the quarter ended September 30, 2007 as compared to the same quarter in 2006.

 

On September 27, 2007, the company announced the execution of a stock purchase agreement for the sale of Sino-American Energy Corporation which represents all of Ultra’s interest in Bohai Bay, China for $223 million. Proved reserves at year-end 2006 for Sino-American were approximately 4 MMBbls which represented 1% of Ultra’s total booked proved reserves. Despite having owned Sino-American in the third quarter of 2007, under generally accepted accounting principles (“GAAP”), its operations have been reclassified as “Discontinued Operations” for the entire quarter and for the prior-year period. As a result, production, revenues and expenses associated with Sino-American have been removed from continuing operations and reclassified to discontinued operations. The sale closed on October 22, 2007, with an effective date of June 30, 2007. The purchaser of Sino-American Energy Corporation is SPC E&P (China) Pte Ltd, a wholly-owned subsidiary of Singapore Petroleum Company Limited.

 

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values. The Company adopted SFAS No. 123R using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. Share-based compensation expense recognized under SFAS No. 123R for the nine months ended September 30, 2007 and 2006 was $1.6 million and $0.7 million, respectively, which consisted of stock-based compensation expense related to employee stock options. At September 30, 2007, there was $8.8 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under stock incentive plans. That cost is expected to be recognized over a weighted average period of 2.24 years. See Note 4 for additional information.

 

SFAS No. 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The Company utilized a Black-Scholes option pricing model to measure the fair value of stock options granted to employees. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statement of Operations. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.

The Company uses the full cost method of accounting for oil and gas operations whereby all costs associated with the exploration for and development of oil and gas reserves are capitalized on a country-by-country basis. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells and overhead charges directly related to acquisition, exploration and development activities. Substantially all of the oil and gas activities are conducted jointly with others and, accordingly, the amounts reflect only the Company’s proportionate interest in such activities. Inflation has not had a material impact on the Company’s results of operations and is not expected to have a material impact on the Company’s results of operations in the future.

 

Under the full cost method of accounting, a ceiling test is performed each quarter. The full cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule 4-10. The ceiling test determines a limit, on a country-by-country basis, on the book value of oil and gas properties. The capitalized costs of proved oil and gas properties, net of accumulated DD&A and the related deferred income taxes, may not exceed the estimated future net cash flows from proved oil and gas reserves, generally using prices in effect at the end of the period held flat for the life of production excluding the estimated abandonment cost for properties with asset retirement obligations recorded on the balance sheet and including the effect of derivative contracts that qualify as cash flow hedges, discounted at 10%, net of related tax effects, plus the cost of unevaluated properties and major development.

 

SEC Regulation S-X Rule 4-10 states that if prices in effect at the end of a quarter are the result of a temporary decline and prices improve prior to the issuance of the financial statements, the increased price may be applied in the computation of the ceiling test. At September 30, 2007, prices in effect in southwest Wyoming were temporarily low due to a confluence of the following factors: (i) a fire at a compressor station on a major pipeline that exports natural gas from Wyoming; (ii) scheduled and unscheduled maintenance on pipelines in the region; and, (iii) lack of demand due to mild temperatures in the Rockies’ region. Since September 30, 2007, prices have recovered such that the Company’s future net cash flows (as described above) are in excess of the Company’s capitalized costs of proved oil and gas properties, net of accumulated DD&A and the related deferred income taxes. If the Company had applied the price in effect at September 30, 2007 ($0.67 per Mcf), it would have recognized a ceiling test impairment of $489.5 million.

 

RESULTS OF OPERATIONS

 

QUARTER ENDED SEPTEMBER 30, 2007 VS. QUARTER ENDED SEPTEMBER 30, 2006

 

During the third quarter of 2007, production from continuing operations increased 26% on an equivalent basis to 26.9 Bcfe from 21.4 Bcfe for the same quarter in 2006 attributable to the Company’s successful drilling activities during 2006 and in the first nine months of 2007. Average realized prices for natural gas decreased 29% due to a fire at a compressor station on a major pipeline that exports natural gas from Wyoming, scheduled and unscheduled maintenance on pipelines in the region and lack of demand due to mild temperatures in the Rockies’ region to $4.04 per Mcf in the third quarter of 2007 as compared to $5.68 for the third quarter of 2006. The decrease in realized average natural gas prices offset by the increase in production contributed to an 8% decrease in revenues from continuing operations to $117.2 million as compared to $127.5 million in 2006.

 

Lease operating expense (“LOE”) increased to $6.4 million at September 30, 2007 compared to $5.4 million at September 30, 2006 due to increased production volumes along with increased water disposal costs in Wyoming. On a unit of production basis, LOE costs decreased to $0.24 per Mcfe at September 30, 2007 compared to $0.25 per Mcfe at September 30, 2006 due to increased production volumes. During the third quarter of 2007, production taxes were $13.0 million compared to $14.5 million during the third quarter of 2006, or $0.48 per Mcfe, compared to $0.68 per Mcfe. The decrease in per unit taxes is attributable to the lower realized gas price received during the quarter ended September 30, 2007 as compared to the same period in 2006. Production taxes are calculated based on a percentage of revenue from production. Gathering fees increased to $6.7 million at September 30, 2007 compared to $5.5 million at September 30, 2006 largely due

to increased production volumes. On a per unit basis, gathering fees remained relatively flat at $0.25 per Mcfe for the three months ended September 30, 2007 as compared to $0.26 per Mcfe for the same period in 2006.

 

Depletion, depreciation and amortization (“DD&A”) expenses increased to $31.9 million during the quarter ended September 30, 2007 from $19.6 million for the same period in 2006, attributable to increased production volumes and a higher depletion rate, due mainly to forecasted increased future development costs. On a unit basis, DD&A increased to $1.18 per Mcfe at September 30, 2007 from $0.91 at September 30, 2006.

 

General and administrative expenses declined to $3.5 million ($0.13 per Mcfe) at September 30, 2007 compared to $4.2 million ($0.20 per Mcfe) for the same period in 2006. This decrease was primarily attributable to a reduction in year over year compensation expense in combination with higher production volumes during the quarter ended September 30, 2007 as compared to the same period in 2006.

 

Interest expense increased to $5.6 million during the quarter ended September 30, 2007 from $0.9 million during the same period in 2006. The increase is related to higher outstanding balances under the Company’s credit facility during the quarter ended September 30, 2007 as compared to the same period in 2006. At September 30, 2007, the outstanding balance under the credit facility was $395.0 million while the outstanding balance at September 30, 2006 was $110.0 million.

 

Net income before income taxes decreased to $50.5 million for the quarter ended September 30, 2007 from $77.7 million for the same period in 2006 primarily as a result of decreased natural gas prices offset by increased production.

 

The income tax provision decreased to $17.7 million for the three months ended September 30, 2007 as compared to $35.9 million for the three months ended September 30, 2006 due to lower pre-tax income and lower withholding tax related to share repurchases (See Note 6).

 

Discontinued operations, net of tax, (which is comprised entirely of results associated with the Chinese assets) decreased to $4.6 million for the quarter ended September 30, 2007 from $10.7 million for the same period in 2006. The decrease is primarily related to decreased oil production and increased LOE and DD&A.

 

For the quarter ended September 30, 2007, net income decreased to $37.4 million or $0.24 per diluted share as compared with $52.5 million or $0.33 per diluted share for the same period in 2006 primarily attributable to reduced gas prices realized in 2007.

 

NINE MONTHS ENDED SEPTEMBER 30, 2007 VS. NINE MONTHS ENDED SEPTEMBER 30, 2006

 

During the nine-months ended September 30, 2007, production from continuing operations increased 45% on an equivalent basis to 80.8 Bcfe from 55.9 Bcfe for the same nine-month period in 2006. The increase is primarily attributable to the additional wells drilled and completed during 2006 along with the increased drilling and completion during the nine-months ended September 30, 2007. Average realized prices for natural gas decreased 23% due to a fire at a compressor station on a major pipeline that exports natural gas from Wyoming, scheduled and unscheduled maintenance on pipelines in the region and lack of demand due to mild temperatures in the Rockies’ region to $4.76 per Mcf for the nine months ended September 30, 2007 as compared to $6.18 for the same period in 2006. The increase in production offset by the decrease in realized average natural gas price contributed to a 13% increase in revenues to $404.7 million as compared to $358.2 million in 2006.

 

LOE increased to $16.7 million for the nine months ended September 30, 2007 compared to $10.2 million during the same period in 2006 due to increased production volumes as well as increased water disposal costs in Wyoming. On a unit of production basis, LOE costs increased to $0.21 per Mcfe during the nine months ended September 30, 2007 as compared to $0.18 per Mcfe during the same period ended September 30, 2006 due to increased water disposal costs in Wyoming. During the nine months ended September 30, 2007 production taxes were $45.2 million compared to $41.2 million during the same period in 2006, or $0.56 per Mcfe during nine months ended September 30, 2007 as compared to $0.74 per Mcfe during the same period in 2006. Production taxes are calculated based on a percentage of revenue from production. Gathering fees increased to $20.1 million during the first nine months of 2007 compared to $13.6 million during the nine

months ended September 30, 2006 largely due to increased production volumes. On a per unit basis, gathering fees remained relatively flat at $0.25 per Mcfe for the nine months ended September 30, 2007 compared to $0.24 per Mcfe for the same period in 2006.

 

DD&A expenses increased to $94.1 million during the nine months ended September 30, 2007 from $50.2 million for the same period in 2006, attributable to increased production volumes and a higher depletion rate, due to forecasted increased future development costs. On a unit basis, DD&A increased to $1.16 per Mcfe for the nine months ended September 30, 2007 from $0.90 per Mcfe for the same period in 2006.

 

General and administrative expenses decreased by 16% to $10.1 million during the nine months ended September 30, 2007 compared to $12.1 million for the same period in 2006. On a per unit basis, general and administrative expenses decreased to $0.13 per Mcfe during the nine months ended September 30, 2007 compared with $0.22 per Mcfe for the same period in 2006. This decrease was primarily attributable to a reduction in year over year compensation expense in combination with higher production volumes.

 

Interest expense increased to $12.5 million during the nine months ended September 30, 2007 from $1.2 million during the same period in 2006. The increase is related to higher outstanding balances under the Company’s credit facility during the first nine months of 2007 as compared to the same period in 2006.

 

Net income before income taxes decreased by 11% to $206.9 million for the nine months ended September 30, 2007 from $231.3 million for the same period in 2006.

 

The income tax provision decreased 20% to $73.7 million for the nine months ended September 30, 2007 as compared to $91.9 million for the nine months ended September 30, 2006 attributable to a decrease in pre-tax income and lower withholding tax related to share repurchases (See Note 6).

 

Discontinued operations, net of tax, (which is comprised entirely of results associated with the Chinese assets) decreased to $19.9 million for the quarter ended September 30, 2007 from $31.2 million for the same period in 2006. The decrease is primarily related to decreased oil production and increased LOE and DD&A.

 

For the nine months ended September 30, 2007, net income decreased by 10% to $153.1 million or $0.96 per diluted share as compared with $170.6 million or $1.05 per diluted share for the same period in 2006.

 

The discussion and analysis of the Company’s financial condition and results of operations is based upon consolidated financial statements, which have been prepared in accordance with U.S. GAAP. In addition, application of generally accepted accounting principles requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the revenues and expenses reported during the period. Changes in these estimates, judgments and assumptions will occur as a result of future events, and, accordingly, actual results could differ from amounts estimated.

 

LIQUIDITY AND CAPITAL RESOURCES

 

During the nine month period ended September 30, 2007, the Company relied on cash provided by operations along with borrowings under the senior credit facility to finance its capital expenditures. The Company participated in the drilling of 144 wells in Wyoming. For the nine-month period ended September 30, 2007, net capital expenditures were $531.0 million ($517.1 from continuing operations and $13.9 million from discontinued operations). At September 30, 2007, the Company reported a cash position of $8.7 million compared to $16.8 million at September 30, 2006. Working capital at September 30, 2007 was $26.9 million compared to a deficit of $36.9 million at September 30, 2006. As of September 30, 2007, the Company had $395.0 million in bank indebtedness outstanding and $105.0 million of available borrowing capacity under our facility. Other long-term obligations of $34.3 million comprised of items payable in more than one year, primarily related to production taxes.

 

The Company’s positive cash provided by operating activities, along with the availability under the senior credit facility, are projected to be sufficient to fund the Company’s budgeted capital expenditures for 2007, which are currently projected to be $740 million. Of the $740 million budget, the Company plans to allocate approximately 94% to Wyoming and 4% to Pennsylvania. The remaining 2% was allocated to Bohai Bay, China.

The Company (through its subsidiary) is a party to a revolving credit facility with a syndicate of banks led by JP Morgan Chase Bank, N.A. which matures in April 2012. This agreement provides an initial loan commitment of $500.0 million and may be increased to a maximum aggregate amount of $750.0 million at the request of the Company. Each bank has the right, but not the obligation, to increase the amount of its commitment as requested by the Company. In the event the existing banks increase their commitment to an amount less than the requested commitment amount, then it would be necessary to add new financial institutions to the credit facility.

 

Loans under the credit facility are unsecured and bear interest, at our option, based on (A) a rate per annum equal to the higher of the prime rate or the weighted average fed funds rate on overnight transactions during the preceding business day plus 50 basis points, or (B) a base Eurodollar rate, substantially equal to the LIBOR rate, plus a margin based on a grid of our consolidated leverage ratio (0.875 basis points per annum as of September 30, 2007).

 

The facility has restrictive covenants that include the maintenance of a ratio of consolidated funded debt to EBITDAX (earnings before interest, taxes, DD&A and exploration expense) not to exceed 31/2 times; and as long as our debt rating is below investment grade, the maintenance of an annual ratio of the net present value of our oil and gas properties to total funded debt of at least 1.75 to 1.00. At September 30, 2007, we were in compliance with all of our debt covenants.

 

During the nine months ended September 30, 2007, net cash provided by operating activities was $358.2 million, a 9% increase over the $329.3 million for the same period in 2006. The increase in net cash provided by operating activities was largely attributable to the increase in production during the nine months ended September 30, 2007, partially offset by decreased realized natural gas prices during the nine months ended September 30, 2007 as compared to the same period in 2006.

 

During the nine months ended September 30, 2007, net cash used in investing activities was $528.5 million as compared to $310.9 million for the same period in 2006. The increase in net cash used in investing activities is largely due to increased capital expenditures associated with the Company’s drilling activities in 2007.

 

During the nine months ended September 30, 2007, net cash provided by financing activities was $164.5 million as compared to net cash used in financing activities of $45.6 million for the same period in 2006. The change in net financing activities is primarily attributable to borrowings under the Company’s senior credit facility during 2007 offset by increased share repurchases under the Company’s share repurchase program during the nine months ended September 30, 2006 (See Note 5).

 

OFF BALANCE SHEET ARRANGEMENTS

 

The Company did not have any off-balance sheet arrangements as of September 30, 2007.

 

CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

 

This report contains or incorporates by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included in this document, including without limitation, statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding our financial position, estimated quantities and net present values of reserves, business strategy, plans and objectives of the Company’s management for future operations, covenant compliance and those statements preceded by, followed by or that otherwise include the words “believe”, “expects”, “anticipates”, “intends”, “estimates”, “projects”, “target”, “goal”, “plans”, “objective”, “should”, or similar expressions or variations on such expressions are forward-looking statements. The Company can give no assurances that the assumptions upon which such forward-looking statements are based will prove to be correct nor can the Company assure adequate funding will be available to execute the Company’s planned future capital program.

Other risks and uncertainties include, but are not limited to, fluctuations in the price the Company receives for oil and gas production, reductions in the quantity of oil and gas sold due to increased industry-wide demand and/or curtailments in production from specific properties due to mechanical, marketing or other problems, operating and capital expenditures that are either significantly higher or lower than anticipated because the actual cost of identified projects varied from original estimates and/or from the number of exploration and development opportunities being greater or fewer than currently anticipated and increased financing costs due to a significant increase in interest rates. See the Company’s annual report on Form 10-K for the year ended December 31, 2006 for additional risks related to the Company’s business.

 

 

The Company’s major market risk exposure is in the pricing applicable to its natural gas and oil production. Realized pricing is primarily driven by the prevailing price for the Company’s Wyoming natural gas production. Historically, prices received for natural gas production have been volatile and unpredictable. Pricing volatility is expected to continue. Gas price realizations averaged $4.76 per Mcf during the nine months ended September 30, 2007.

 

The Company primarily relies on fixed price forward gas sales to manage its commodity price exposure. These fixed price forward gas sales are considered normal sales. The Company may, from time to time and to a lesser extent, use derivative instruments as one way to manage its exposure to commodity prices. The Company has periodically entered into fixed price to index price swap agreements in order to hedge a portion of its production. The oil and natural gas reference prices of these commodity derivatives contracts are based upon crude oil and natural gas futures, which have a high degree of historical correlation with actual prices the Company receives. Under SFAS No. 133 all derivative instruments are recorded on the balance sheet at fair value. Changes in the derivative’s fair value are recognized currently in earnings unless specific hedge accounting criteria are met. For qualifying cash flow hedges, the gain or loss on the derivative is deferred in accumulated other comprehensive income (loss) to the extent the hedge is effective. For qualifying fair value hedges, the gain or loss on the derivative is offset by related results of the hedged item in the income statement. Gains and losses on hedging instruments included in accumulated other comprehensive income (loss) are reclassified to oil and natural gas sales revenue in the period that the related production is delivered. Derivative contracts that do not qualify for hedge accounting treatment are recorded as derivative assets and liabilities at market value in the consolidated balance sheet, and the associated unrealized gains and losses are recorded as current expense or income in the consolidated statement of operations. The Company currently does not have any derivative contracts in place that do not qualify as a cash flow hedge.

 

At September 30, 2007, the Company had the following open commodity derivative contracts to manage price risk on a portion of its natural gas production whereby the Company receives the fixed price and pays the variable price (all prices NWPL Rockies basis).

 

 

 

 

The Company also utilizes fixed price forward physical delivery contracts at southwest Wyoming delivery points to hedge its commodity price exposure. The Company had the following fixed price physical delivery contracts in place on behalf of its interest and those of other parties at September 30, 2007. (The Company’s approximate average net interest in physical gas sales is 80%.)

 

 

 

 

We have performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Our disclosure controls and procedures are the controls and other procedures that we have designed to ensure that we record, process, accumulate and communicate information to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures and submissions within the time periods specified in the SEC’s rules and forms. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those determined to be effective can provide only a reasonable assurance with respect to financial statement preparation and presentation. Based on the evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of September 30, 2007. There were no changes in our internal control over financial reporting during the nine months ended September 30, 2007 that have materially affected or are reasonably likely to affect, our internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

 

The Company is currently involved in various routine disputes and allegations incidental to its business operations. While it is not possible to determine the ultimate disposition of these matters, the Company believes that the resolution of all such pending or threatened litigation is not likely to have a material adverse effect on the Company’s financial position, or results of operations.

 

 

There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

 

 

 

On May 17, 2006, the Company announced that its Board of Directors authorized a share repurchase program for up to an aggregate $1 billion of the Company’s outstanding common stock which has been and will be funded by cash on hand and the Company’s senior credit facility. Pursuant to this authorization, the Company has commenced a program to purchase up to $500.0 million of the Company’s outstanding shares through open market transactions or privately negotiated transactions. The stock repurchase will be funded with cash held in an Ultra Resources bank account or the Company’s senior credit facility.

 

During the nine months ended September 30, 2007, the Company repurchased 1,431,170 shares of its common stock in open market transactions for an aggregate $78.9 million at a weighted average price of $55.12 per share. Since the program’s inception in May 2006, the Company has purchased a total of 5.4 million shares in open market transactions for an aggregate $276.4 million at a weighted average price of $51.19 per share.

 

In addition to the shares repurchased in open market transactions during the nine months ended September 30, 2007, the Company also acquired 82,797 shares delivered by employees for $4.9 million to satisfy the exercise price of the employees’ stock options and tax withholding obligations to satisfy tax withholding obligations in connection with the vesting of equity shares of common stock issued pursuant to the Company’s employee incentive plans.

 

In total, during the nine months ended September 30, 2007, the Company repurchased 1,513,967 shares of its common stock for an aggregate $83.8 million dollars at a weighted average price of $55.36 per share. Since the program’s inception in May 2006, the Company has repurchased 5.5 million shares of its common stock for an aggregate $282.1 million at a weighted average price of $51.18 per share.

 

 

None.

 

 

None.

 

 

None.

 

 

(a) Exhibits

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

ULTRA PETROLEUM CORP.

 

Name:     Michael D. Watford

 

Date: November 1, 2007

 

Name:     Marshall D. Smith

 

Date: November 1, 2007

 

EXHIBIT INDEX