Although a few analysts and investors quibble over what niche to put the company in, Unit Corp.’s strategy of improving market share, developing new markets, increasing its reserve base, and maintaining a conservative debt position is working well.
Don Stowers, Editor, OGFJ
Photos by Evan Taylor
Most oil and gas companies the size of Tulsa’s Unit Corp. are easy to categorize. They may be E&P companies, drilling contractors, or pipeline companies. Unit Corp. is all three.
President and CEO Larry Pinkston says that 2005 revenues break down to about 50% contract drilling, 35% E&P, and the remaining 15% from its newest subsidiary, Superior Pipeline Co.
The upside of all this, says Pinkston, is that there are abundant business opportunities in all three areas, which the company is exploiting. The downside, he admits, is that some investors and analysts don’t quite know what to make of a company with their unusual business profile.
“We’re a tough story for some investors to understand,” he adds. “Are we a drilling company, or are we an E&P company? And why do we own a pipeline company? We see the opportunities in each of these, but investors like to put you in a particular category.”
Investors and stockholders are far from unhappy though. 2005 was a banner year for Unit Corp., which set all-time records in all of the company’s business segments and received accolades from the investment community. Records were set in the following areas:
- Revenue, net income, and cash flow;
- The amount of oil and natural gas reserves;
- The volume of oil and natural gas production;
- Day-rates, cash-flow margins per day, the number of drilling rigs owned and utilized; and
- Volumes of gas gathered and processed per day.
Overview
As of Dec. 31, 2005, Unit Petroleum Co. (the E&P operation) had record oil and gas reserves of 412 bcfe, which consisted of 9.9 million barrels of oil and 352.8 bcf of natural gas. For the 22nd consecutive year, the company achieved its goal of replacing more than 150% of its production with new reserves.
Brad Guidry, senior vice president - exploration for Unit Petroleum, says the company plans to participate in the drilling of 235 wells in 2006 - a 22% increase over 2005. He expects to achieve a 25% to 30% growth in production this year.
Photo courtesy of Unit Corp.
Unit Drilling Co., which accounts for more than half the corporation’s revenues, also had an outstanding year. The company added 12 drilling rigs to its fleet in 2005, bringing the total number of operating rigs to 112. However, one was lost to a fire in January, reducing the total to 111. Unit’s average rig utilization rate for 2005 was 97%. The rig fleet is capable of reaching depths ranging from 5,000 to 40,000 feet.
Unit Drilling is the 3th-largest medium-to-deep depth land driller in the US, and is the largest driller in the Anadarko and Arkoma basins, according to John Cromling, executive vice president of Unit Drilling. The company also has been operating 7 rigs in the Barnett shale of North Texas. He added that the company expects to add another 10 rigs this year and will continue to add rigs in the future to meet customer demand.
Founded in 1996, Superior Pipeline Co. LLC is the newest Unit business segment. It is a midstream company that engages in the gathering, processing, and treating of natural gas. The company currently owns 2 natural gas treatment plants, 5 processing plants, and 36 active gathering systems, consisting of 500 miles of pipeline.
In August of 2004, Unit completed its purchase of the 60% interest in Superior that it did not already own. The company focuses on the acquisition, management, and enhancement of existing gas systems and the construction and operation of start-up, or “grassroots,” projects. Bob Parks, president and manager of Superior, says the company gathered record volumes of 142,444 MMBtu/day in 2005 - a 330% increase over 2004.
Larry Pinkston has served as president of Unit Corp. since August 2003. He added COO to his title in February 2004 and became CEO in April 2005. Pinkston also serves on the board of directors, which is chaired by John G. Nikkel, who retired as CEO in 2005. Pinkston holds a bachelor’s degree in accounting from East Central University in Oklahoma and is a Certified Public Accountant. He has been with Unit Corp. since 1981 in a variety of roles, including corporate budget director, controller, treasurer, and CFO.
“Unit has experienced dramatic growth in recent years, and we intend to continue growing the company in such a way that our stockholders get the best returns possible on their investment,” said Pinkston. “We are optimistic about the opportunities available to us.”
Unit Petroleum Co.
Asked about the prospect of spinning off Unit Petroleum from Unit Corp., Pinkston responded, “We get asked that question a lot. My response is that when the E&P business gets so big that we can’t stay out of our drilling customers’ plays without risking the loss of drilling customers, then we’ll do it. So far, this hasn’t been a problem.”
Guidry commented that Unit Petroleum needs to have at least 600 bcfe in reserves before a spin-off would be seriously considered. “We don’t want to be just another small-cap company,” he added. “The company would have to be viable and sustainable.”
The E&P unit operates primarily in the Mid-Continent region, and on the Texas Gulf Coast, said Guidry. It is active in Oklahoma and the Permian basin of West Texas, and is looking for additional opportunities in the Rockies and in Louisiana.
“We are fairly conservative,” he said. “About 10% of our budget goes to high-risk exploration-type plays and 10% into resource-type plays. Our main focus is on low-risk exploration and development drilling.”
“Development of new natural gas production from the Lower Atoka sands in our Panola Field is a key component of Unit’s 2006 drilling program,” said Guidry. “We have a well-developed infrastructure to bring our Panola Field wells to production quickly. We believe there are numerous opportunities to further develop the field, as we believe there are as many as 8 prospective sands to target over the next several years.”
He added that he remains positive about the E&P unit’s goal of drilling 235 wells during 2006. The completion rate has been 85% for the past ten years.
Although most of Unit Petroleum’s growth is through the drillbit, the company continues to acquire oil and natural gas properties that fit into the company’s growth strategy. In April, the company purchased properties with oil and gas reserves estimated approximately 14.2 bcfe for $32.4 million in cash. About 45% of the reserves associated with these properties are located in Oklahoma, 36% in Texas, and 19% in New Mexico.
Financials
David Merrill, Unit Corp. CFO and treasurer, said the company uses debt or cash flow to purchase properties for Unit Petroleum. For larger acquisitions of contract drilling rigs, Unit prefers equity.
“Our debt-to-capitalization ratio is very conservative,” said Merrill. “It’s about 10%. In the first quarter, we only had about $90 million in debt outstanding with additional buying capacity of about$145 million to draw from as of the end of the first quarter.”
Higher oil and natural gas prices and a favorable market environment contributed to Unit’s outstanding financial performance in 2005. Year-over-year revenue increased 71% to $885.6 million, while year-over-year earnings per share increased 134% to $4.60 per diluted share on a total of 46.2 million shares. Net cash provided by operating activities increased 56% to $317.8 million, according to the company’s annual report for 2005.
Merrill also noted that Unit Corp. has complied with and will continue to comply with all the provisions of the Sarbanes-Oxley requirements. “It was a big undertaking, time-wise and in terms of cost,” he said, adding that he did bring in some contract personnel to help the company become compliant, but they did not outsource.
Unit Drilling Co.
Unit Drilling Co., headed by John Cromling, has historically been the bread and butter for Unit Corp. Labor intensive, the contract drilling business unit employs 2,700 of the approximately 3,000 people in the entire firm. It also brings in more than half the total revenues and is a cash cow with today’s high rig day-rates, which average from $16,000/day to $27,000/day, depending on the type rig and equipment furnished.
Founded in 1963 with 3 drilling rigs, Unit Drilling Co. has grown to become one of the largest land drillers in the US. Today the company operates 115 onshore rigs in the Anadarko and Arkoma basins, the Rocky Mountains, the Barnett shale, and the Texas and Louisiana Gulf Coast. The fleet is leveraged to natural gas drilling, and the company claims to have the largest percentage of deep-rated, premium rigs in the industry. Rig utilization averages about 97% to 98%, according to Cromling.
“Ten years ago, about all our activity was in Oklahoma and the Texas panhandle,” said Cromling. “Since then we’ve expanded into other areas. We have 7 rigs operating in the Barnett shale (in North Texas) and another 23 in the Rockies. We’re also operating in East Texas and along the Gulf Coast in Texas and Louisiana.”
A continuing problem for Unit Drilling and all drilling companies is finding qualified personnel to operate the rigs.
“About 50% of the people we hire have never worked on a rig before,” said Cromling. “This is because the industry was dormant for so long and people left the oil and natural gas business to find other types of work. We are actively recruiting new personnel throughout the oil patch and are training them through a mentoring program. Rather than hiring away workers from competing drilling companies, we believe this program will bring a lot of young people to the industry, which will be good for everyone.”
On the E&P side, Guidry said Unit is actively recruiting exploration geologists on college campuses - primarily at the University of Oklahoma, Oklahoma State, the University of Tulsa, the University of Texas, Texas A&M, and the University of Houston. At any given time, the company has 3 to 5 college interns working in their Tulsa and Houston offices.
Cromling said the overall strategy for the contract drilling group is three-pronged:
- Provide high quality drilling equipment and premium service;
- Retain key drilling personnel through consistent, maximized rig utilization; and
- Expand operational areas and rig fleet as appropriate.
Average drilling rig utilization for 2005 was 102.1 rigs - a 16% improvement over 2004. Drilling revenues for the year increased 55% to $462.1 million, while average day-rates for the year rose 39% to $12,431/day. By February of this year, day-rates for Unit rose to an all-time high of $17,129/day. Contract drilling operating margins increased to 42% in 2005, compared to 29% in 2004.
Unit is in the process of adding 4 additional 1,500-horsepower SCR drilling rigs. “The four rigs are under contract at an average day-rate of $23,000,” said Pinkston. “These rigs were built to meet the market’s demand for faster, deeper, and safer units.”
He added, “The era of drilling for easy oil and natural gas is long gone. Today, we’re drilling long-reach horizontal wells into over-pressured zones that require the best crews and equipment. These four rigs were built to meet customer needs. During the second half of 2006, we will add an additional 5 rigs through a combination of our internal new-build program and our acquisition program.”
Superior Pipeline Co.
Superior Pipeline Co. LLC was formed in 1996 with Unit Corp. owning 40% of the company. In July of 2004, Unit purchased the remaining 60%.
“We are always building new systems and expanding current ones,” said Parks. “Superior has doubled in size in the last 2 years.”
Superior’s operations are located in Oklahoma, Louisiana, and Texas. Superior has grown over the years through grassroots construction projects, acquisitions, and a strong customer base of mostly independent producers.
Gas gathering and processing revenues increased 238% to $100.5 million in 2005. The company gathered 142,444 MMBtu/day and processed 30,613 MMBtu/day - an increase of 330% and 128%, respectively, over 2004.
For 2006, Superior’s capital expenditure budget will be approximately $30 million for new projects. Parks said that the company plans to expand its geographic focus and to grow by expanding both its existing facilities and systems and by acquiring or building new systems and facilities.
“Percentage-wise, Superior will see the greatest growth of all Unit Corp. businesses because it started out from a much smaller base,” added Pinkston. “The pipeline business is positioned to take advantage of new opportunities that may arise due to changes in the regulatory environment.”
Conclusion
Unless oil and gas prices plummet and demand for drilling rigs suddenly declines, expect Unit Corp. and its 3 subsidiaries to continue to enjoy high revenues and income. Conditions are ripe for continued growth and the company has positioned itself well to take advantage of domestic opportunities.
Let’s take a look at the first quarter of 2006 to see how the company’s financials are shaping up so far this year:
- Earnings per share of $1.61 versus $0.67 in the same quarter of 2005;
- Total revenues of $282.8 million -up 65% from 1Q05;
- Contract drilling accounted for more half of all revenues-$161.4 million;
- Land drilling operations boasted full utilization of the company’s fleet of 109 land rigs compared to 106 rigs the prior quarter;
- Fleet average daily margins improved 18% over the prior quarter;
- E&P operations had strong year-over-year growth with production up 36% to 12.7 bcfe.
- E&P growth was up 8% over the prior quarter.
“We are very pleased with the first-quarter results,” commented Pinkston. “All business units are continuing to expand to meet external demands, and we are achieving record quarterly volumes.”
Unit Corp. has been able to respond to market conditions and grow in favorable as well as unfavorable conditions. One of the company’s strengths is its strategic decision to operate in the domestic natural gas basins that it knows best and not overextend itself into unfamiliar areas. That strategy has served it well in the past and is helping the company achieve its goals today.
