Unit Corporation Reports 2010 First Quarter Results

May 4, 2010 | News

Unit Corporation (NYSE: UNT) reported today its first quarter 2010
results. For the quarter, it reported net income of $36.2 million, or
$0.76 per diluted share, compared to a net loss of $147.5 million, or
$3.14 per diluted share for the three months ended March 31, 2009.
Included in the first quarter 2009 results was a noncash ceiling test
write down of $281.2 million ($175.1 million after tax, or $3.73 per
diluted share). The ceiling test write down was required to reduce the
carrying value of the company’s oil and natural gas properties due to
significantly lower commodity prices existing at the end of the first
quarter 2009. If the ceiling test write down had not been required, net
income for the first quarter of 2009 would have been $27.6 million, or
$0.59 per diluted share (see Non-GAAP Financial Measures below). Total
revenues for the first quarter of 2010 were $206.6 million (30% contract
drilling, 48% oil and natural gas, and 20% mid-stream), compared to
total revenues for the first quarter of 2009 of $201.1 million (44%
contract drilling, 44% oil and natural gas, and 11% mid-stream).

CONTRACT DRILLING SEGMENT INFORMATION

The average number of drilling rigs used in the first quarter of 2010
was 50.9 drilling rigs, a decrease of 4% from the first quarter of 2009,
and an increase of 39% from the fourth quarter of 2009. Contract
drilling rig rates for the first quarter of 2010 averaged $14,127 per
day, a decrease of 24%, or $4,511 per day, from the first quarter of
2009, and a decrease of 4%, or $581 per day, from the fourth quarter of
2009. Average operating margins for the first quarter were $4,435 per
day (before elimination of intercompany drilling rig profit of $0.4
million; see Non-GAAP Financial Measures below) as compared to $8,213
per day (before elimination of intercompany drilling rig profit of $0.6
million; see Non-GAAP Financial Measures below) for 2009, a decrease of
46%. Approximately $28 per day of the first quarter 2010 average
operating margin was the result of early termination fees associated
with the cancellation of long-term contracts. Average operating margins
for the first quarter of 2010 was $4,435 per day while the average
operating margins for the fourth quarter of 2009 was $5,268 per day
(before elimination of intercompany drilling rig profit and bad debt
expense of $0.4 million; see Non-GAAP Financial Measures below), a
decrease of $833 or 16%. Approximately $619 per day of the fourth
quarter 2009 average operating margin was the result of early
termination fees associated with the cancellation of long-term
contracts. Excluding early termination fees, average operating margins
for the first quarter of 2010 were $4,407 per day, a decrease of $242
per day or 5% as compared to $4,649 per day for the fourth quarter of
2009.

Larry Pinkston, Unit’s Chief Executive Officer and President, said: “We
have experienced an increase in the demand for our drilling rigs during
the first quarter and are receiving increases in dayrates on drilling
rigs focused on horizontal drilling, but overall dayrates continue to be
negatively impacted by low commodity prices and the expiration of
long-term contracts. Regarding the sale of eight of our idle mechanical
drilling rigs that we previously announced, we have closed on six of
those rigs and plan to close on the remaining two rigs by the end of the
second quarter. These drilling rigs range in horsepower from 800 to
1,000. Total proceeds from that sale will be $23.9 million, resulting in
an estimated gain of $5.7 million which is included in other revenues in
the Statement of Operations. We plan to use the sales proceeds to
refurbish and upgrade certain drilling rigs in our existing fleet that
we intend to target toward horizontal drilling activity. Once the sale
of the eight drilling rigs is completed, our drilling rig fleet will
total 123. Currently, 62 of those 123 drilling rigs are under contract.
Contracts with terms ranging from six months to two years in length are
in place for 32 of the 62 drilling rigs currently under contract for
work.”

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

1st Qtr 10 4th Qtr 09 3rd Qtr 09 2nd Qtr 09 1st Qtr 09 4th Qtr 08 3rd Qtr 08 2nd Qtr 08 1st Qtr 08
Rigs 125 130 130 131 131 132 131 131 129
Utilization 40% 28% 26% 24% 40% 74% 85% 80% 78%

OIL AND NATURAL GAS SEGMENT INFORMATION

  • Completed 27 gross wells in the first quarter of 2010 with a 96%
    success rate.
  • Approximately 66% of anticipated natural gas production and 62% of
    anticipated crude oil production is hedged for 2010.
  • Plan to drill 175 wells during 2010 with a revised production estimate
    of 64.0 to 65.0 Bcfe.

First quarter 2010 production was 303,000 barrels of oil, in comparison
to 343,000 barrels of oil in the first quarter of 2009, a 12% decrease.
Natural gas liquids (NGLs) production was 377,000 barrels in comparison
to 393,000 barrels in the first quarter of 2009, a 4% decrease. First
quarter 2010 natural gas production decreased 15% to 10.0 Bcf from 11.9
Bcf during the comparable quarter of 2009. First quarter 2010 production
totaled 14.1 Bcfe, a 13% decrease over first quarter 2009 and a decrease
of 1% over the fourth quarter of 2009. At the end of the first quarter
of 2010, the average daily rate of production was 156.4 million cubic
feet equivalent (MMcfe), a 2% increase over that at the end of the
fourth quarter of 2009.

Unit’s average natural gas price for the first quarter of 2010 increased
9% to $5.95 per thousand cubic feet (Mcf) as compared to $5.44 per Mcf
for the first quarter of 2009. Unit’s average oil price for the first
quarter of 2010 was $67.33 per barrel compared to $50.51 per barrel for
the first quarter of 2009, a 33% increase, and Unit’s average NGLs price
for the first quarter of 2010 was $42.76 per barrel compared to $18.69
per barrel for the first quarter of 2009, a 129% increase.

For 2010, approximately 66% of the company’s anticipated average daily
natural gas production is hedged and 62% of its anticipated daily oil
production is hedged. The natural gas production is hedged under swap
contracts at a comparable average NYMEX price of $6.95. The average
basis differential for the swaps is ($0.66). Of the oil hedges, 60% are
under swap contracts at an average price of $61.36 and 40% are under a
collar contract with a floor of $67.50 and a ceiling of $81.53.

The following table illustrates this segment’s production and certain
results for the periods indicated:

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

14.1

14.3

14.7

15.4

16.3

16.8

15.9

16.0

14.7

Production, MMcfe/day

156.8

155.8

159.4

169.6

180.9

182.6

172.4

175.3

162.1

Realized price, Mcfe (1)

$

6.82

$

6.12

$

5.92

$

5.75

$

5.48

$

6.21

$

9.49

$

10.19

$

8.72

Wells Drilled

27

37

21

16

21

67

82

72

57

Success Rate

96

%

92

%

90

%

100

%

90

%

90

%

89

%

90

%

86

%

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

During the first quarter of 2010, this segment completed the drilling of
27 wells with a success rate of 96% compared to the completion of 21
wells with a 90% success rate during the first quarter of 2009.

Unit’s exploration and production activities for 2010 are primarily
focused in its Granite Wash play and Segno prospect. Unit concentrates
its Granite Wash drilling program primarily in the Texas Panhandle
portion of the play. During the first quarter of 2010, the company
completed three vertical wells and one horizontal well. In addition, the
company is drilling one horizontal well and has another horizontal well
that will be fracture stimulated in early May. The company will increase
the number of Unit rigs drilling primarily horizontal wells in the
Granite Wash from one drilling rig to three by mid-May. To date, Unit
has drilled horizontal laterals in four different Granite Wash sands to
evaluate which sands generate favorable economics. The early results
indicate that three of the four sands that have been tested so far are
favorable for horizontal drilling and plans are to test a fifth sand
later this year. The horizontal well that was completed during the
quarter had first sales on March 1st at a rate of
approximately 1,800 Mcfe per day with reserves estimated between 1.5 to
2.0 Bcfe. The results from this sand do not support further drilling in
this interval at current natural gas prices although completion
techniques may be able to be optimized and reserves increased to make
drilling in this sand economic. The Frank Shaller 7H is a horizontal
Granite Wash well drilled in late 2009 that continues to produce
strongly at a rate of approximately 5,800 Mcfe per day after being on
line for over four months. This well has estimated reserves of 6.0 to
8.0 Bcfe. In addition to the three rigs that will be drilling Granite
Wash wells, the company has three to four Unit rigs drilling primarily
horizontal oil and natural gas plays in formations such as the Tonkawa,
Marmaton, Cleveland, Lower Morrow, Hunton and Marchand located in the
Texas Panhandle and Western Oklahoma.

In the Segno prospect, located in Polk, Tyler and Hardin counties,
Texas, Unit has completed two wells during the first quarter of 2010 and
is drilling or completing three additional wells. The two completed
wells are the fourth and fifth wells drilled on the prolific Wing lease
where Unit has a 100 % working interest. The Wing # 4 was an east
extension of the field that encountered three potential gas pays. The
initial completion in the deepest zone resulted in a marginal gas test
and the company elected to move up to the second zone which will be
fracture stimulated in mid-May. The Wing # 5 was drilled in a new fault
block to the south and encountered seven potential gas pays. The initial
completion in a deeper new sand has averaged approximately 1,500 Mcf per
day and 33 barrels of oil per day since first production on April 2,
2010. Unit has drilled two of the three commitment wells in its new
joint venture area to the south of Segno that the company discussed in
previous releases. Both wells are in the completion process and it is
too early to determine if these wells will be economic at current gas
prices. The third well will spud in the next few weeks. The company
anticipates keeping two Unit rigs working in the Segno prospect for the
majority of 2010.

In the Haynesville shale, Unit has two areas of activity located in
Shelby and Harrison counties in East Texas. In Shelby County, the
company is currently participating in its first horizontal Haynesville
well in the Stockman prospect. Unit owns a 54% working interest in the
Smith #1-H which is currently drilling at approximately 9,000 feet.
Current plans are to drill three or four horizontal wells in this
prospect in 2010. In Harrison County, Unit has 100% working interest in
the Lawrence #1-H which drilled during the latter part of 2009. The
company encountered a mechanical problem after successfully fracture
stimulating the first three stages and were unable to pump the final
four stages at that time. Due to delays in securing a frac date for the
remaining four stages, Unit elected to produce the well to sales
starting on March 11, 2010. The well has averaged approximately 1,400
Mcfe per day during the initial 47 days of production.

In the Marcellus Shale play located primarily in Somerset County,
Pennsylvania, the first two horizontal wells have been completed and
both are selling gas into the pipeline. The initial well achieved a
3,500′ lateral which was fracture stimulated with seven stages and has
been selling gas at an approximate rate of 500 Mcfe per day for the past
five months. The second horizontal achieved a 2,600′ lateral which was
fractured stimulated with eight stages and has averaged approximately
1,500 Mcfe per day since first gas sales in early April 2010. Although
the initial rates are lower than expected, the early production rates
are showing minimal decline. We are moving forward with further
evaluation of its leasehold. The plan is to drill four to five new
horizontal wells starting in September 2010 and also shoot approximately
35 square miles of 3-D seismic data.

Pinkston said: “Our first quarter 2010 drilling activity was slowed down
by unusually wet weather, especially in the Texas Panhandle Granite Wash
play, and operational delays as we transition to drilling primarily
horizontal wells. In addition, we are experiencing delays in completing
wells due to shortages in fracture stimulation services. As a result of
these conditions, we have reduced our 2010 production guidance to 64.0
to 65.0 Bcfe. The number of wells we plan to participate in drilling and
the level of capital expenditures remains unchanged for 2010 at 175
wells and $365 million, respectively.”

MID-STREAM SEGMENT INFORMATION

  • Increased first quarter 2010 liquids sold per day volumes and
    processing volumes per day by 16% and 5%, respectively, over the first
    quarter of 2009.
  • 12 new wells connected to existing systems during the first quarter of
    2010.

First quarter 2010 processing volumes of 76,513 MMBtu per day and
liquids sold volumes of 253,707 gallons per day increased 16% and 5%,
respectively, over first quarter of 2009. First quarter 2010 gathering
volumes were 180,117 MMBtu per day, a 6% decrease from the first quarter
of 2009. Operating profit (as defined in the Selected Financial and
Operational Highlights) for the first quarter was $8.4 million or a 474%
improvement over 2009’s first quarter, due primarily to increased
liquids prices, which resulted in increased processing margins.

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

1st Qtr 10 4th Qtr 09 3rd Qtr 09 2nd Qtr 09 1st Qtr 09 4th Qtr 08 3rd Qtr 08 2nd Qtr 08 1st Qtr 08
Gas gathered
MMBtu/day 180,117 177,145 179,047 187,666 192,320 187,585 195,914 205,397 200,697
Gas processed
MMBtu/day 76,513 77,501 77,923 75,481 72,650 72,491 71,260 67,545 59,797
Liquids sold
Gallons/day 253,707 263,668 251,830 239,121 218,762 197,428 199,805 202,130 183,924

This segment operates three natural gas treatment plants, owns eight
processing plants, 33 active gathering systems and approximately 845
miles of pipeline.

Pinkston said: “Processing and liquids sold volumes continue to remain
strong. Construction activity on our new plant at Hemphill in the
Panhandle of Texas is on schedule and should be operational early in the
fourth quarter of 2010. In conjunction with Tenaska Midstream Services,
LLC, we began the construction of a pipeline in West Virginia in March.
That project is going forward according to plan. We continue to work
with various producers in the Appalachian Basin to develop additional
pipeline construction projects. We connected 12 new wells to existing
systems during the first quarter and have increased our miles of
pipeline by 45 miles between the comparable quarters.”

FINANCIAL INFORMATION

Unit ended the first quarter of 2010 with working capital of $56.1
million, long-term debt of $30.0 million, and a debt to capitalization
ratio of 2%. Under the company’s credit facility, the amount available
to be borrowed is the lesser of the amount elected by the company as the
commitment amount (currently $325 million) or the value of the borrowing
base as determined by the lenders under the credit facility, but not to
exceed the maximum credit facility amount of $400 million. As of April
1, 2010, Unit’s borrowing base was determined to be $500 million.

MANAGEMENT COMMENT

Larry Pinkston said: “Our first quarter 2010 operating results were
solid as we still face the challenges of an industry trying to recover
from weak economic conditions. We are optimistic about the increases we
are seeing in the demand for drilling by exploration and production
companies. Our balance sheet is well positioned to take advantage of
growth opportunities that may arise in all three of our business
segments during the year.”

WEBCAST

Unit will webcast its first quarter earnings conference call live over
the Internet on May 4, 2010 at 11:00 a.m. Eastern Time. To listen to the
live call, please go to www.unitcorp.com
at least fifteen minutes before 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, 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
March 31,
2010 2009
Statement of Operations:
Revenues:
Contract drilling $ 60,854 $ 88,699
Oil and natural gas 99,053 88,904
Gas gathering and processing 41,135 22,143
Other 5,508 1,316
Total revenues 206,550 201,062
Expenses:
Contract drilling:
Operating costs 40,900 50,330
Depreciation 13,786 12,619
Oil and natural gas:
Operating costs 25,034 24,816
Depreciation, depletion and amortization 25,336 38,006
Impairment of oil and natural gas properties — 281,241
Gas gathering and processing:
Operating costs 32,726 20,677
Depreciation and amortization 3,941 4,061
General and administrative 6,279 6,089
Interest, net — 477
Total expenses 148,002 438,316
Income (Loss) Before Income Taxes 58,548 (237,254 )
Income Tax Expense (Benefit):
Current 2,240 —
Deferred 20,155 (89,761 )
Total income taxes 22,395 (89,761 )
Net Income (Loss) $ 36,153 $ (147,493 )
Net Income (Loss) per Common Share:
Basic $ 0.77 $ (3.14 )
Diluted $ 0.76 $ (3.14 )
Weighted Average Common
Shares Outstanding:
Basic 47,121 46,921
Diluted 47,686 46,921
March 31, December 31,
2010 2009
Balance Sheet Data:
Current assets $ 170,721 $ 128,095
Total assets $ 2,321,170 $ 2,228,399
Current liabilities $ 114,651 $ 105,147
Long-term debt $ 30,000 $ 30,000
Other long-term liabilities $ 81,339 $ 81,126
Deferred income taxes $ 466,697 $ 446,316
Shareholders’ equity $ 1,628,483 $ 1,565,810
Three Months Ended March 31,
2010 2009
Statement of Cash Flows Data:
Cash Flow From Operations before Changes
in Operating Assets and Liabilities (1) $ 97,030 $ 103,382
Net Change in Operating Assets and Liabilities

(17,363

)

69,508

Net Cash Provided by Operating Activities $ 79,667 $ 172,890
Net Cash Used in Investing Activities $ (86,926

)

$(112,034

)

Net Cash Provided by (Used in) Financing Activities $ 7,158 $ (60,428 )
Three Months Ended March 31,
2010 2009
Contract Drilling Operations Data:
Rigs Utilized 50.9 52.8
Operating Margins (2) 33 % 43 %
Operating Profit Before
Depreciation (2) ($MM) $ 20.0 $ 38.4
Oil and Natural Gas Operations Data:
Production:
Oil – MBbls 303 343
Natural Gas Liquids – MBbls 377 393
Natural Gas – MMcf 10,034 11,862
Average Prices:
Oil price per barrel received $ 67.33 $ 50.51
Oil price per barrel received, excluding hedges $ 75.70 $ 38.52
NGLs price per barrel received $ 42.76 $ 18.69
NGLs price per barrel received, excluding hedges $ 42.76 $ 18.69
Natural Gas price per Mcf received $ 5.95 $ 5.44
Natural Gas price per Mcf received, excluding hedges $ 5.14 $ 3.48
Operating Profit Before DD&A and Impairment (2) ($MM) $ 74.0 $ 64.1
Mid-Stream Operations Data:
Gas Gathering – MMBtu/day 180,117 192,320
Gas Processing – MMBtu/day 76,513 72,650
Liquids Sold – Gallons/day 253,707 218,762
Operating Profit Before Depreciation
and Amortization (2) ($MM) $ 8.4 $ 1.5

(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 or 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 working capital
and our drilling segment’s average daily operating margin before
elimination of rig profit.

Below is a reconciliation of GAAP financial measures to non-GAAP
financial measures for the three months ended March 31, 2010 and 2009.
Non-GAAP financial measures should not be considered by themselves or a
substitute for our company’s 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
March 31,
2010 2009
(In thousands)
Net income excluding impairment of oil and
natural gas properties:
Net income (loss) $ 36,153 $ (147,493 )
Add:
Impairment of oil and natural gas properties
(net of income tax) — 175,072
Net income excluding impairment of oil and
natural gas properties $ 36,153 $ 27,579
Diluted earnings per share excluding
impairment of oil and natural gas properties:
Diluted earnings per share

Add:

Diluted earnings per share from impairment

$ 0.76 $ (3.14 )
of oil and natural gas properties — 3.73
Diluted earnings per share excluding
impairment of oil and natural gas properties $ 0.76 $ 0.59

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 analyst.
  • 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
March 31,
2010 2009
(In thousands)
Net cash provided by operating activities $ 79,667 $ 172,890
Subtract:
Net change in operating assets and liabilities (17,363 ) 69,508
Cash flow from operations before changes
in operating assets and liabilities $ 97,030 $ 103,382

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 Rig Profit

Three Months Ended
March 31, December 31,
2010 2009 2009
(In thousands)
Contract drilling revenue $ 60,854 $ 88,699 $ 47,932
Contract drilling operating cost 40,900 50,330 30,515
Operating profit from contract drilling 19,954 38,369 17,417
Add:
Elimination of intercompany rig profit
and bad debt expense 376 625 377
Operating profit from contract drilling
before elimination of intercompany
rig profit 20,330 38,994 17,794
Contract drilling operating days 4,584 4,748 3,378
Average daily operating margin before
elimination of rig profit $ 4,435 $ 8,213 $ 5,268

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

  • Our management uses the measurement to evaluate the cash flow
    performance or 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