Ultra, GMX enter Thomson Reuters shale gas index

Thu Mar 31, 2011 10:13am EDT

* Ultra becomes player in Marcellus; GMX now in Bakken oil

* Gas companies confront low prices amid production boom

By Daniel Trotta

NEW YORK, March 31 (Reuters) - Ultra Petroleum (UPL.N) and GMX Resources GMXR.N join the Thomson Reuters shale gas index TRSHALEGAS in the second quarter, putting the spotlight on two companies undergoing strategic changes.

Houston-based Ultra, an established player in the unconventional Pinedale natural gas field in Wyoming, has expanded into the Marcellus Shale in Pennsylvania in recent years to join the boom in shale gas production.

Oklahoma City-based GMX has diversified from its shale gas operations in the Haynesville Shale in Texas and Louisiana by adding oil exploration in the Bakken formation in North Dakota and the Niobrara formation in Wyoming.

They replace Apache Corp (APA.N) and Cimarex Energy Co (XEC.N), two companies that investors view more as oil companies than natural gas investments.

While Ultra trades at a slight premium with an EV/EBITDA ratio of 8 versus 6.5 for the index as a whole, GMX enters the index trading near the bottom on an EV/EBITDA basis at 5.2 as the company has raised equity and debt to pay for its Bakken acquisitions.

Ultra has mineral rights to some 260,000 acres (105,000 hectares) under lease in the Marcellus, which is expected to account for 15 percent of the company's 250 billion cubic feet of production forecast for this year.

Pinedale is a "tight sand" formation requiring technology similar to the modern hydraulic fracturing or "fracking" technique that has led to a boom in the Marcellus and other shale plays.

"In Pinedale we do more complicated frack jobs, drilling deeper wells that are more expensive and at higher pressures in an area where there is no water around in Wyoming," said Kelly Whitley, Ultra's director of investor relations.

GMX Resources has been mostly a shale gas producer in Haynesville but has joined the rush to drill for oil in the Bakken.

"They've been primarily a Haynesville producer on the East Texas side where you probably need gas prices closer to $6 for that area to be economic," said Biju Perincheril, an analyst at Jeffries and Company.

"The challenge is making that transition (to oil production) is not cheap. They probably will need additional funding," Perincheril said.

Gas prices NGc1 have been trending lower in recent years, trading in the range of $4.30 per mmBtu on Thursday after spiking above $13 in July 2008.

Many analysts are bearish on prices for the near future in what the U.S. Energy Information Administration said could be a record year for U.S. production in 2011, potentially breaking a 1973 record.

Proponents say onshore natural gas extracted from shale and other unconventional geological formations can provide the United States with an important domestic energy source, though industry has come under scrutiny from environmentalists concerned about the effects of fracking.

The Thomson Reuters shale gas index, using estimates by Thomson Reuters I/B/E/S, measures 20 companies based on their valuation ratios of price to earnings; enterprise value over earnings before interest, tax, depreciation and amortization; and price to net asset value.

Its constituents are chosen by Reuters News, and the second-quarter rebalance will appear starting on Monday. (Reporting by Daniel Trotta, editing by Dave Zimmerman)

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