Ultra Petroleum Corp. (NYSE: UPL) announced Oct. 21 that it has signed an agreement to buy oil-producing properties in the Uinta Basin for $650 million.

“This oil acquisition fits our strategy of profitable growth with exceptional returns at oil prices well below $75 per barrel,” said Michael D. Watford, chairman, president and CEO. “As operator with 100% working interest, we will apply the same drilling techniques used in Pinedale due to similar geologic characteristics.”

The asset is cash-flow positive starting in year one and completely pays for itself in five years followed by decades of free cash flow, Watford said.

The purchase of an oil-producing asset was “not surprising as UPL has been looking to pivot away from poor Marcellus differentials and weak gas prices,” according to Tudor, Picking, Holt & Co.

The oil-producing properties are located in northeast Utah and currently produce a net 4,000 barrels of oil per day from 38 producing wells. Net risked reserves are estimated to be 90 million barrels of oil.

The company said it has 575 future well locations and proved-like reserves of 37 million barrels of oil.

Uinta Basin Regional Comparison

Three Rivers

Altamont/

Bluebell

Monument Butte

Natural Buttes

Operator

UPL

BBG

NFX

QEP

Vertical Depth (feet)

7,000

13,000

5,000

10,000

Well Cost ($MM)

$1.5

$3.6

$1.1

$2.3

Well EURs (oil)

160,000–380,000

300 ,000

100,000

2.3 Bcfe (gas)

Source: Ultra Petroleum

Wells Fargo Securities said Ultra Petroleum plans to double production in 2014 with one rig, which would equate to $170 million operating cash flow at the field level using a 20% deduct off strip pricing. The company is targeting the Lower Green River, which is slightly shallower than other formations in the Uinta (7,000-foot vertical depth), allowing for spud-to-release times of about a week and costs of $1.5 million per well.

The transaction includes the prior operator’s takeaway capacity, which UPL believes is sufficient to handle projected volumes.

“We like the purchase from a diversification/cash flow/return standpoint, and the assets give UPL the optionality to allocate capital towards oil instead of simply gas assets,” Wells Fargo said.

Doubling the Uinta’s production in 2014 would bring gas as a percent of Ultra’s total to 93% from 98% based on estimates for fiscal year 2014.

“Although market perception not likely to be the same as buying Bakken assets given some takeaway/permitting constraints in the Uinta, we believe shares will move higher,” Wells Fargo said.

However, Global Hunter Securities said that Ultra had long weighed the prospect of an oil acquisition.

“We do not expect the market to be overly enthusiastic on this news given that other players, such as Bill Barrett Corp. (NYSE: BBG), have not been rewarded for their position in the basin due to marketing and other issues,” GHS said.

Ultra Petroleum expects to finance the acquisition through debt at the subsidiary and parent level. Ultra anticipates the transaction will close December 2013, subject to closing adjustments and customary terms and conditions, with an effective date of Oct. 1, 2013.

Ultra Petroleum Corp. is an independent exploration and production company focused on developing its long-life natural gas reserves in the Green River Basin of Wyoming – the Pinedale and Jonah Fields and is in the early exploration and development stages in the Appalachian Basin of Pennsylvania.

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