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 1934
		FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		FOR THE TRANSITION PERIOD FROM                      TO

ULTRA PETROLEUM CORP.

(Exact name of registrant as specified in its charter)

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)

(281) 876-0120
(Registrant’s telephone number,
including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer þ     Accelerated Filer o     Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO þ

The number of common shares, without par value, of Ultra Petroleum Corp., outstanding as of May 2, 2006 was 155,547,929.

 

 

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

(Expressed in U.S. Dollars)

ULTRA PETROLEUM CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

		Three Months Ended
		March 31,
		2006				2005
Revenues:
Natural gas sales		$	117,792,848			$	73,950,973
Oil sales			33,457,394				15,413,043
			151,250,242				89,364,016
Expenses:
Production expenses and taxes			24,842,626				16,614,588
Depletion and depreciation			18,640,141				11,239,509
General and administrative expenses			4,202,345				3,176,361
			47,685,112				31,030,458
Operating income			103,565,130				58,333,558
Other (expense) income:
Interest expense			(171,781	)			(900,643	)
Interest income			573,053				74,865
			401,272				(825,778	)
Income for the period, before income tax provision			103,966,402				57,507,780
Income tax provision			36,492,207				20,185,231
Net income for the period			67,474,195				37,322,549
Retained earnings, beginning of period			393,588,558				165,288,311
Retained earnings, end of period		$	461,062,753			$	202,610,860
Net income per common share – basic		$	0.43			$	0.25
Net income per common share – diluted		$	0.41			$	0.23
Weighted average common shares outstanding – basic			155,220,836				150,862,214
Weighted average common shares outstanding – diluted			163,204,385				160,950,546

ULTRA PETROLEUM CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(Expressed in U.S. Dollars)		Three Months Ended
		March 31,
		2006				2005
Cash provided by (used in):
Operating activities:
Net income for the period		$	67,474,195			$	37,322,549
Adjustments to reconcile net income to net cash provided by operating activities:
Depletion and depreciation			18,640,141				11,239,509
Deferred income taxes			29,957,207				20,185,231
Stock compensation			668				614,576
Net changes in non-cash working capital:
Restricted cash			(581	)			(412	)
Accounts receivable			8,900,403				10,339,753
Inventory			711,000				(675,463	)
Prepaid expenses and other current assets			7,402				(2,560,819	)
Accounts payable and accrued liabilities			(269,022	)			15,528,963
Other long-term obligations			6,413,817				248,147
Taxes payable			2,970,010				—
Net cash provided by operating activities			134,805,240				92,242,034
Investing 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			–				13,000,000
Payments 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				5,568,316
Net cash provided by (used in) financing activities			4,101,355				(9,431,684	)
Increase in cash during the period			56,401,136				681,046
Cash and cash equivalents, beginning of period			44,394,775				16,932,661
Cash and cash equivalents, end of period		$	100,795,911			$	17,613,707
Supplemental disclosures of cash flow information Non-cash tax benefit of stock options exercised		$	3,024,435			$	16,225,922

ULTRA PETROLEUM CORP.
CONSOLIDATED BALANCE SHEETS

(Expressed in U.S. Dollars)
		March 31,				December 31,
		2006				2005
		(unaudited)
Assets
Current assets
Cash and cash equivalents		$	100,795,911			$	44,394,775
Restricted cash			214,480				213,899
Accounts receivable			66,755,628				75,656,031
Deferred tax asset			234				—
Inventory			19,779,550				22,062,585
Prepaid expenses and other current assets			120,642				128,044
Total current assets			187,666,445				142,455,334
Oil and gas properties, net, using the full cost method of accounting
Proved			662,314,858				612,960,790
Unproved			95,878,333				89,702,465
Capital assets			2,050,358				2,147,528
Total assets		$	947,909,994			$	847,266,117
Liabilities and shareholders’ equity
Current liabilities
Accounts payable and accrued liabilities		$	49,028,839			$	49,297,861
Current taxes payable			6,535,000				3,564,990
Capital cost accrual			36,731,166				46,879,289
Total current liabilities			92,295,005				99,742,140
Deferred income tax liability			182,679,460				155,746,465
Other long-term obligations			27,133,936				20,576,574
Shareholders’ equity
Share capital			185,932,490				178,806,030
Treasury stock			(1,193,650	)			(1,193,650	)
Retained earnings			461,062,753				393,588,558
Total shareholders’ equity			645,801,593				571,200,938
Total liabilities and shareholders’ equity		$	947,909,994			$	847,266,117

ULTRA PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(All dollar amounts in this Quarterly Report on Form 10-Q are expressed in U.S. dollars unless otherwise noted)

DESCRIPTION OF THE BUSINESS:

Ultra Petroleum Corp. (the “Company”) is an independent oil and gas company engaged in the acquisition, exploration, development, and production of oil and gas properties. The Company is incorporated under the laws of the Yukon Territory, Canada. The Company’s principal business activities are in the Green River Basin of Southwest Wyoming and Bohai Bay, China.

1. SIGNIFICANT ACCOUNTING POLICIES:

The accompanying financial statements, other than the balance sheet data as of December 31, 2005, are unaudited and were prepared from the Company’s records. Balance sheet data as of December 31, 2005 was derived from the Company’s audited financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles. The Company’s management believes that these financial statements include all adjustments necessary for a fair presentation of the Company’s financial position and results of operations. All adjustments are of a normal and recurring nature unless specifically noted. The Company prepared these statements on a basis consistent with the Company’s annual audited statements and Regulation S-X. Regulation S-X allows the Company to omit some of the footnote and policy disclosures required by generally accepted accounting principles and normally included in annual reports on Form 10-K. You should read these interim financial statements together with the financial statements, summary of significant accounting policies and notes to the Company’s most recent annual report on Form 10-K.

(a) Basis of presentation and principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries UP Energy Corporation, Ultra Resources, Inc. and Sino-American Energy Corporation. The Company presents its financial statements in accordance with U.S. GAAP. All material inter-company transactions and balances have been eliminated upon consolidation.

(b) Accounting principles: The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States.

(c) Cash and cash equivalents: We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.

(d) Restricted cash: Restricted cash represents cash received by the Company from production sold where the final division of ownership of the production is unknown or in dispute. Wyoming law requires that these funds be held in a federally insured bank in Wyoming.

(e) Capital assets: Capital assets are recorded at cost and depreciated using the declining-balance method based on a seven-year useful life.

(f) Oil and gas properties: The Company uses the full cost method of accounting for exploration and development activities as defined by the Securities and Exchange Commission (“SEC”). Under this method of accounting, the costs of unsuccessful, as well as successful, exploration and development activities are capitalized as properties and equipment on a country-by-country basis. This includes any internal costs that are directly related to exploration and development activities but does not include any costs related to production, general corporate overhead or similar activities. Effective with the adoption of Statement of Financial Accounting Standard No. 143 “Accounting for Asset Retirement Obligations” (“SFAS No. 143”) in 2003, the carrying amount of oil and gas properties also includes estimated asset retirement costs recorded based on the fair value of the asset retirement obligation when incurred. Gain or loss on the sale or other disposition of oil and gas properties is not recognized, unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves of oil and natural gas attributable to a country.

The sum of net capitalized costs and estimated future development costs of oil and gas properties are amortized using the unit-of-production method based on the proven reserves as determined by independent petroleum engineers. Oil and gas reserves and production are converted into equivalent units based on relative energy content. Operating fees received related to the properties in which the Company owns an interest are netted against expenses. Fees received in excess of costs incurred are recorded as a reduction to the full cost pool. Effective with the adoption of SFAS No. 143, asset retirement obligations are included in the base costs for calculating depletion.

Oil and gas properties include costs that are excluded from capitalized costs being amortized. These amounts represent investments in unproved properties and major development projects. The Company excludes these costs on a country-by-country basis until proved reserves are found or until it is determined that the costs are impaired. All costs excluded are reviewed at least quarterly to determine if impairment has occurred. The amount of any impairment is transferred to the capitalized costs being amortized (the depreciation, depletion and amortization (“DD&A”) pool) or a charge is made against earnings for those international operations where a reserve base has not yet been established. For international operations where a reserve base has not yet been established, an impairment requiring a charge to earnings may be indicated through evaluation of drilling results, relinquishing drilling rights or other information.

Under the full cost method of accounting, a ceiling test is performed each quarter. The full cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule 4-10. The ceiling test determines a limit, on a country-by-country basis, on the book value of oil and gas properties. The capitalized costs of proved oil and gas properties, net of accumulated DD&A and the related deferred income taxes, may not exceed the estimated future net cash flows from proved oil and gas reserves, generally using prices in effect at the end of the period held flat for the life of production excluding the estimated abandonment cost for properties with asset retirement obligations recorded on the balance sheet and including the effect of derivative contracts that qualify as cash flow hedges, discounted at 10%, net of related tax effects, plus the cost of unevaluated properties and major development. The effect of implementing SFAS No. 143 had no effect on the ceiling test calculation as the future cash outflows associated with settling asset retirement obligations are excluded from this calculation.

(g) Inventories: Crude oil products and materials and supplies inventories are carried at the lower of current market value or cost. Inventory costs include expenditures and other charges directly and indirectly incurred in bringing the inventory to its existing condition and location and the Company uses the weighted average method to record its inventory. Selling expenses and general and administrative expenses are reported as period costs and excluded from inventory cost. Inventories of materials and supplies are valued at cost or less. Crude oil product inventory at March 31, 2006 includes depletion and lease operating expenses of $155,000 associated with the Company’s crude oil production in China. Drilling and completion supplies inventory of $19.8 million primarily includes the cost of pipe that will be utilized during the 2006 drilling program.

(h) Derivative transactions: The Company has, in the past, used derivative instruments as one way to manage its exposure to commodity prices. As of March 31, 2006, the Company had no open derivative contracts to manage its price risk on its production.

(i) Income taxes: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

(j) Earnings per share: Basic earnings per share is computed by dividing net earnings attributable to common stock by the weighted average number of common shares outstanding during each period. Diluted earnings per share is computed by adjusting the average number of common shares outstanding for the dilutive effect, if any, of common stock equivalents. The Company uses the treasury stock method to determine the dilutive effect. The earnings per share information has been updated to reflect the 2 for 1 stock split on May 10, 2005.

     The following table provides a reconciliation of the components of basic and diluted net income per common share:

		Three Months Ended
		March 31, 2006				March 31, 2005
Net income		$	67,474,195			$	37,322,549
Weighted average common shares outstanding during the period			155,220,836				150,862,214
Effect of dilutive instruments			7,983,549				10,088,332
Weighted average common shares outstanding during the period including the effects of dilutive Instruments			163,204,385				160,950,546
Basic earnings per share		$	0.43			$	0.25
Diluted earnings per share		$	0.41			$	0.23

(k) Use of estimates: Preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(l) Reclassifications: Certain amounts in the financial statements of the prior years have been reclassified to conform to the current year financial statement presentation.

(m) Accounting for share-based compensation: On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values. SFAS No. 123R supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) for periods beginning in fiscal year 2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS No. 123R. The Company has applied the provisions of SAB 107 in its adoption of SFAS No. 123R.

The Company adopted SFAS No. 123R using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. The Company’s Consolidated Financial Statements as of and for the three months ended March 31, 2006 reflect the impact of SFAS No. 123R. In accordance with the modified prospective transition method, the Company’s Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123R. Share-based compensation expense recognized under SFAS No. 123R for the three months ended March 31, 2006 was $668, which consisted of stock-based compensation expense related to employee stock options. There was no stock-based compensation expense related to employee stock options recognized during the three months ended March 31, 2005. See Note 5 for additional information.

SFAS No. 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statement of Income. Prior to the adoption of SFAS No. 123R, the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB No. 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Under the intrinsic value method, no stock-based compensation expense had been recognized in the Company’s Consolidated Statement of Income because the exercise price of the Company’s stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant.

Under SFAS No. 123R, share-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Share-based compensation expense recognized in the Company’s Consolidated Statement of Income for the three months ended March 31, 2006 includes compensation expense for share-based payment awards granted subsequent to January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. As of December 31, 2005, all stock options granted to date had fully vested. Compensation expense attributable to awards granted subsequent to January 1, 2006 is recognized using the straight-line method. As share-based compensation expense recognized in the Consolidated Statement of Income for the first quarter of 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company’s pro forma information required under SFAS No. 123 for the periods prior to January 1, 2006, the Company accounted for forfeitures as they occurred.

Under SFAS No. 123 (and APB No. 25), the Company utilized a Black-Scholes option pricing model to measure the fair value of stock options granted to employees. For additional information, see Note 5. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.

Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the Company’s employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, the existing valuation models may not provide an accurate measure of the fair value of the Company’s employee stock options. Although the fair value of employee stock options is determined in accordance with SFAS No. 123R and SAB 107 using a Black-Scholes option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. The Company is responsible for determining the assumptions used in estimating the fair value of its share-based payment awards.

(n) Revenue Recognition. Within the Company’s United States segment, natural gas revenues are recorded on the entitlement method. Under the entitlement method, revenue is recorded when title passes based on the Company’s net interest. The Company records its entitled share of revenues based on estimated production volumes. Subsequently, these estimated volumes are adjusted to reflect actual volumes that are supported by third party pipeline statements or cash receipts. Since there is a ready market for natural gas, the Company sells the majority of its products soon after production at various locations at which time title and risk of loss pass to the buyer. Gas imbalances occur when the Company sells more or less than its entitled ownership percentage of total gas production. Any amount received in excess of the Company’s share is treated as a liability. If the Company receives less than its entitled share, the underproduction is recorded as a receivable. Oil revenues are recognized when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred and title is transferred.

In China, revenues are recognized when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred and title is transferred.

(o) Impact of recently issued accounting pronouncements: As of January 1, 2006, the Company adopted SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3” (“SFAS No. 154”). SFAS No. 154 requires retrospective application of voluntary changes in accounting principles, unless it is impracticable. The Company does not expect this standard to have a material impact on its financial statements.

2. ASSET RETIREMENT OBLIGATIONS:

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, Accounting for Asset Retirement Obligations (“SFAS No. 143”). SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Company has recorded a liability of $3,744,893 ($2,975,289 U.S and $769,604 China) to account for future obligations associated with its assets in both the United States and China.

3. OIL AND GAS PROPERTIES:

		March 31,				December 31,
		2006				2005
Developed Properties:
Acquisition, equipment, exploration, drilling and environmental costs — Domestic		$	767,101,312			$	700,425,880
Acquisition, equipment, exploration, drilling and environmental costs — China			44,312,399				43,890,413
Less 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				612,960,790
Unproven Properties:
Acquisition and exploration costs – Domestic			17,584,361				17,647,300
Acquisition 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				2005
Bank indebtedness			—				—
Other long-term obligations			27,133,936				20,576,574
		$	27,133,936			$	20,576,574

Bank indebtedness: The Company (through its subsidiary) participates in a revolving credit facility with a group of banks led by JP Morgan Chase Bank, N.A. The agreement specifies a maximum loan amount of $500 million, an aggregate borrowing base of $800 million and a commitment amount of $200 million at November 14, 2005. The commitment amount may be increased up to the lesser of the borrowing base amount or $500 million at any time at the request of the Company. Each bank shall have the right, but not the obligation, to increase the amount of their commitment as requested by the Company. In the event that the existing banks increase their commitment to an amount less than the requested commitment amount, then it would be necessary to bring additional banks into the facility. At March 31, 2006, the Company had no amounts outstanding and $200 million unused and available under the current committed amount.

The credit facility matures on May 1, 2010. The note bears interest at either (A) the bank’s prime rate plus a margin of zero percent (0.00%) to three-quarters of one percent (0.75%) based on the percentage of available credit drawn or at (B) LIBOR plus a margin of one percent (1.00%) to one and three-quarters of one percent (1.75%) based on the percentage of available credit drawn. For purposes of calculating interest, the available credit is equal to the borrowing base. An average annual commitment fee of 0.25% to 0.375%, depending on the percentage of available credit drawn, is charged quarterly for any unused portion of the commitment amount.

The borrowing base is subject to periodic (at least semi-annual) review and re-determination by the banks and may be decreased or increased depending on a number of factors, including the Company’s proved reserves and the bank’s forecast of future oil and gas prices. If the borrowing base is reduced to an amount less than the balance outstanding, the Company has sixty days from the date of written notice of the reduction in the borrowing base to pay the difference. Additionally, the Company is subject to quarterly reviews of compliance with the covenants under the bank facility including minimum coverage ratios relating to interest, working capital and advances to Sino-American Energy Corporation. In the event of a default under the covenants, the Company may not be able to access funds otherwise available under the facility. As of March 31, 2006, the Company was in compliance with required covenants of the bank facility.

The debt outstanding under the credit facility is secured by a majority of the Company’s proved domestic oil and gas properties.

Other long-term obligations: These costs relate to the long-term portion of production taxes payable, a liability associated with imbalanced production, the long-term portion of costs associated with our compensation programs and our asset retirement obligations (See Note 2).

5. SHARE BASED COMPENSATION

Share-Based Payment Arrangements

The Company’s Stock Incentive Plans are administered by the Board of Directors (the “Plan Administrator”). The Plan Administrator may make awards of stock options to employees, directors, officers and consultants of the Company as long as the aggregate number of common shares issuable to any one person pursuant to incentives does not exceed 5% of the number of common shares outstanding at the time of the award. In addition, no participant may receive during any fiscal year of the Company’s awards of incentives covering an aggregate of more than 500,000 common shares. The Plan Administrator determines the vesting requirements and any vesting restrictions or forfeitures that occur in certain circumstances. Incentives may not have an exercise period longer than 10 years. The exercise price of the stock may not be less than the fair market value of the common shares at the time of award, where “fair market value” means the weighted average trading price of the common shares for the five trading days preceding the date of the award.

On April 29, 2005, the shareholders approved the adoption of the 2005 Stock Incentive Plan (“2005 Stock Incentive Plan”). The 2005 Stock Incentive Plan authorizes the Plan Administrator to award incentives from the effective date of the 2005 Stock Incentive Plan. The 2005 Stock Incentive Plan is in addition to the Company’s existing stock option plans (the “2000 Option Plan” and the “1998 Stock Plan”). The 2000 Option Plan and the 1998 Stock Plan remain effective and the Company will make grants under each of the existing plans.

The purpose of the 2005 Stock Incentive Plan is to foster and promote the long-term financial success of the Company and to increase shareholder value by attracting, motivating and retaining key employees, consultants and directors and providing such participants in the 2005 Stock Incentive Plan with a program for obtaining an ownership interest in the Company that links and aligns their personal interests with those of the Company’s shareholders, thus enabling such participants to share in the long-term growth and success of the Company. To accomplish these goals, the 2005 Stock Incentive Plan permits the granting of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, and other stock-based awards, some of which may require the satisfaction of performance-based criteria in order to be payable to participants. The 2005 Stock Incentive Plan is an important component of the total compensation package offered to employees and directors, reflecting the importance that the Company places on motivating and rewarding superior results with long-term, performance-based incentives.

The purposes of the 2000 Option Plan and the 1998 Stock Plan are: (i) to associate the interests of management of the Company and its subsidiaries and affiliates closely with the stockholders to generate an increased incentive to contribute to the Company’s future success and prosperity, thus enhancing the value of the Company for the benefit of its stockholders; (ii) to maintain competitive compensation levels thereby attracting and retaining highly competent and talented directors, employees and consultants; and (iii) to provide an incentive to such management for continuous employment with the Company.

Accounting for share-based compensation

In December 2004, the FASB issued SFAS No. 123R. SFAS No. 123R is a revision of SFAS No. 123 and supersedes APB Opinion 25. Among other items, SFAS No. 123R eliminates the use of APB Opinion 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. Pro forma disclosure is no longer an alternative under the new standard. Accordingly, the Company adopted SFAS No. 123R as of January 1, 2006.

SFAS No. 123R provides specific guidance on income tax accounting and clarifies how SFAS No. 109, “Accounting for Income Taxes”, should be applied to stock-based compensation. For example, the expense for certain types of option grants is only deductible for tax purposes at the time that the taxable event takes place, which could cause variability in the Company’s effective tax rates recorded throughout the year. SFAS No. 123R does not allow companies to “predict” when these taxable events will take place. Furthermore, it requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under SFAS No. 123. This requirement will reduce net operating cash flows and increase net financing cash flows in periods. These future amounts cannot be estimated, because they depend on, among other things, when employees exercise stock options.

Valuation and Expense Information under SFAS 123R

The following table summarizes share-based compensation expense related to employee stock options under SFAS 123R for the three months ended March 31, 2006 which was allocated as follows:

		Three Months
		Ended
		March 31, 2006
Total cost of share-based payment plans		$	325,114
Amounts 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		$	668
Amount of related income tax benefit recognized in income		$	234
Cumulative effect from adoption of SFAS No. 123R on :
Income from continuing operations		$	668
Income before income taxes			668
Net income			434
Cash flow from operations			—
Cash flow from financing activities		$	1,741,003
Basic earnings per share			—
Diluted earnings per share			—

The fair value of each share option award is estimated on the date of grant using a Black-Scholes pricing model based on assumptions noted in the following table. The Company’s employee stock options have various restrictions including vesting provisions and restrictions on transfers and hedging, among others, and are often exercised prior to their contractual maturity. Expected volatilities used in the fair value estimate are based on historical volatility of the Company’s stock. The Company uses historical data to estimate share option exercises, expected term and employee departure behavior used in the Black-Scholes pricing model. Groups of employees (executives and non-executives) that have similar historical behavior are considered separately for purposes of determining the expected term used to estimate fair value. The assumptions utilized result from differing pre- and post-vesting behaviors among executive and non-executive groups. The risk-free rate for periods within the contractual term of the share option is based n the U.S. Treasury yield curve in effect at the time of grant. There were no options granted to executives during the first quarter of 2006.

		Non-Executives
Expected volatility			45.70	%
Expected dividends			0	%
Expected term (in years)			2.75
Risk free rate			4.84	%
Expected forfeiture rate			25.00	%

Securities Authorized for Issuance Under Equity Compensation Plans

As of March 31, 2006, the Corporation had the following securities issuable pursuant to outstanding award agreements or reserved for issuance under the Corporation’s previously approved stock incentive plans. (Upon exercise, shares issued will be newly issued shares).

Number of

Securities to

Number of Securities

Be Issued

Remaining Available for

Upon

Weighted-

Future Issuance Under

Exercise

Average

Equity Compensation

of

Exercise Price of

Plans (Excluding

Outstanding

Outstanding

Securities Reflected in

Plan Category

Options

Options

the First Column)

Equity compensation plans approved by security holders

9,234,900

$

9.03

11,104,000

Equity compensation plans not approved by security holders

n/a

n/a

n/a

Total

9,234,900

$

9.03

11,104,000

Changes in Stock Options and Stock Options Outstanding

The following table summarizes the changes in stock options for the year ended December 31, 2005 and the three months ended March 31, 2006:

						Weighted
						Average
		Number of				Exercise Price
		Options				(US$)
Balance, December 31, 2004			12,703,400			$	0.26 to $24.31
Granted			1,529,000			$	23.90 to $58.71
Exercised			(4,793,700	)		$	0.32 to $25.68
Forfeited			(50,000	)		$	25.68 to $25.68
Balance, December 31, 2005			9,388,700			$	0.26 to $58.71
Granted			15,000			$	63.14 to $63.14
Exercised			(168,800	)		$	0.57 to $33.80
Forfeited			—				—
Expired			—				—
Balance, March 31, 2006			9,234,900			$	0.26 to $63.14

The following tables summarize information about the stock options outstanding at March 31, 2006:

		Options Outstanding
						Weighted				Weighted
						Average				Average				Aggregate
Range of Exercise		Number				Remaining				Exercise Price				Intrinsic Value
Price ($US)		Outstanding				Contractual Life				($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				—

		Options Exercisable
						Weighted
						Average				Weighted
						Remaining				Average				Aggregate
Range of Exercise		Number				Contractual				Exercise Price				Intrinsic Value
Price ($US)		Exercisable				Life				($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			—				—				—				—

The aggregate intrinsic value in the preceding tables represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $62.31 on March 31, 2006, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of March 31, 2006 was 9,219,900.

The weighted-average grant-date fair value of share options granted during the three months ended March 31, 2006 was $21.67. The total intrinsic value of share options exercised during the three months ended March 31, 2006 was $8.6 million.

At March 31, 2006, there was $243,167 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Stock Incentive Plans. That cost is expected to be recognized over a weighted average period of one year.

Prior to adoption of SFAS No. 123R on January 1, 2006, the Company followed SFAS No. 123 which allowed for the continued measurement of compensation cost for such plans using the intrinsic value based method prescribed by APB Opinion No. 25 provided that pro forma results of operations were disclosed for those options granted. Accordingly, the Company accounted for stock options granted to employees and directors of the Company under the intrinsic value method. Had the Company reported compensation costs as determined by the fair value method of accounting for option grants to employees and directors, net income and net income per common share would approximate the following pro forma amounts: (The earnings per share amounts have been adjusted to reflect the 2 for 1 stock split on May 10, 2005).

		Three Months Ended
		March 31, 2005
Net income as reported:		$	37,322,549
Add: Stock based employee compensation, net of tax			—
Deduct: Stock based employee compensation, net of tax			(1,844,100	)
Pro Forma		$	35,478,449
Basic Earnings per share:
As Reported		$	0.25
Pro Forma		$	0.24
Diluted Earnings per share:
As Reported		$	0.23
Pro Forma		$	0.22

For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the options’ vesting period. The weighted-average fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions at March 31, 2005:

Expected volatility			38.40	%
Expected dividends			0	%
Expected term (in years)			6.50
Risk free rate			3.57	%
Expected forfeiture rate		Actual forfeitures

PERFORMANCE SHARE PLANS:

Long-Term Incentive Plan

Also in 2005, the Corporation adopted a Long-Term Incentive Plan (“LTIP”) in order to further align the interests of key employees with shareholders and give key employees the opportunity to share in the long-term performance of the Corporation by achieving specific corporate financial and operational goals. Under the LTIP, the Compensation Committee establishes certain performance measures at the beginning of each three-year overlapping performance period. Performance measures may vary for performance periods. In the event of a change of control of the Corporation, all outstanding awards are paid at target levels in cash. The event of a change of control is not currently probable.

Each participant in the LTIP is assigned threshold, target and maximum award levels that are expressed as a percentage of his or her base salary. Selected officers, managers and other key employees are eligible to participate in the LTIP. Participants are recommended by the CEO and approved by the Compensation Committee and are assigned to a specific eligibility level. The participation levels are as follows (the respective percentage award is calculated based upon the participant’s base salary at the beginning of the award period), (i) if threshold performance objectives are attained, the incentive award opportunities range from 6% to 38%; (ii) if target performance objectives are attained, the incentive award opportunities range from 20% to 125%; and (iii) if maximum performance objectives are attained, the incentive award opportunities range from 30% to 188%. The threshold award level is not the minimum award, but is the award at the threshold performance level. Awards are expressed as dollar targets and become payable in common shares issued under the Stock Plans at the end of each three-year performance period based on the overall performance of the Corporation during such period. A new three-year period begins each January, beginning January 1, 2005. Participants must be employed by the Corporation at the end of a performance period in order to receive an award. Employees joining the Corporation after January 1, 2005 will participate on a pro rata basis based on their length of employment during the performance period.

For the first performance period (January 2005 — December 2007), the Compensation Committee has established the following performance measures: return on equity, reserve replacement ratio, and production growth. At the discretion of the Compensation Committee, additional metrics may be added to individual participants.

For the three months ended March 31, 2006, the Company recognized $122,757 and $126,402 in pre-tax compensation expense related to the 2005 LTIP and 2006 LTIP, respectively. The amounts recognized during the first quarter of 2006 assumes that maximum performance objectives are attained. If the Company ultimately attains maximum performance objectives, the associated total compensation expense, estimated at March 31, 2006, for the three year performance periods would be approximately $1.6 million and $1.5 million (before taxes) related to the 2005 LTIP and 2006 LTIP, respectively.

Best in Class

In 2005, the Company also established a Best in Class program for all employees of the Corporation, including executive officers. The purpose of the program is to recognize and financially reward the collective efforts of all the Corporation’s employees in achieving sustained industry leading performance and the enhancement of shareholder value.

Under the Best in Class program, on January 1, 2005 or the employment date if subsequent to January 1, 2005, all employees of the Corporation received a contingent award of stock units equal to $50,000 worth of the Corporation’s common stock based on the average of the high and low share price on the date of grant. Employees joining the Corporation after January 1, 2005 will participate on a pro rata basis based on their length of employment during the performance period. The number of units that will vest and become payable is based on the Corporation’s performance relative to the industry during a three-year performance period beginning January 1, 2005 and ending December 31, 2007 and are set at threshold (50%), target (100%) and maximum (150%) levels. For each vested unit, the participant will receive one share of common stock.

The emphasis of this plan is to recognize and reward the Corporation’s employees for performance that is recognized in the industry as clearly outstanding. Performance metrics will be developed and measured by an accepted third party research organization. The total vested award will be the sum of the vesting percentage for each metric. The maximum units that may be vested is 150% of the original award. Performance results will be determined after the end of the performance period and publication of the applicable industry reports. A participant must be employed when payments are made in order to receive an award.

For the three months ended March 31, 2006, the Company recognized $207,954 in pre-tax compensation expense related to the Best in Class Incentive Compensation Plan. The amount recognized during the first quarter of 2006 assumes that target performance levels are achieved. If the Company ultimately attains the target performance level, the associated total compensation expense, estimated at March 31, 2006, for the entire three year performance period would be approximately $3.4 million before income taxes.

6. SEGMENT INFORMATION

The Company has two reportable operating segments, one domestic and one foreign, which are in the business of natural gas and crude oil exploration and production. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from oil and gas operations before price-risk management and other, general and administrative expenses and interest expense. The Company’s reportable operating segments are managed separately based on their geographic locations. Financial information by operating segment is presented below:

		Three Months Ended March 31,
		2006												2005
		Domestic				China				Total				Domestic				China				Total
Oil and gas sales		$	125,818,264			$	25,431,978			$	151,250,242			$	78,910,389			$	10,453,627			$	89,364,016
Costs and Expenses:
Depletion and depreciation			15,256,929				3,383,212				18,640,141				9,669,509				1,570,000				11,239,509
Lease operating expenses			2,409,388				2,787,000				5,196,388				1,985,306				1,454,000				3,439,306
Production taxes			14,625,254				1,271,637				15,896,891				9,022,063				522,676				9,544,739
Gathering			3,749,347				—				3,749,347				3,630,543				—				3,630,543
Operating income			89,777,346				17,990,129				107,767,475				54,602,968				6,906,951				61,509,919
General and administrative											4,202,345												3,176,361
Other (income) expense											(401,272	)											825,778
Income before income taxes										$	103,966,402											$	57,507,780
Capital expenditures		$	66,539,139			$	6,660,793			$	73,199,932			$	46,602,144			$	7,214,101			$	53,816,245
Net oil and gas properties		$	651,548,688			$	106,644,503			$	758,193,191			$	418,851,914			$	98,200,384			$	517,052,298

7. LONG TERM CONTRACTS:

On December 19, 2005, the Company signed two Precedent Agreements with Rockies Express Pipeline, LLC and Entrega Gas Pipeline LLC governing how the parties will proceed through the design, regulatory process and construction of the pipeline facilities and, subject to certain conditions precedent, the Company will take firm transportation service if and when the pipeline facilities are constructed. The Company’s Board of Directors approved the Precedent Agreements on February 6, 2006 and Kinder Morgan, as the Managing Member of the Rockies Express Pipeline LLC advised the Company of their final approval of the Precedent Agreements, and their intent to proceed with the construction of the Rockies Express Pipeline on February 28, 2006.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and operating results of the Company should be read in conjunction with the consolidated financial statements and related notes of the Company. Except as otherwise indicated all amounts are expressed in U.S. dollars. We operate in one industry segment, natural gas and oil exploration and development with two geographical segments; the United States and China.

The Company currently generates the majority of its revenue, earnings and cash from the production and sales of natural gas and oil from its property in southwest Wyoming. The price of natural gas in the southwest Wyoming region is a critical factor to the Company’s business. The price of gas in southwest Wyoming historically has been volatile. The average annual realizations for the period 2003-2005 have ranged from $3.84 to $8.64 per Mcf. This volatility could be very detrimental to the Company’s financial performance. The Company seeks to limit the impact of this volatility on its results by entering into derivative and forward sales contracts for gas in southwest Wyoming. The average realization for the Company’s gas during the first quarter of 2006 was $7.13 per Mcf, basis Opal, Wyoming. The Company’s average realized crude oil price for its Bohai Bay production was $54.56 USD per barrel for the quarter ended March 31, 2006

The Company has grown its natural gas and oil production significantly over the past three years and management believes it has the ability to continue growing production by drilling already identified locations on its leases in Wyoming and by bringing into production the already discovered oilfields in China. The Company delivered 28% production growth on an Mcfe basis during the quarter ended March 31, 2006 as compared to the same quarter in 2005.

The Company uses the full cost method of accounting for oil and gas operations whereby all costs associated with the exploration for and development of oil and gas reserves are capitalized to the Company’s cost centers. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells and overhead charges directly related to acquisition, exploration and development activities. Separate cost centers are maintained for the United States and China. Substantially all of the oil and gas activities are conducted jointly with others and, accordingly, the amounts reflect only the Company’s proportionate interest in such activities. Inflation has not had a material impact on the Company’s results of operations and is not expected to have a material impact on the Company’s results of operations in the future.

RESULTS OF OPERATIONS

QUARTER ENDED MARCH 31, 2006 VS. QUARTER ENDED MARCH 31, 2005

During the first quarter of 2006, production increased 28% on an equivalent basis to 20.1 Bcfe from 15.7 Bcfe for the same quarter in 2005 attributable to the Company’s successful drilling activities during 2005 and in the first quarter of 2006 along with continued production in China. Average realized price for natural gas increased 28% to $7.13 per Mcf in the first quarter of 2006 as compared to $5.58 for the first quarter of 2005, such increase contributing to a 69% increase in revenues to $151.3 million as compared to $89.4 million in 2005.

In Wyoming, production costs increased to $2.4 million at March 31, 2006 compared to $2.0 million at March 31, 2005 due to increased production volumes. On a unit of production basis, LOE costs remained flat at $0.14 per Mcfe at March 31, 2006 and March 31, 2005. During the first quarter of 2006 production taxes were $14.6 million compared to $9.0 million during the first quarter of 2005, or $0.85 per Mcfe, compared to $0.65 per Mcfe. Production taxes are calculated based on a percentage of revenue from production. Therefore, higher prices received increased the costs on a per unit basis. Gathering fees increased slightly to $3.7 million at March 31, 2006 compared to $3.6 million at March 31, 2005. On a per unit basis, gathering fees decreased to $0.22 per Mcfe for the three months ended March 31, 2006 from $0.26 per Mcfe for the same period in 2005. Such decrease is attributable to revised gathering and processing arrangements.

In Wyoming, depletion, depreciation and amortization (“DD&A”) expenses increased to $15.3 million during the quarter ended March 31, 2006 from $9.7 million for the same period in 2005, attributable to increased production volumes and a higher depletion rate, due to forecasted increased future development costs. On a unit basis, DD&A increased to $0.88 per Mcfe at March 31, 2006 from $0.70 at March 31, 2005.

In China, production costs were $2.8 million at March 31, 2006 ($1.00 per Mcfe or $5.98 per BOE) compared to $1.5 million ($0.78 per Mcfe and $4.68 per BOE) at March 31, 2005. The increase is attributable to increased production volumes associated with four fields producing during the first quarter of 2006 compared with two during the same period in 2005. Severance taxes in China increased to $1.3 million for the three months ended March 31, 2006 from $0.5 million for the three months ended March 31, 2005. The increase is due to increased production volumes during the period.

DD&A expense in China was $3.4 million ($1.21 per Mcfe or $7.26 per BOE) for the quarter ended March 31, 2006 as compared to $1.6 million ($0.84 per Mcfe or $5.06 per BOE) for the same period in 2005. This increase is attributable to increased production volumes coupled with cost being allocated from unevaluated properties to the full cost pool.

Net income before income taxes increased 81% to $104.0 million for the quarter ended March 31, 2006 from $57.5 million for the same period in 2005. The income tax provision increased 81% to $36.5 million for the three months ended March 31, 2006 as compared to $20.2 million for the three months ended March 31, 2005, attributable to an increase in pre-tax income. The Company’s effective tax rate was 35.1% for the periods ended March 31, 2006 and 2005. For the quarter ended March 31, 2006, net income increased 81% to $67.5 million or $0.41 per diluted share as compared with $37.3 million or $0.23 per diluted share for the same period in 2005.

General and administrative expenses increased 32% to $4.2 million at March 31, 2006 compared to $3.2 million for the same period in 2005. This increase was primarily attributable to increased external audit fees. On a per unit basis, general and administrative expenses increased to $0.21 per Mcfe during the first quarter of 2006 as compared with $0.20 per Mcfe for the same period in 2005.

The discussion and analysis of the Company’s financial condition and results of operations is based upon consolidated financial statements, which have been prepared in accordance with U.S. GAAP. In addition, application of generally accepted accounting principles requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the revenues and expenses reported during the period. Changes in these estimates, judgments and assumptions will occur as a result of future events, and, accordingly, actual results could differ from amounts estimated.

LIQUIDITY AND CAPITAL RESOURCES

During the three month period ended March 31, 2006, the Company relied on cash provided by operations to finance its capital expenditures. The Company participated in the drilling of 31 wells in Wyoming and continued to participate in the exploration and development processes in the China blocks including the ongoing batch drilling program for the development wells. For the three-month period ended March 31, 2006, net capital expenditures were $73.2 million. At March 31, 2006, the Company reported a cash position of $100.8 million compared to $17.6 million at March 31, 2005. Working capital at March 31, 2006 was $95.4 million compared to a working capital deficit at March 31, 2005 of $(4.5) million. As of March 31, 2006, the Company had no bank indebtedness outstanding and other long-term obligations of $27.1 million comprised of items payable in more than one year, primarily related to production taxes.

The Company’s positive cash provided by operating activities, along with the availability under the senior credit facility, are projected to be sufficient to fund the Company’s budgeted capital expenditures for 2006, which are currently projected to be $425 million. Of the $425 million budget, the Company plans to spend approximately $400 million of its 2006 budget in Wyoming and approximately $20 million in China with the balance allocated to evaluating other areas. Of the $400 million for Wyoming, the Company plans to drill or participate in an estimated 160 gross wells in 2006, of which approximately 25% will be exploration wells and the remaining will be development wells. Of the $20 million budgeted for China, approximately 33% will be for exploratory/appraisal activity and the balance will be for development activity. The Company currently has no budget for acquisitions in 2006.

The Company (through its subsidiary) participates in a revolving credit facility with a group of banks led by JP Morgan Chase Bank, N.A. The agreement specifies a maximum loan amount of $500 million, an aggregate borrowing base of $800 million and a commitment amount of $200 million at November 14, 2005. The commitment amount may be increased up to the lesser of the borrowing base amount or $500 million at any time at the request of the Company. Each bank shall have the right, but not the obligation, to increase the amount of their commitment as requested by the Company. In the event that the existing banks increase their commitment to an amount less than the requested commitment amount, then it would be necessary to bring additional banks into the facility. At March 31, 2006, the Company had no amounts outstanding and $200 million unused and available under the current committed amount.

The credit facility matures on May 1, 2010. The note bears interest at either (A) the bank’s prime rate plus a margin of zero percent (0.00%) to three-quarters of one percent (0.75%) based on the percentage of available credit drawn or at (B) LIBOR plus a margin of one percent (1.00%) to one and three-quarters of one percent (1.75%) based on the percentage of available credit drawn. For purposes of calculating interest, the available credit is equal to the borrowing base. An average annual commitment fee of 0.25% to 0.375%, depending on the percentage of available credit drawn, is charged quarterly for any unused portion of the commitment amount.

The borrowing base is subject to periodic (at least semi-annual) review and re-determination by the banks and may be decreased or increased depending on a number of factors, including the Company’s proved reserves and the bank’s forecast of future oil and gas prices. If the borrowing base is reduced to an amount less than the balance outstanding, the Company has sixty days from the date of written notice of the reduction in the borrowing base to pay the difference. Additionally, the Company is subject to quarterly reviews of compliance with the covenants under the bank facility including minimum coverage ratios relating to interest, working capital and advances to Sino-American Energy Corporation. In the event of a default under the covenants, the Company may not be able to access funds otherwise available under the facility. As of March 31, 2006, the Company was in compliance with required covenants of the bank facility.

During the three-months ended March 31, 2006, net cash provided by operating activities was $134.8 million as compared to $92.2 million for the three-months ended March 31, 2005. The increase in cash provided by operating activities was largely attributable to the increase in earnings.

During the three-months ended March 31, 2006, cash used in investing activities was $82.5 million as compared to $82.1 million for the three-months ended March 31, 2005.

During the three-months ended March 31, 2006, cash provided by (used in) financing activities was $4.1 million as compared to ($9.4) million for the three-months ended March 31, 2005. The change is primarily attributable to an absence of repayments under the senior credit facility during the three months ended March 31, 2006 as there were no amounts outstanding.

OFF BALANCE SHEET ARRANGEMENTS

The Company did not have any off-balance sheet arrangements as of March 31, 2006.

CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report contains or incorporates by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included in this document, including without limitation, statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding our financial position, estimated quantities and net present values of reserves, business strategy, plans and objectives of the Company’s management for future operations, covenant compliance and those statements preceded by, followed by or that otherwise include the words “believe”, “expects”, “anticipates”, “intends”, “estimates”, “projects”, “target”, “goal”, “plans”, ”objective”, “should”, or similar expressions or variations on such expressions are forward-looking statements. The Company can give no assurances that the assumptions upon which such forward-looking statements are based will prove to be correct nor can the Company assure adequate funding will be available to execute the Company’s planned future capital program.

Other risks and uncertainties include, but are not limited to, fluctuations in the price the Company receives for oil and gas production, reductions in the quantity of oil and gas sold due to increased industry-wide demand and/or curtailments in production from specific properties due to mechanical, marketing or other problems, operating and capital expenditures that are either significantly higher or lower than anticipated because the actual cost of identified projects varied from original estimates and/or from the number of exploration and development opportunities being greater or fewer than currently anticipated and increased financing costs due to a significant increase in interest rates. See the Company’s annual report on Form 10-K for the year ended December 31, 2005 for additional risks related to the Company’s business.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s major market risk exposure is in the pricing applicable to its gas and oil production. Realized pricing is primarily driven by the prevailing price for the Company’s Wyoming natural gas production. Historically, prices received for gas production have been volatile and unpredictable. Pricing volatility is expected to continue. Gas price realizations averaged $7.13 per Mcf during the three months ended March 31, 2006.

The Company may, from time to time, use derivative instruments as one way to manage its exposure to commodity prices. The Company has periodically entered into fixed price to index price swap agreements in order to hedge a portion of its production. The oil and natural gas reference prices of these commodity derivatives contracts are based upon crude oil and natural gas futures, which have a high degree of historical correlation with actual prices the Company receives. Under SFAS No. 133 all derivative instruments are recorded on the balance sheet at fair value. Changes in the derivative’s fair value are recognized currently in earnings unless specific hedge accounting criteria are met. For qualifying cash flow hedges, the gain or loss on the derivative is deferred in accumulated other comprehensive income (loss) to the extent the hedge is effective. For qualifying fair value hedges, the gain or loss on the derivative is offset by related results of the hedged item in the income statement. Gains and losses on hedging instruments included in accumulated other comprehensive income (loss) are reclassified to oil and natural gas sales revenue in the period that the related production is delivered. Derivative contracts that do not qualify for hedge accounting treatment are recorded as derivative assets and liabilities at market value in the consolidated balance sheet, and the associated unrealized gains and losses are recorded as current expense or income in the consolidated statement of operations. The Company currently does not have any derivative contracts in place that do not qualify as a cash flow hedge.

At March 31, 2006, the Company had no open derivative contracts to manage price risk on its natural gas production. The Company also utilizes fixed price forward gas sales contracts at southwest Wyoming delivery points to hedge its commodity exposure. The Company had the following fixed price physical delivery contracts in place on behalf of its interest and those of other parties at March 31, 2006. (The Company’s approximate average net interest in physical gas sales is 80%.)

Remaining		Volume –				Average
Contract		MMBTU				Price /
Period		/ day				MMBTU
Calendar 2006			70,000			$	5.86

The above derivative and forward gas sales contracts represent approximately 24% of the Company’s currently forecasted gas production for the balance of 2006.

ITEM 4 – CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

In connection with the preparation of the Company’s Annual Report of Form 10-K for the year ended December 31, 2005 (“2005 10-K”), an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). The Company concluded that control deficiencies in its internal control over financial reporting as of December 31, 2005 constituted material weaknesses within the meaning of the Public Company Accounting Oversight Board’s Auditing Standard No. 2.

The material weaknesses identified by the Company were disclosed in its 2005 10-K, which was filed with the SEC on March 31, 2006. Based on that and subsequent evaluations, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2006, the Company’s disclosure controls and procedures are not effective as a result of the previously-identified material weaknesses in internal control over financial reporting. As reported in the 2005 10-K, management is in the process of taking remedial steps to correct these weaknesses.

(b) Changes in Internal Control Over Financial Reporting

As reported in Item 9A of the 2005 10-K, the Company determined that material weaknesses in internal control over financial reporting existed as of December 31, 2005. These material weaknesses also existed as of March 31, 2006, and therefore are reported in this Form 10-Q:

	•		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.

Management, with oversight from the Audit Committee of the Board of Directors, has been addressing the material weakness disclosed in its 2005 10-K and is committed to effectively remediating known weaknesses as expeditiously as possible. Due to the fact that these remedial steps have not been completed, the Company performed additional analysis and procedures in order to ensure that the consolidated financial statements contained in this Form 10-Q were prepared in accordance with generally accepted accounting principles in the United States of America. Although the Company’s remediation efforts are well underway, control weaknesses will not be considered remediated until new internal controls over financial reporting are implemented and operational for a sufficient period of time to allow for effective testing and are tested, and management and its independent registered certified public accounting firm conclude that these controls are operating effectively.

In order to remediate the material weakness described in the 2005 10-K, to date the Company has:

	•		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.

Other than as described above, there has been no change in the Company’s internal controls over financial reporting during the fiscal quarter ended March 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is currently involved in various routine disputes and allegations incidental to its business operations. While it is not possible to determine the ultimate disposition of these matters, the Company believes that the resolution of all such pending or threatened litigation is not likely to have a material adverse effect on the Company’s financial position, or results of operations.

ITEM 1A. RISK FACTORS

There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS IN SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

The Board of Directors has set the date for the 2006 annual meeting of stockholders (the “2006 Annual Meeting”) as June 29, 2006, which is more than thirty days after the anniversary date of the 2005 annual meeting. Therefore, in accordance with Rule 14a-5(f) under the Securities Exchange Act of 1934 and other applicable rules of the Securities and Exchange Commission, we are hereby notifying our stockholders that May 12, 2006 will be the deadline for submitting stockholder proposals for inclusion in our proxy statement for the 2006 Annual Meeting, which we believe is a reasonable time before we will begin the printing and mailing of our proxy materials for the 2006 Annual Meeting. All stockholder proposals must be in compliance with applicable laws and regulations in order to be considered for inclusion in the proxy statement and form of proxy for the 2006 Annual Meeting. In addition, if we are not notified by such deadline of an intent to present a proposal at our 2006 Annual Meeting, management will have the right conferred by the proxies to exercise its discretionary voting authority with respect to such proposal, if presented at the meeting. The foregoing deadlines are later than the deadlines disclosed in the Company’s proxy statement dated March 24, 2005.

Stockholder proposals should be addressed to the Secretary of Ultra Petroleum Corp. at our principal executive offices located at 363 N. Sam Houston Parkway E., Suite 1200, Houston, Texas 77060. Stockholder proposals received by us after May 12, 2006 will be considered untimely and will not be included in our proxy statement for the 2006 Annual Meeting. It is recommended that stockholders submitting proposals use certified mail, return receipt requested, in order to provide proof of timely receipt. We reserve the right to reject, rule out of order, or take other appropriate action with respect to any proposal that does not comply with these and other applicable requirements.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

     3.1 Articles of Incorporation of Ultra Petroleum Corp. – (incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10Q for the period ended June 30, 2001.)

     3.2 By-Laws of Ultra Petroleum Corp — (incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10Q for the period ended June 30, 2001.)

     3.3 Articles of Amendment to Articles of Incorporation of Ultra Petroleum Corp. (incorporated by reference to Exhibit 3.3 of the Company’s Report on Form 10-K/A for the period ended December 31, 2005)

     4.1 Specimen Common Share Certificate – (incorporated by reference to Exhibit 4.1 of the Company’s Quarterly Report on Form 10Q for the period ended June 30, 2001.)

     31.1* Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     31.2* Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     32.1* Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     32.2* Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 8, 2006

EXHIBIT INDEX

     3.1 Articles of Incorporation of Ultra Petroleum Corp. — (incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10Q for the period ended June 30, 2001.)

     3.2 By-Laws of Ultra Petroleum Corp — (incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10Q for the period ended June 30, 2001.)

     3.3 Articles of Amendment to Articles of Incorporation of Ultra Petroleum Corp. (incorporated by reference to Exhibit 3.3 of the Company’s Report on Form 10-K/A for the period ended December 31, 2005)

     4.1 Specimen Common Share Certificate — (incorporated by reference to Exhibit 4.1 of the Company’s Quarterly Report on Form 10Q for the period ended June 30, 2001.)

     31.1* Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     31.2* Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     32.1* Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     32.2* Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.