Cramer Last Night -- Natural Gas

(c) 2009 F. Bruce Abel

Natural gas, natural gas. Two days ago it was Anandarko and last night it was Ultra. Cramer is fixated on natural gas. And natural gas stocks. He thinks the administration is being won over, and I'll bet he is right.

The transcript from last night:

Jim: Here's a quandary... I've been astonished by the ability of natural gas stocks to soar ever higher, even as the price of the underlying commodity has been pounded, pounded into the ground... You'd think the producers would be at multi-year lows, or at least 52-week lows, with natural gas prices touching seven years ago... Seven years... Low...

Jim: But instead, the stocks have been ramping... I've said I think the action is a sign that Washington will finally embrace this cleaner, greener, much cheaper fossil fuel... Instead of schizophrenically pushing pristine, but impractical energy sources, like wind and solar, while at the same time favoring the dirtiest fuel around, coal, betting somehow, they can make it clean...And maybe there is even more to it than that... Why, with prices so low are natural gas companies drilling more?... They should be drilling less... Unless they expect the commodity to come back, that is...Take one of my absolute favorites, Ultra Petroleum (UPL), which just reported a very solid quarter earlier this month, earning $0.52 a share and beating the Street's earnings expectations by $0.06... I like this company because it's one of the lowest cost producers out there and getting even better, as its costs fell by a miraculous 18% from the previous quarter...Ultra produced 44.5 billion cubic feet of natural gas, slightly above its forecast, although it left full year production guidance the same, predicting an 18-20% increase in production compared to 2008... The company had cut its drilling budget by $50 million the previous quarter, but then it did a u-turn, and increased its drilling budget by $65 million...Ultra is also ramping its drilling in that Marcellus Shale that I talk about... The one in the west part of Pennsylvania, and some of the central... where it now plans to drill 35 instead of 23 wells that it originally planned... Now, it's taken on some debt here... It's bringing its total debt to $764 million... It worries me a little, because it wants to push into Marcellus... You don't know... You don't do that when you expect things to get worse... You got to know something...Some of the improvement is company specific... Ultra got permission from the government to drill in the Pinedale field... We've talked about that many times... That's year round drilling, which there were some animals that were in the way... That allows the company to get to the better reserves, and shortens the time it takes to move rigs from one well to the next...Ultra Petroleum (UPL) is also hedged well, so well run, it realized gas prices for the quarter were $5.04 per thousand cubic feet... Remember, this stuff is at like $2.80 here... Nearly twice the market price... For 2010 its hedged 51% of its production at $5.50... And for 2011, about 32% of the production is hedged at $5.56...Still, this isn't just about one natural gas company that's executing well... There's got to be a bigger story here... Don't take it from me... Let's go to a man who's called it straight the whole way since the show began... Let's go to Michael Watford, the CEO of Ultra Petroleum... Mr. Watford, welcome back to Mad Money...Mr. Watford: Thanks for the invitation, Jim. I always appreciate visiting with you.Jim: Well, you've just executed and executed and executed, but can you bring costs down to where you can make money when natural gas is under $3.00?Mr. Watford: Yes, Jim. I think Ultra is probably the only aspiration and production company in the U.S. today that can make money at sub $3.00 gas prices... I think you saw the second quarter of 2009 are all in costs were about $2.43/mcfe... So, even at a $3.00 gas price, we have earnings... Our cash flow, all in cash costs are at about $1.40...Jim: $1.40?Mr. Watford: $1.40 for cash costs, yes...Jim: Well, to our viewers, they probably think that you hire the same, you hire neighbors, you bring them in, it doesn't matter... Can you tell our viewer why your costs are lower than other guys?Mr. Watford: Well, Jim, we believe in profitable growth... Too many of our peers are really focused mainly on growth... We believe we got to make money through the business cycle, whatever the commodity prices are... We're a price taker, we have no influence on what the commodity prices whether its natural gas or crude oil is, so we focus on cost... And we do a great job of focusing on costs... We're attracted to low cost basins, as well... So, we tend to be more development in nature, on shore and natural gas, versus exploration in nature, deep water and crude oil exploration... So you see that both at the Pinedale Atlantic line, with the large natural gas resource we have there, and with the second corollary we're starting to develop in Pennsylvania... Both are very low costs with high margins, even at more modest gas prices...Jim: Michael, you would not, I believe, be drilling in the Marcellus Shale in Pennsylvania if you didn't think, this is my own personal view, that we are about to get a change in Washington, and this natural gas fuel will be favored for more than just 62% of heating American homes.Mr. Watford: Well, I definitely agree with you... I think we're about to see a change where natural gas will be a favored fuel... It clearly has many benefits over some of the more carbon emitting hydro-carbons like coal, and it's a natural bridge to help us move to wind and solar...Jim: Now, you did lower your drilling budget and then raise... Was that something you saw in Marcellus that just said, listen we can, even at these prices, really do well?Mr. Watford: Yeah, we think we can even do better in the Marcellus than we've done in Pinedale, and that's extraordinary.Jim: No, Pinedale is the cheapest in the country!Mr. Watford: Pinedale is fabulous, but we think that Marcellus, our returns will equal or exceed that... Now, part of that has to do with proximity to better gas markets.Jim: Right... Could you explain the hub system to our people so that they understand that natural gas in Colorado could be cheaper than gas somewhere else...Mr. Watford: Well, it all has to do with transportation costs to get your gas to market... Unfortunately, the Rockies have been rich in supply, and lacked take away capacity, or pipe line capacity to get the gas to market... There's very little local demand in the Rockies... So all the gas has to be exported or transported to the west coast, or Midwest northeast... The new Rockies express pipeline, which is just coming into being and will finally be finished early November, provides access to another 1.6 b's a day of gas out of the Rockies to access higher price Midwest, northeast markets... Soon, here in the next 18-24 months, we'll have additional pipeline capacity out of the Rockies... A ruby pipeline project, which will go to the west coast... So probably by this time 2011, Rocky supply will have the most market diversity of any natural gas supply basin in the U.S.Jim: What you're telling me is it wouldn't be so far field if we had all these pipelines all over the country to see a chain of 2000 natural gas gas stations where all the trucks that are doing interstate driving could fill up...Mr. Watford: I think that's very likely and very possible.Jim: Wow... Okay, how about this?... Today, National Post, a Canadian paper... "Natural gas may hit $1 in Canada"... I mean, what do we do if that happens?... Mr. Watford: Well, I don't think we worry about it if it happens for 2 or 3 months... You look at the forward curve of what happens after winter starts... I don't think anyone really pays attention to what happens in the next 30, 45 days...Jim: All right... One last question... I'm Dow Chemical Co. (DOW)... I have a $20 Billion natural gas bill... I call Michael Watford and I say, Michael I'm willing to pay $3.50 for the next 10 years of your natural gas... Do you make that deal?Mr. Watford: No, I don't make that deal because I think that in the next 10 years the natural gas price will average closer to $6.00... I think their futures market for 2010-2011 says that.Jim: Michael Watford, you a really good at your job. Thank you so much for coming on Mad Money...Mr. Watford: Thank you very much for inviting us.