##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM  TO
 Commission file number 0-29370
 ULTRA PETROLEUM CORP.
  Yukon Territory, Canada
    
    N/A(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. employer
identification number)363 North Sam Houston Parkway, Suite 1200, Houston, Texas
    
    77060(Address of principal executive offices)
    
    (Zip code)
 
 þ o
 þ o
  þ o o
 o þ




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1  FINANCIAL STATEMENTSITEM 2  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4  CONTROLS AND PROCEDURESPART II  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 1A. RISK FACTORSITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDSITEM 3. DEFAULTS IN SENIOR SECURITIESITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERSITEM 5. OTHER INFORMATIONITEM 6. EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESEXHIBIT INDEXCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906    Table of Contents  
 PART I  FINANCIAL INFORMATION
 
 ITEM 1  FINANCIAL STATEMENTS
  
 Three Months EndedMarch 31,2006
    
    
    2005Revenues:Natural gas sales
    
    $
    117,792,848
    
    
    $
    73,950,973Oil sales
    
    
    33,457,394
    
    
    
    15,413,043151,250,242
    
    
    
    89,364,016Expenses:Production expenses and taxes
    
    
    24,842,626
    
    
    
    16,614,588Depletion and depreciation
    
    
    18,640,141
    
    
    
    11,239,509General and administrative expenses
    
    
    4,202,345
    
    
    
    3,176,36147,685,112
    
    
    
    31,030,458Operating income
    
    
    103,565,130
    
    
    
    58,333,558Other (expense) income:Interest expense
    
    
    (171,781
    )
    
    
    (900,643
    )Interest income
    
    
    573,053
    
    
    
    74,865401,272
    
    
    
    (825,778
    )Income for the period, before income tax provision
    
    
    103,966,402
    
    
    
    57,507,780Income tax provision
    
    
    36,492,207
    
    
    
    20,185,231Net income for the period
    
    
    67,474,195
    
    
    
    37,322,549Retained earnings, beginning of period
    
    
    393,588,558
    
    
    
    165,288,311Retained earnings, end of period
    
    $
    461,062,753
    
    
    $
    202,610,860Net income per common share  basic
    
    $
    0.43
    
    
    $
    0.25Net income per common share  diluted
    
    $
    0.41
    
    
    $
    0.23Weighted average common shares outstanding  basic
    
    
    155,220,836
    
    
    
    150,862,214Weighted average common shares outstanding  diluted
    
    
    163,204,385
    
    
    
    160,950,546
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(Expressed in U.S. Dollars)
    
    Three Months EndedMarch 31,2006
    
    
    2005Cash provided by (used in):Operating activities:Net income for the period
    
    $
    67,474,195
    
    
    $
    37,322,549Adjustments to reconcile net income to net cash
provided by operating activities:Depletion and depreciation
    
    
    18,640,141
    
    
    
    11,239,509Deferred income taxes
    
    
    29,957,207
    
    
    
    20,185,231Stock compensation
    
    
    668
    
    
    
    614,576Net changes in non-cash working capital:Restricted cash
    
    
    (581
    )
    
    
    (412
    )Accounts receivable
    
    
    8,900,403
    
    
    
    10,339,753Inventory
    
    
    711,000
    
    
    
    (675,463
    )Prepaid expenses and other current assets
    
    
    7,402
    
    
    
    (2,560,819
    )Accounts payable and accrued liabilities
    
    
    (269,022
    )
    
    
    15,528,963Other long-term obligations
    
    
    6,413,817
    
    
    
    248,147Taxes payable
    
    
    2,970,010
    
    
    
    Net cash provided by operating activities
    
    
    134,805,240
    
    
    
    92,242,034Investing activities:Oil and gas property expenditures
    
    
    (73,199,932
    )
    
    
    (53,816,245
    )Change in capital cost accrual
    
    
    (10,148,123
    )
    
    
    (18,726,012
    )Inventory
    
    
    981,635
    
    
    
    (9,512,988
    )Purchase of capital assets
    
    
    (139,039
    )
    
    
    (74,059
    )Net cash used in investing activities
    
    
    (82,505,459
    )
    
    
    (82,129,304
    )Financing activities:Borrowings on long-term debt, gross
    
    
    
    
    
    
    13,000,000Payments on long-term debt, gross
    
    
    
    
    
    
    (28,000,000
    )Tax benefit realized from share options exercised
    
    
    1,741,003
    
    
    
    Proceeds from exercise of options
    
    
    2,360,352
    
    
    
    5,568,316Net cash provided by (used in) financing activities
    
    
    4,101,355
    
    
    
    (9,431,684
    )Increase in cash during the period
    
    
    56,401,136
    
    
    
    681,046Cash and cash equivalents, beginning of period
    
    
    44,394,775
    
    
    
    16,932,661Cash and cash equivalents, end of period
    
    $
    100,795,911
    
    
    $
    17,613,707Supplemental disclosures of cash flow information
Non-cash tax benefit of stock options exercised
    
    $
    3,024,435
    
    
    $
    16,225,922
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(Expressed in U.S. Dollars)March 31,
    
    
    December 31,2006
    
    
    2005(unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    100,795,911
    
    
    $
    44,394,775Restricted cash
    
    
    214,480
    
    
    
    213,899Accounts receivable
    
    
    66,755,628
    
    
    
    75,656,031Deferred tax asset
    
    
    234
    
    
    
    Inventory
    
    
    19,779,550
    
    
    
    22,062,585Prepaid expenses and other current assets
    
    
    120,642
    
    
    
    128,044Total current assets
    
    
    187,666,445
    
    
    
    142,455,334Oil and gas properties, net, using the full
cost method of accountingProved
    
    
    662,314,858
    
    
    
    612,960,790Unproved
    
    
    95,878,333
    
    
    
    89,702,465Capital assets
    
    
    2,050,358
    
    
    
    2,147,528Total assets
    
    $
    947,909,994
    
    
    $
    847,266,117Liabilities and shareholders equityCurrent liabilitiesAccounts payable and accrued liabilities
    
    $
    49,028,839
    
    
    $
    49,297,861Current taxes payable
    
    
    6,535,000
    
    
    
    3,564,990Capital cost accrual
    
    
    36,731,166
    
    
    
    46,879,289Total current liabilities
    
    
    92,295,005
    
    
    
    99,742,140Deferred income tax liability
    
    
    182,679,460
    
    
    
    155,746,465Other long-term obligations
    
    
    27,133,936
    
    
    
    20,576,574Shareholders equityShare capital
    
    
    185,932,490
    
    
    
    178,806,030Treasury stock
    
    
    (1,193,650
    )
    
    
    (1,193,650
    )Retained earnings
    
    
    461,062,753
    
    
    
    393,588,558Total shareholders equity
    
    
    645,801,593
    
    
    
    571,200,938Total liabilities and shareholders equity
    
    $
    947,909,994
    
    
    $
    847,266,117
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DESCRIPTION OF THE BUSINESS:
  1. SIGNIFICANT ACCOUNTING POLICIES:
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Three Months EndedMarch 31, 2006
    
    
    March 31, 2005Net income
    
    $
    67,474,195
    
    
    $
    37,322,549Weighted average common shares outstanding
during the period
    
    
    155,220,836
    
    
    
    150,862,214Effect of dilutive instruments
    
    
    7,983,549
    
    
    
    10,088,332Weighted average common shares outstanding
during the period including the effects of dilutive
Instruments
    
    
    163,204,385
    
    
    
    160,950,546Basic earnings per share
    
    $
    0.43
    
    
    $
    0.25Diluted earnings per share
    
    $
    0.41
    
    
    $
    0.23
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2. ASSET RETIREMENT OBLIGATIONS:
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3. OIL AND GAS PROPERTIES:
 March 31,
    
    
    December 31,2006
    
    
    2005Developed Properties:Acquisition, equipment, exploration, drilling and environmental
costs  Domestic
    
    $
    767,101,312
    
    
    $
    700,425,880Acquisition, equipment, exploration, drilling and environmental
costs  China
    
    
    44,312,399
    
    
    
    43,890,413Less accumulated depletion, depreciation and amortization  Domestic
    
    
    (133,136,985
    )
    
    
    (118,172,467
    )Less accumulated depletion, depreciation and amortization  China
    
    
    (15,961,868
    )
    
    
    (13,183,036
    )662,314,858
    
    
    
    612,960,790Unproven Properties:Acquisition and exploration costs  Domestic
    
    
    17,584,361
    
    
    
    17,647,300Acquisition and exploration costs  China
    
    
    78,293,972
    
    
    
    72,055,165$
    758,193,191
    
    
    $
    702,663,255
 4. LONG-TERM LIABILITIES:
 March 31,
    
    
    December 31,2006
    
    
    2005Bank indebtedness
    
    
    
    
    
    
    Other long-term obligations
    
    
    27,133,936
    
    
    
    20,576,574$
    27,133,936
    
    
    $
    20,576,574
      5. SHARE BASED COMPENSATION
 Share-Based Payment Arrangements
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Accounting for share-based compensation
   Valuation and Expense Information under SFAS 123R
  Three MonthsEndedMarch 31, 2006Total cost of share-based payment plans
    
    $
    325,114Amounts capitalized in inventory and fixed assets
    
    
    Amounts recognized in income for amounts previously
capitalized in inventory and fixed assets
    
    
    Amounts charged against income, before income tax benefit
    
    $
    668Amount of related income tax benefit recognized in income
    
    $
    234Cumulative effect from adoption of SFAS No. 123R on :Income from continuing operations
    
    $
    668Income before income taxes
    
    
    668Net income
    
    
    434Cash flow from operations
    
    
    Cash flow from financing activities
    
    $
    1,741,003Basic earnings per share
    
    
    Diluted earnings per share
    
    
    
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Non-ExecutivesExpected volatility
    
    
    45.70
    %Expected dividends
    
    
    0
    %Expected term (in years)
    
    
    2.75Risk free rate
    
    
    4.84
    %Expected forfeiture rate
    
    
    25.00
    %
 Securities Authorized for Issuance Under Equity Compensation Plans
  Number ofSecurities to
    
    
    
    
    
    
    Number of SecuritiesBe Issued
    
    
    
    
    
    
    Remaining Available forUpon
    
    
    Weighted-
    
    
    Future Issuance UnderExercise
    
    
    Average
    
    
    Equity Compensationof
    
    
    Exercise Price of
    
    
    Plans (ExcludingOutstanding
    
    
    Outstanding
    
    
    Securities Reflected inPlan Category
    
    Options
    
    
    Options
    
    
    the First Column)Equity compensation plans approved by security holders
    
    
    9,234,900
    
    
    $
    9.03
    
    
    
    11,104,000Equity compensation plans not approved by security holders
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aTotal
    
    
    9,234,900
    
    
    $
    9.03
    
    
    
    11,104,000
 Changes in Stock Options and Stock Options Outstanding
  WeightedAverageNumber of
    
    
    Exercise PriceOptions
    
    
    (US$)Balance, December 31, 2004
    
    
    12,703,400
    
    
    $
    0.26 to $24.31Granted
    
    
    1,529,000
    
    
    $
    23.90 to $58.71Exercised
    
    
    (4,793,700
    )
    
    $
    0.32 to $25.68Forfeited
    
    
    (50,000
    )
    
    $
    25.68 to $25.68Balance, December 31, 2005
    
    
    9,388,700
    
    
    $
    0.26 to $58.71Granted
    
    
    15,000
    
    
    $
    63.14 to $63.14Exercised
    
    
    (168,800
    )
    
    $
    0.57 to $33.80Forfeited
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    Balance, March 31, 2006
    
    
    9,234,900
    
    
    $
    0.26 to $63.14
  Options OutstandingWeighted
    
    WeightedAverage
    
    Average
    
    AggregateRange of Exercise
    
    Number
    
    Remaining
    
    Exercise Price
    
    Intrinsic ValuePrice ($US)
    
    Outstanding
    
    Contractual Life
    
    ($US)
    
    ($US)$0.38 - 0.46
    
    
    2,627,500
    
    
    
    2.83
    
    
    $
    0.46
    
    
    $
    162,511,065$0.25  0.57
    
    
    800,000
    
    
    
    4.05
    
    
    $
    0.35
    
    
    $
    49,568,000$1.49  2.61
    
    
    1,400,000
    
    
    
    4.96
    
    
    $
    1.91
    
    
    $
    84,566,400$3.91  4.43
    
    
    680,000
    
    
    
    6.11
    
    
    $
    4.39
    
    
    $
    39,384,400$4.83 - 7.10
    
    
    931,200
    
    
    
    7.11
    
    
    $
    5.04
    
    
    $
    53,328,304$11.68 - 24.21
    
    
    1,439,000
    
    
    
    8.06
    
    
    $
    15.99
    
    
    $
    66,650,770$23.90 - 58.71
    
    
    1,342,200
    
    
    
    9.24
    
    
    $
    35.48
    
    
    $
    36,014,330$63.14 - 63.14
    
    
    15,000
    
    
    
    10.00
    
    
    $
    63.14
    
    
    
    
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Options ExercisableWeightedAverage
    
    WeightedRemaining
    
    Average
    
    AggregateRange of Exercise
    
    Number
    
    Contractual
    
    Exercise Price
    
    Intrinsic ValuePrice ($US)
    
    Exercisable
    
    Life
    
    ($US)
    
    ($US)$0.38 - 0.46
    
    
    2,627,500
    
    
    
    2.83
    
    
    $
    0.46
    
    
    $
    162,511,065$0.25  0.57
    
    
    800,000
    
    
    
    4.05
    
    
    $
    0.35
    
    
    $
    49,568,000$1.49  2.61
    
    
    1,400,000
    
    
    
    4.96
    
    
    $
    1.91
    
    
    $
    84,566,400$3.91  4.43
    
    
    680,000
    
    
    
    6.11
    
    
    $
    4.39
    
    
    $
    39,384,400$4.83 - 7.10
    
    
    931,200
    
    
    
    7.11
    
    
    $
    5.04
    
    
    $
    53,328,304$11.68 - 24.21
    
    
    1,439,000
    
    
    
    8.06
    
    
    $
    15.99
    
    
    $
    66,650,770$23.90 - 58.71
    
    
    1,342,200
    
    
    
    9.24
    
    
    $
    35.48
    
    
    $
    36,014,330$63.14 - 63.14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
     Three Months EndedMarch 31, 2005Net income as reported:
    
    $
    37,322,549Add: Stock based employee compensation, net of tax
    
    
    Deduct: Stock based employee compensation, net of tax
    
    
    (1,844,100
    )Pro Forma
    
    $
    35,478,449Basic Earnings per share:As Reported
    
    $
    0.25Pro Forma
    
    $
    0.24Diluted Earnings per share:As Reported
    
    $
    0.23Pro Forma
    
    $
    0.22
  Expected volatility
    
    
    38.40
    %Expected dividends
    
    
    0
    %Expected term (in years)
    
    
    6.50Risk free rate
    
    
    3.57
    %Expected forfeiture rate
    
    Actual forfeitures
 PERFORMANCE SHARE PLANS:
 Long-Term Incentive Plan
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Best in Class
     6. SEGMENT INFORMATION
  Three Months Ended March 31,2006
    
    
    2005Domestic
    
    
    China
    
    
    Total
    
    
    Domestic
    
    
    China
    
    
    TotalOil and gas sales
    
    $
    125,818,264
    
    
    $
    25,431,978
    
    
    $
    151,250,242
    
    
    $
    78,910,389
    
    
    $
    10,453,627
    
    
    $
    89,364,016Costs and Expenses:Depletion and
depreciation
    
    
    15,256,929
    
    
    
    3,383,212
    
    
    
    18,640,141
    
    
    
    9,669,509
    
    
    
    1,570,000
    
    
    
    11,239,509Lease operating expenses
    
    
    2,409,388
    
    
    
    2,787,000
    
    
    
    5,196,388
    
    
    
    1,985,306
    
    
    
    1,454,000
    
    
    
    3,439,306Production taxes
    
    
    14,625,254
    
    
    
    1,271,637
    
    
    
    15,896,891
    
    
    
    9,022,063
    
    
    
    522,676
    
    
    
    9,544,739Gathering
    
    
    3,749,347
    
    
    
    
    
    
    
    3,749,347
    
    
    
    3,630,543
    
    
    
    
    
    
    
    3,630,543Operating income
    
    
    89,777,346
    
    
    
    17,990,129
    
    
    
    107,767,475
    
    
    
    54,602,968
    
    
    
    6,906,951
    
    
    
    61,509,919General and
administrative
    
    
    
    
    
    
    
    
    
    
    4,202,345
    
    
    
    
    
    
    
    
    
    
    
    3,176,361Other (income) expense
    
    
    
    
    
    
    
    
    
    
    (401,272
    )
    
    
    
    
    
    
    
    
    
    
    825,778Income before income taxes
    
    
    
    
    
    
    
    
    
    $
    103,966,402
    
    
    
    
    
    
    
    
    
    
    $
    57,507,780Capital expenditures
    
    $
    66,539,139
    
    
    $
    6,660,793
    
    
    $
    73,199,932
    
    
    $
    46,602,144
    
    
    $
    7,214,101
    
    
    $
    53,816,245Net oil and gas properties
    
    $
    651,548,688
    
    
    $
    106,644,503
    
    
    $
    758,193,191
    
    
    $
    418,851,914
    
    
    $
    98,200,384
    
    
    $
    517,052,298
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7. LONG TERM CONTRACTS:
  
 ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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14




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ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    Remaining
    
    Volume 
    
    AverageContract
    
    MMBTU
    
    Price /Period
    
    / day
    
    MMBTUCalendar 2006
    
    
    70,000
    
    
    $
    5.86
 .
 
 ITEM 4  CONTROLS AND PROCEDURES
 (a) Evaluation of Disclosure Controls and Procedures
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(b) Changes in Internal Control Over Financial Reporting
  
    
    The Company did not maintain effective company level controls. Specifically,
(i) certain of its accounting personnel in key roles did not possess an
appropriate level of technical expertise, and (ii) the Companys monitoring of
the internal audit function was not sufficient to provide management a basis to
assess the quality of the Companys internal control performance over time.
These deficiencies resulted in a more than a remote likelihood that a material
misstatement of the Companys annual or interim financial statements would not
be prevented or detected.
    
    The Company did not have adequate policies and procedures regarding
supervisory review of account reconciliations and account and transaction
analyses. This deficiency resulted in material errors (as reported in the 2005
10-K) which were corrected prior to the issuance of the Companys 2005
consolidated financial statements.
    
    The Company did not have adequate policies and procedures to ensure that
accurate and reliable interim and annual consolidated financial statements were
prepared and reviewed on a timely basis. Specifically, the Company did not have
sufficient personnel with the skills and experience in the application of U.S.
generally accepted accounting principles and policies and procedures regarding
the preparation and management review of footnote disclosures accompanying the
Companys financial statements. As a result of these deficiencies, material
errors were identified in the footnotes to the Companys preliminary 2005
consolidated financial statements. These errors were corrected by management
prior to the issuance of the Companys 2005 consolidated financial statements.
   
    
    begun an internal review and assessment process regarding its financial
reporting and internal audit functions;
    
    engaged Protiviti to (1) review and assess current
Sarbanes-Oxley process and control documentation and compliance plans, (2)
recommend remediation and project plans for 2006, and (3) assist management with
Sarbanes-Oxley compliance requirements during 2006;] and
    
    engaged Grant Thornton LLP to assist in identifying and recommending any
necessary organization and procedural changes for improving the Companys
controls for the purposes of complying with Sarbanes-Oxley.
  
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  16




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##### Table of Contents



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS IN SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
   
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
          
 *
    
    filed herewith 17




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ULTRA PETROLEUM CORP.Date: May 8, 2006
    By:
    /s/    Michael D. WatfordName:
    Michael D. WatfordTitle:
    Chief Executive Officer  By:
    /s/ Marshall D. SmithName:
    Marshall D. SmithTitle:
    Chief Financial Officer 18




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##### Table of Contents



EXHIBIT
INDEX
         
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    filed herewith