Ultra Petro CFO sees tighter capex for many rivals

SAN FRANCISCO, Oct 6 (Reuters) - Ultra Petroleum Corp (UPL.N: Quote, Profile, Research, Stock Buzz) expects many rival U.S. natural gas drillers to temper 2009 drilling plans due to the twin pressures of tighter credit and lower prices, Chief Financial Officer Mark Smith said on Monday.

"You're going to see private companies pull back, you're going to see the high-cost producers pull back," Smith told investors at an industry conference. "We're just now starting that cycle where management teams are focused on what their drilling's going to be going forward."

He expected more to follow in the footsteps of Chesapeake Energy Co (CHK.N: Quote, Profile, Research, Stock Buzz), Petrohawk Energy Corp (HK.N: Quote, Profile, Research, Stock Buzz) and SandRidge Energy Inc (SD.N: Quote, Profile, Research, Stock Buzz) in cutting capital expenditure budgets.

On Monday, PetroQuest Energy Inc (PQ.N: Quote, Profile, Research, Stock Buzz) trimmed its capex estimate for 2008, partly due to a decline in energy prices.

U.S. natural gas futures NGX8 dropped more than 6 percent on Monday to $6.89 per million British thermal units as spot gas prices hit a nine-month low.

Smith pointed to a "cliff" around $7 for gas hotspots such as the Woodford and Barnett shales, Bossier Cotton Valley, and Uinta and Piceance basins because they required prices above that to make production worthwhile, based on Credit Suisse figures that assume a 10 percent internal rate of return

"In a lower price environment, we're going to see these fields begin to switch off," Smith told investors after presenting at the 2008 Oil & Gas Investment Symposium in San Francisco.

"So we're going to see management teams coming up on this quarter, when they're planning for '09, begin to say: 'You know what, we're no longer going to fund ourselves by ... spending 1.5 to two times our cash flow. We're going to pull that back, because some of these things don't make sense.'"

Smith said banks getting tougher on lending would also start to squeeze the private companies that produce nearly half of all U.S. natural gas.

"What are some of their key characteristics -- it's that they fly very, very close to that borrowing base limit allowed by the banks," he said.

As banks start to reset loans, these private companies would have to start diverting cash flow that would otherwise go to drilling to their banks, or else lose their companies.

"They're not going to do that, that's their livelihood, that's their family legacy. They're going to dedicate those cash flows to debt," Smith said.

"We have the luxury of being a low-cost producer," he added. "We see our cash flow being about our capex for 2009. We don't have those same pressures."

Ultra shares closed down $2.71, or 5.3 percent, at$48.16 on Monday on the New York Stock Exchange after hitting their lowest level in more than three years earlier in the day.. (Reporting by Braden Reddall)