Ultra Petroleum

One of the most attractive long-term investment themes is in the natural gas industry.  And Ultra Petroleum (UPL) represents one of the most fundamentally solid and attractively valued stocks in this space.  And while I remain as positive as ever on this long-term theme, I exited positions in UPL during today’s trading for the following reasons.

Short-term forces have had the natural gas thesis under pressure in recent months, as prices remain in secular decline due to oversupply more than offsetting the substitution effect from high oil prices.  This has caused the stock price of natural gas related companies like UPL to underperform.  While increasing substitution and a slowdown in production will eventually shift natural gas prices into a secular rise, we may still be at least a few months away at this point.  And with the global economy weakening and Europe descending toward potential crisis, now is not an attractive time to hold higher beta names like those found in the natural gas space.

 

The decision to exit Ultra Petroleum on Wednesday was driven by the following factors.  Since the beginning of the week, UPL has posted a +17% gain that included a +7.2% advance on Wednesday alone.  And today’s jump came on trading volume that was three times the average daily volume.  Given that short interest in UPL was running in the low double digits heading into the week, the recent sharp advance has the feel of a short squeeze.  This, of course, is not the foundation for a sustained move higher.  Another factor driving the UPL sale was technical resistance.  During the trading day, UPL advanced up to resistance at its 50-day moving average before quickly pulling back.  UPL has risen into resistance at its 50-day moving average on six separate occasions over the past year, and on each past instance it has failed and moved lower.  These factors along with the Relative Strength Index reaching a bearish peak reading at 50 all suggested that the timing was right to step to the sidelines on this position.

I will likely look to reestablish positions in UPL at some point in the future when fundamentals start to show signs of sustainable improvement and the technical picture is more constructive.

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