Unit Corporation Reports 2010 Fourth Quarter and Year End Results

Feb 22, 2011 | News

Unit Corporation (NYSE: UNT) reported net income of $43.7 million, or
$0.92 per diluted share, for the three months ended December 31, 2010.
For the same period in 2009, net income was $28.5 million, or $0.60 per
diluted share. Total revenues for the fourth quarter of 2010 were $252.6
million (39% contract drilling, 45% oil and natural gas, and 16%
mid-stream), compared to $177.3 million (27% contract drilling, 51% oil
and natural gas, and 21% mid-stream) for the fourth quarter of 2009.

For all of 2010, Unit reported net income of $146.5 million, or $3.09
per diluted share. For the same period in 2009, Unit reported a net loss
of $55.5 million, or $1.18 per diluted share. The 2009 results included
a noncash ceiling test write down of $281.2 million ($175.1 million
after tax, or $3.70 per diluted share). The ceiling test write down
reduced the carrying value of Unit’s oil and natural gas properties and
was required because of significantly lower commodity prices existing at
the end of the first quarter 2009. Without the ceiling test write down,
net income for 2009 would have been $119.6 million, or $2.52 per diluted
share (see Non-GAAP Financial Measures below).

Total revenues for all of 2010 were $881.8 million (36% contract
drilling, 45% oil and natural gas, and 18% mid-stream), compared to
$709.9 million (33% contract drilling, 50% oil and natural gas, and 15%
mid-stream) for the same period in 2009.

CONTRACT DRILLING SEGMENT INFORMATION

The average number of drilling rigs used in the fourth quarter of 2010
was 70.9, an increase of 93% over the fourth quarter of 2009, and an
increase of 8% over the third quarter of 2010.

Per day drilling rig rates for the fourth quarter of 2010 averaged
$16,570, up 13% (or $1,862) from the fourth quarter of 2009, and up 5%
(or $756) from the third quarter of 2010.

Average per day operating margin for the fourth quarter of 2010 was
$7,559 (before elimination of intercompany drilling rig profit of $4.4
million). This compares to $5,268 (before elimination of intercompany
drilling rig profit and bad debt expense of $0.4 million) for the fourth
quarter of 2009, an increase of 44%, or $2,292. As compared to the third
quarter of 2010 ($7,056 before elimination of intercompany drilling rig
profit of $2.9 million) fourth quarter 2010 operating margin increased
7% or $504 – in each case with regard to the elimination of intercompany
drilling rig profit see Non-GAAP Financial Measures below. Included in
the average operating margin amount for the fourth quarter of 2010 and
2009 was a per day amount of $31 and $619 for early termination fees
resulting from the cancellation of long-term contracts.

Unit averaged 61.4 working drilling rigs for 2010, up 58% from 38.9
during 2009.

Average per day operating margin for 2010 was $6,202 (before elimination
of intercompany drilling rig profit of $9.2 million) as compared to
$6,894 (before elimination of intercompany drilling rig profit and bad
debt expense of $1.5 million) for 2009, a decrease of 10% (in each case
with regard to the elimination of intercompany drilling rig profit see
Non-GAAP Financial Measures below). Included in the average operating
margin amount for 2010 and 2009 was a per day amount of $16 and $428,
respectively, for early termination fees resulting from the cancellation
of long-term contracts. Excluding early termination fees, average
operating margins for 2010 were $6,186 per day, a decrease of $280 per
day or 4% as compared to $6,466 per day for 2009.

The following table illustrates Unit’s drilling rig count at the end of
each period and average utilization rate during the period:

4th Qtr 10 3rd Qtr 10 2nd Qtr 10 1st Qtr 10 4th Qtr 09 3rd Qtr 09 2nd Qtr 09 1st Qtr 09 4th Qtr 08
Rigs 121 123 123 125 130 130 131 131 132
Utilization 59% 54% 47% 40% 28% 26% 24% 40% 74%

Larry Pinkston, Unit’s Chief Executive Officer and President, said: “We
are pleased with the results that our contract drilling segment has been
able to obtain. The fourth quarter of 2010 was the sixth consecutive
quarter in which we increased the average number of our working drilling
rigs over the previous quarter. As the industry has continued to
transition to drilling horizontal or directional wells, we have been
able to respond to that demand by refurbishing rigs or adding new
drilling rigs. Approximately 73% of our drilling rigs working today are
drilling for oil or natural gas liquids and approximately 88% are
drilling horizontal or directional wells. During 2010, we refurbished
and upgraded 30 drilling rigs and during 2011 we have plans to add five
new drilling rigs to our fleet. All five new drilling rigs are under
long-term contracts and are 1,500 horsepower, diesel-electric drilling
rigs. On completion of these new drilling rigs, our rig fleet will total
126 drilling rigs. Currently, 72 of our drilling rigs are under
contract. Long-term contracts (contracts with original terms ranging
from six months to two years in length) are in place for 38 of the 72
contracted drilling rigs. Of these contracts nine are up for renewal
during the first quarter of 2011, 11 during the second quarter of 2011,
six during the third quarter of 2011, nine during the fourth quarter of
2011, and three in 2012 and beyond. These contracts do not include the
five term contracts for the new drilling rigs.”

OIL AND NATURAL GAS SEGMENT INFORMATION

  • Completed 167 gross wells during 2010 with a success rate of 90%.
  • Continued strategy of focusing development activities on oil and
    natural gas liquids (NGLs) by increasing 2010 net proved oil and NGLs
    reserves 27% over 2009.
  • Hedged 80,000 MMBtu per day of natural gas and 4,000 Bbls per day of
    oil for 2011.
  • Currently anticipate 2011 production of 66.0 to 68.0 Bcfe.

Fourth quarter 2010 oil production was 519,000 barrels, in comparison to
295,000 barrels for the same period of 2009, up 76%. Natural gas liquids
(NGLs) production during the fourth quarter of 2010 was 406,000 barrels,
an increase of 17% when compared to 346,000 barrels for the same period
of 2009. Fourth quarter 2010 natural gas production increased 1% to 10.6
billion cubic feet (Bcf) compared to 10.5 Bcf for the comparable quarter
of 2009. Fourth quarter 2010 equivalent production totaled 16.2 Bcfe, up
13% from the fourth quarter of 2009 and up 8% from the third quarter of
2010. Total production for 2010 was 59.2 Bcfe, down 3% over the 60.7
Bcfe produced during 2009.

Unit’s average natural gas price, including the effects of hedges, for
the fourth quarter of 2010 decreased 7% to $5.39 per thousand cubic feet
(Mcf) as compared to $5.77 per Mcf for the fourth quarter of 2009.
Unit’s average oil price, including the effects of hedges, for the
fourth quarter of 2010 increased 21% to $74.28 per barrel compared to
$61.57 per barrel for the fourth quarter of 2009. Unit’s average NGLs
price, including the effects of hedges, for the fourth quarter of 2010
was $40.16 per barrel compared to $26.02 per barrel for the fourth
quarter of 2009, up 54%.

For 2010, Unit’s average natural gas price, including the effects of
hedges, increased 1% to $5.62 per Mcf as compared to $5.59 per Mcf for
2009. Unit’s average oil price, including the effects of hedges, for
2010 was $69.52 per barrel compared to $56.33 per barrel during 2009, a
23% increase. Unit’s average NGLs price, including the effects of
hedges, for 2010 was $37.04 per barrel compared to $22.81 per barrel
during 2009, a 62% increase.

For 2011, Unit has hedged 80,000 MMBtu per day of its natural gas
production, 4,000 Bbls per day of its oil production and 504 Bbls per
day of its NGLs production. The natural gas production is hedged under
swap contracts at a comparable average NYMEX price of $4.85. The average
basis differential for the swaps is ($0.19). The oil production is
hedged under swap contracts at an average price of $84.28 per barrel.
The NGLs production is hedged under swap contracts at an average price
of $40.76 per barrel.

For 2012, Unit has hedged approximately 30,000 MMBtu per day of its
natural gas production and 2,500 Bbls per day of its oil production. The
natural gas production is hedged under swap contracts at a comparable
average NYMEX price of $5.48. The average basis differential for the
swaps is ($0.28). The oil production is hedged under swap contracts at
an average price of $88.49 per barrel.

The following table illustrates Unit’s production and certain other
results for the periods indicated:

4th Qtr 10 3rd Qtr 10 2nd Qtr 10 1st Qtr 10 4th Qtr 09 3rd Qtr 09 2nd Qtr 09 1st Qtr 09 4th Qtr 08
Production, Bcfe

16.2

14.9

14.0

14.1

14.3

14.7

15.4

16.3

16.8

Production, MMcfe/day

176.0

162.2

153.3

156.8

155.8

159.4

169.6

180.9

182.6

Realized price, Mcfe (1)

$

6.93

$

6.36

$

6.37

$

6.82

$

6.12

$

5.92

$

5.75

$

5.48

$

6.21

Wells Drilled

62

39

39

27

37

21

16

21

67

Success Rate

95

%

85

%

92

%

96

%

92

%

90

%

100

%

90

%

90

%

(1) Realized price includes oil, natural gas liquids, natural gas and
associated hedges.

Pinkston said: “2010 was a transition year for us with regards to our
drilling program as we continued to implement our strategy to focus on
oil or NGLs rich prospects. Getting wells online were delayed by
difficulties in securing fracing services and connections to gathering
systems. During the latter part of the year, we were able to obtain
these services and reduce the unusually large backlog of our well
completions, especially in the Granite Wash and Marmaton plays.

“We recently announced our total proved oil and natural gas reserves at
December 31, 2010 were 622.2 Bcfe of natural gas, an 8% increase over
our 2009 total proved reserves. The reserve growth consisted of a 50%
and 10% increase in oil and NGLs, respectively, while natural gas
reserves were essentially unchanged. Our production replacement for 2010
was 176%, with 158% through the drill bit. The capital expenditure
budget for 2011 is $415 million, an 11% increase over 2010. Our
preliminary annual production guidance for 2011 is approximately 66.0 to
68.0 Bcfe, an increase of 11% to 15% over 2010.”

MID-STREAM SEGMENT INFORMATION

  • Increased 2010 processing volumes per day and liquids sold volumes per
    day by 8% and 11%, respectively, over 2009.
  • Completed the Lone Tree Gas Processing Plant in Hemphill County, Texas.
  • Constructing a 16-mile pipeline and related compressor station in
    Preston County, West Virginia.

Fourth quarter of 2010 per day processing volumes were 85,195 MMBtu
while liquids sold volumes were 291,186 gallons per day, an increase of
10% each, over the fourth quarter of 2009. Fourth quarter 2010 per day
gathering volumes were 188,252 MMBtu, up 6% over the fourth quarter of
2009. Operating profit (as defined in the Selected Financial and
Operational Highlights) for the fourth quarter was $9.9 million, an
increase of 10% from the fourth quarter of 2009, primarily due to
increased processing margins resulting from increased liquids prices and
increased volumes.

For 2010, processing volumes were 82,175 MMBtu per day and liquids sold
volumes were 271,360 gallons per day, an increase of 8% and 11%,
respectively, over 2009. Gathering volumes for 2010 were 183,867 MMBtu
per day, essentially unchanged from 2009.

The following table illustrates certain results from this segment’s
operations for the periods indicated:

4th Qtr 10 3rd Qtr 10 2nd Qtr 10 1st Qtr 10 4th Qtr 09 3rd Qtr 09 2nd Qtr 09 1st Qtr 09 4th Qtr 08
Gas gathered
MMBtu/day 		188,252 183,161 183,858 180,117 177,145 179,047 187,666 192,320 187,585
Gas processed
MMBtu/day 		85,195 84,175 82,699 76,513 77,501 77,923 75,481 72,650 72,491
Liquids sold

Gallons/day

291,186 260,519 279,736 253,707 263,668 251,830 239,121 218,762 197,428

Pinkston said: “Gas processed volumes, liquids sold volumes as well as
gas gathered volumes all continued to increase and remained strong in
the fourth quarter. We recently announced the completion of the Lone
Tree Gas Processing Plant, a 50 MMcf per day turbo-expander natural gas
processing plant at our Hemphill Processing Complex in Hemphill
County, Texas. The completion of this new natural gas processing
plant increases our Hemphill facility’s processing capacity to
approximately 100 MMcf per day, with run rates expected at 70 to 80 MMcf
per day by the middle of the second quarter.

“In connection with our Appalachian operations, we are currently
constructing a 16-mile, 16″ pipeline and related compressor
station in Preston County, West Virginia, which will have a capacity of
approximately 220 MMcf per day. This pipeline project is on schedule to
be completed by mid-2011.”

FINANCIAL INFORMATION

Unit ended the year with working capital of $41.1 million, long-term
debt of $163.0 million, and a debt to capitalization ratio of 9%. Under
its credit facility, the amount available to be borrowed is the lesser
of the amount the company elects as the commitment amount (currently
$325 million) or the value of the borrowing base as determined by the
lenders (currently $500 million), but, in either event, not to exceed
the maximum credit facility amount of $400 million.

MANAGEMENT COMMENT

Larry Pinkston said: “We are pleased with our 2010 fourth quarter and
the positive momentum each of our business segments carries into 2011.
We will continue to focus our exploration operations on oil and natural
gas liquids rich plays like the Granite Wash and Marmaton and will
continue to refurbish and upgrade certain drilling rigs while adding new
rigs to our fleet as we respond to the demand for horizontal drilling by
exploration and production companies. Our mid-stream segment will
continue to grow with new pipeline projects, the expansion of existing
facilities and exploring for additional opportunities in various basins
throughout the country.”

WEBCAST

Unit will webcast its fourth quarter and year end earnings conference
call live over the Internet on February 22, 2011 at 10:00 a.m. Central
Time (11:00 a.m. Eastern). To listen to the live call, please go to www.unitcorp.com
at least fifteen minutes prior to the start of the call to download and
install any necessary audio software. For those who are not available to
listen to the live webcast, a replay will be available shortly after the
call and will remain on the site for twelve months.

Unit Corporation is a Tulsa-based, publicly held energy company engaged
through its subsidiaries in oil and gas exploration, production,
contract drilling and gas gathering and processing. Unit’s Common Stock
is listed on the New York Stock Exchange under the symbol UNT. For more
information about Unit Corporation, visit its website at http://www.unitcorp.com.

This news release contains forward-looking statements within the meaning
of the private Securities Litigation Reform Act. All statements, other
than statements of historical facts, included in this release that
address activities, events or developments that the Company expects or
anticipates will or may occur in the future are forward-looking
statements. A number of risks and uncertainties could cause actual
results to differ materially from these statements, including the impact
that the current decline in wells being drilled will have on production
and drilling rig utilization, productive capabilities of the Company’s
wells, future demand for oil and natural gas, future drilling rig
utilization and dayrates, projected growth of the Company’s oil and
natural gas production, oil and gas reserve information, as well as its
ability to meet its future reserve replacement goals, anticipated gas
gathering and processing rates and throughput volumes, the prospective
capabilities of the reserves associated with the Company’s inventory of
future drilling sites, availability and timing of obtaining third party
services used in the drilling or completion of its oil and gas wells,
anticipated oil and natural gas prices, the number of wells to be
drilled by the Company’s exploration segment, development, operational,
implementation and opportunity risks, possible delays caused by limited
availability of third party services needed in the course of its
operations, possibility of future growth opportunities, and other
factors described from time to time in the Company’s publicly available
SEC reports. The Company assumes no obligation to update publicly such
forward-looking statements, whether as a result of new information,
future events or otherwise.

Unit Corporation

Selected Financial and Operations Highlights

(In thousands except per share and operations data)

Three Months Ended Twelve Months Ended
December 31, December 31,
2010 2009 2010 2009
Statement of Operations:
Revenues:
Contract drilling $ 98,465 $ 47,932 $ 316,384 $ 236,315
Oil and natural gas 114,056 90,480 400,807 357,879
Gas gathering and processing 39,608 37,024 154,516 108,628
Other, net 447 1,896 10,138 7,076
Total revenues 252,576 177,332 881,845 709,898
Expenses:
Contract drilling:
Operating costs 53,966 30,515 186,813 140,080
Depreciation 21,270 11,523 69,970 45,326
Oil and natural gas:
Operating costs 29,422 24,888 105,365 87,734
Depreciation, depletion
and amortization 37,047 24,881 118,793 114,681

Impairment of oil and natural gas properties

—

—

—

281,241

Gas gathering and processing:
Operating costs 29,739 28,020 122,146 87,908
Depreciation
and amortization 3,639 3,938 15,385 16,104
General and administrative 6,780 6,923 26,152 24,011
Interest, net — — — 539
Total expenses 181,863 130,688 644,624 797,624
Income (Loss) Before Income Taxes 70,713 46,644 237,221 (87,726 )
Income Tax Expense (Benefit):
Current (7,447 ) (10,041 ) (9,935 ) (223 )
Deferred 34,495 28,172 100,672 (32,003 )
Total income taxes 27,048 18,131 90,737 (32,226 )
Net Income (Loss) $ 43,665 $ 28,513 $ 146,484 $ (55,500 )
Net Income (Loss) per
Common Share:
Basic $ 0.92 $ 0.61 $ 3.10 $ (1.18 )
Diluted $ 0.92 $ 0.60 $ 3.09 $ (1.18 )
Weighted Average Common
Shares Outstanding:
Basic 47,457 47,020 47,278 46,990
Diluted 47,678 47,503 47,454 46,990
December 31, December 31,
2010 2009
Balance Sheet Data:
Current assets $ 188,180 $ 128,095
Total assets $ 2,669,240 $ 2,228,399
Current liabilities $ 147,128 $ 105,147
Long-term debt $ 163,000 $ 30,000
Other long-term liabilities $ 92,389 $ 81,126
Deferred income taxes $ 556,106 $ 446,316
Shareholders’ equity $ 1,710,617 $ 1,565,810
Twelve Months Ended December 31,
2010 2009
Statement of Cash Flows Data:
Cash Flow From Operations before Changes
in Operating Assets and Liabilities (1) $ 454,492 $ 380,762
Net Change in Operating Assets and Liabilities (64,420 ) 109,713
Net Cash Provided by Operating Activities $ 390,072 $ 490,475
Net Cash Used in Investing Activities $ (536,261 ) $ (271,927 )
Net Cash Provided by (Used in)
Financing Activities

$

146,408

$

(217,992

)

Three Months Ended Twelve Months Ended
December 31, December 31,
2010 2009 2010 2009
Contract Drilling Operations Data:

Rigs Utilized 70.9 36.7 61.4 38.9
Operating Margins (2) 45 % 36 % 41 % 41 %
Operating Profit Before Depreciation (2) ($MM) $ 44.4 $ 17.4 $ 129.6 $ 96.2
Oil and Natural Gas Operations Data:
Production:
Oil – MBbls 519 295 1,521 1,286
Natural Gas Liquids – MBbls 406 346 1,549 1,488
Natural Gas – MMcf 10,635 10,489 40,756 44,063
Average Prices:
Oil price per barrel received

$

74.28

$

61.57

$

69.52

$

56.33

Oil price per barrel received, excluding hedges

$

81.56

$

73.02

$

76.65

$

56.64

NGLs price per barrel received

$

40.16

$

26.02

$

37.04

$

22.81

NGLs price per barrel received,excluding hedges

$

40.59

$

36.10

$

36.96

$

25.66

Natural Gas price per Mcf received

$

5.39

$

5.77

$

5.62

$

5.59

Natural Gas price per Mcf received, excluding hedges

$

3.41

$

3.90

$

4.05

$

3.26

Operating Profit Before DD&A and

Impairment (2) ($MM)

$ 84.6 $ 65.6 $ 295.4 $ 270.1
Mid-Stream Operations Data:
Gas Gathering – MMBtu/day 188,252 177,145 183,867 183,989
Gas Processing – MMBtu/day 85,195 77,501 82,175 75,908
Liquids Sold – Gallons/day 291,186 263,668 271,360 243,492
Operating Profit Before Depreciation
and Amortization (2) ($MM) $ 9.9 $ 9.0 $ 32.4 $ 20.7

(1) The company considers its cash flow from operations before changes
in operating assets and liabilities an important measure in meeting the
performance goals of the company (see Non-GAAP Financial Measures below).

(2) Operating profit before depreciation is calculated by taking
operating revenues by segment less operating expenses excluding
depreciation, depletion, amortization and impairment, general and
administrative and interest expense. Operating margins are calculated by
dividing operating profit by segment revenue.

Non-GAAP Financial Measures

We report our financial results in accordance with generally accepted
account principles (“GAAP”). We believe certain non-GAAP performance
measures provide users of our financial information and our management
additional meaningful information to evaluate the performance of our
company.

This press release includes net income excluding the effect of the
impairment of our oil and natural gas properties, earnings per share
excluding the effect of the impairment of our oil and natural gas
properties, cash flow from operations before changes in operating assets
and liabilities and our drilling segment’s average daily operating
margin before elimination of drilling rig profit.

Below is a reconciliation of GAAP financial measures to non-GAAP
financial measures for the three and twelve months ended December 31,
2010 and 2009. Non-GAAP financial measures should not be considered by
themselves or a substitute for our results reported in accordance with
GAAP.

Unit Corporation
Reconciliation of Net Income and Earnings per Share
Excluding the Effect of Impairment of Oil and Natural Gas
Properties
Three Months Ended Twelve Months Ended
December 31, December 31,
2010 2009 2010 2009
(In thousands except per share amounts)
Net income excluding impairment of oil and
natural gas properties:
Net income (loss) $ 43,665 $ 28,513 $ 146,484 $ (55,500 )
Add:
Impairment of oil and natural gas properties
(net of income tax) — — — 175,072
Net income excluding impairment of oil and
natural gas properties $ 43,665 $ 28,513 $ 146,484 $ 119,572
Diluted earnings per share excluding
impairment of oil and natural gas properties:
Diluted earnings per share

Add:

Diluted earnings per share from impairment

$ 0.92 $ 0.60 $ 3.09 $ (1.18 )
of oil and natural gas properties — — — 3.70
Diluted earnings per share excluding
impairment of oil and natural gas properties $ 0.92 $ 0.60 $ 3.09 $ 2.52

We have included the net income excluding impairment of oil and natural
gas properties and diluted earnings per share excluding impairment of
oil and natural gas properties because:

  • We use the adjusted net income to evaluate the operational performance
    of the company.
  • The adjusted net income is more comparable to earnings estimates
    provided by securities analysts.
  • The impairment of oil and natural gas properties does not occur on a
    recurring basis and the amount and timing of impairments cannot be
    reasonably estimated for budgeting purposes and is therefore typically
    not included for forecasting operating results.
Unit Corporation
Reconciliation of Cash Flow From Operations Before Changes in
Operating Assets and Liabilities
Twelve Months Ended
December 31,
2010 2009
(In thousands)
Net cash provided by operating activities $ 390,072 $ 490,475
Net change in operating assets and liabilities 64,420 (109,713 )
Cash flow from operations before changes
in operating assets and liabilities $ 454,492 $ 380,762

We have included the cash flow from operations before changes in
operating assets and liabilities because:

  • It is an accepted financial indicator used by our management and
    companies in our industry to measure the company’s ability to generate
    cash which is used to internally fund our business activities.
  • It is used by investors and financial analysts to evaluate the
    performance of our company.
Unit Corporation
Reconciliation of Average Daily Operating Margin Before
Elimination of Intercompany Rig Profit
Three Months Ended Three Months Ended Twelve Months Ended
September 30, December 31, December 31,
2010 2010 2009 2010 2009
(In thousands except day and daily data)
Contract drilling revenue $

85,004

$ 98,465 $ 47,932 $ 316,384 $ 236,315
Contract drilling operating cost 45,406 53,966 30,515 186,813 140,080
Operating profit from contract drilling 39,598 44,499 17,417 129,571 96,235
Add:

Elimination of intercompany rig profit

and bad debt expense

2,888

4,440

377

9,158

1,549

Operating profit from contract drilling
before elimination of intercompany
rig profit and bad debt expense 42,486 48,939 17,794 138,729 97,784
Contract drilling operating days 6,021 6,474 3,378 22,367 14,183
Average daily operating margin before
elimination of intercompany rig profit
and bad debt expense

$

7,056

$

7,559

$

5,268

$

6,202

$

6,894

We have included the average daily operating margin before elimination
of intercompany rig profit because:

  • Our management uses the measurement to evaluate the cash flow
    performance of our contract drilling segment and to evaluate the
    performance of contract drilling management.
  • It is used by investors and financial analysts to evaluate the
    performance of our company.

Unit Corporation
David T. Merrill, 918-493-7700
Chief
Financial Officer and Treasurer
www.unitcorp.com