S&P Affirms Ratings on Ultra Petroleum (UPL) Following SWEPI L.P. Deal

Standard & Poor's Ratings Services affirmed its 'BB' corporate credit rating with a stable outlook on Houston, Tex.-based Ultra Petroleum (NYSE: UPL), following the announcement of its proposed asset exchange and cash payment to SWEPI L.P., an affiliate of Royal Dutch Shell plc.

At the same time, we affirmed our 'BB' issue-level rating on the company's existing unsecured debt held at the parent company. The recovery rating on this debt is a '3', reflecting our expectation of meaningful (50% to 70%) recovery in the event of a payment default.

We are affirming the ratings on Ultra Petroleum following its announcement that it will acquire 2,100 billion cubic feet equivalent (bcfe) of proved natural gas reserves in the Pinedale field (Wyoming) from an affiliate of Royal Dutch Shell in exchange for 232 bcfe of proved natural gas reserves in the Marcellus shale (northern Pennsylvania) and $925 million in cash.

"In our view, despite reducing geographic diversification, the acquisition improves the company's business risk profile by meaningfully increasing its overall proved reserve base and improving profitability, given currently narrower gas price differentials in Wyoming relative to northern Pennsylvania," said Standard & Poor's credit analyst Carin Dehne-Kiley.

Based on current natural gas prices and well costs, the company estimates returns of more than 50% in the Pinedale and essentially 0% in this area of the Marcellus. Ultra has increased its capital spending plans for the next several years which, along with the incremental debt to fund the acquisition, pushes out the expected improvement in credit measures until late 2015.

Incorporating the acquisition and organic growth year-to-date, we are raising our assessment of Ultra's business risk profile to "satisfactory" from "fair." We assess Ultra's financial risk profile as "aggressive." We assess Ultra's liquidity as "adequate," given that we expect liquidity sources to exceed uses by at least 1.2x over the next 12 to 24 months. We expect sources would exceed uses even if our projected EBITDA declined by 15%.

Our stable outlook reflects our expectation that Ultra Petroleum will reduce leverage to levels more appropriate for the rating over the next 12 months.

We could consider a downgrade if we expected FFO to debt to remain below 20% for a sustained period, which would most likely occur if Henry Hub natural gas prices fellow below $3.50/mmBTU and Ultra did not rein in capital spending.

We could consider an upgrade if Ultra were able to significantly improve leverage, such that FFO to debt remained above 45% for a sustained period.

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