1 Natural Gas Stock for 2012 and Beyond

The natural gas market has been tanking for the better part of this year. But that doesn't seem to be affecting Ultra Petroleum (NYS: UPL) . This cost-obsessed natural gas producer knows how to keep cutting costs and has capped off a fairly successful year with outstanding fundamentals.

In a deadly market where natural gas prices gradually fell from $4.75/mcf at the start of the year to the current value of $3.09/mcf, management ensured that cash flows were never affected. How? The mantra for this year was pretty simple: Increase natural gas production. The first quarter saw a 15% year-over-year production rise, the second quarter saw a corresponding 13% increase, and the third quarter saw a 14% rise.

The secret
We've been extolling the virtues of natural gas for some time now. From industrial purposes, to electricity generation, to fuel for trucks and cars, this commodity seems to hold huge promise. However, the only problem is that America seems to be swimming in this commodity, thanks to the shale revolution. And currently, demand hasn't matched supply, at least domestically. The result is that prices have hit rock bottom.

However, my Foolish colleague and energy editor Dan Dzombak has revealed the secret to investing in commodities. It's simple: Invest in those companies that produce natural gas below the cost at which it sells. And Dan recommends Ultra Petroleum as his prime pick, along with Southwestern Energy (NYS: SWN) and GMX Resources (NYS: GMXR) . Looking back this year, Ultra has done just that.

Rule No. 1: Don't lose money
The company has managed to keep total production costs between $2.68 and $2.78/mcf, and this ensured positive cash flows. For the first nine months, Ultra Petroleum sold natural gas for an average price of $4.32. The second and third quarters saw record cash flows from operations at $293 million and $242 million, respectively -- the highest in the past 10 quarters.

Ultra looks perfectly ready to take on next year. The growth opportunities ahead are huge. Its properties in Wyoming and Pennsylvania are yet to be fully developed. Expect further production growth in the next few quarters. I'm particularly looking forward to the company's Marcellus shale play, which it is jointly developing with EOG Resources (NYS: EOG) and EXCO Resources (NYS: XCO) .

The balance sheet might be looking a little shaky but I'm not too concerned. Current debt-to-equity stands at 125%. The company has leveraged itself above average levels to finance its capital expenditures. But with an interest coverage ratio of more than 15 times along with the kind of business model that I'm looking at, Ultra looks well placed to repay its loans. The loans are due from 2015 and beyond. That seems comfortably far away.

Foolish bottom line
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At the time thisarticle was published

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