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Unit Corporation (NYSE:UNT)

Q2 2011 Earnings Call

August 2, 2011 11:00 am ET

Executives

Larry D. Pinkston – President and Chief Executive Officer

Brad J. Guidry – Executive Vice President, Unit Petroleum Company

John Cromling – Executive Vice President , Unit Drilling Company

Robert H. Parks, Jr. – Manager of Superior Pipeline Company LLC

David T. Merrill – Vice President, Finance

Analysts

James Rollyson – Raymond James

Robert Christensen – Buckingham Research

Operator

Welcome to the Unit Corporation Second Quarter 2011 Earnings Call. My name is Sandra, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

This conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act. All statements and other than statements of historical facts included in this call 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 any decline in wells being drilled will have on production and drilling rig utilization; the productive capabilities of the company's wells, including the ability of recently completed wells to maintain their initial rate of production or their projected rate of production; future demand for oil and natural gas, future drilling rig utilization and day rates; projected or anticipated growth of the company's oil and natural gas production; oil and gas reserve information, as well as the ability to meet 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 segments; 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 describe 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.

I’ll now turn the call over to Mr. Larry Pinkston, President and CEO. Mr. Pinkston, you may begin.

Larry D. Pinkston

Thank you, Sandra. Good morning, everyone. We want to thank you for joining us this morning. With me today are David Merrill, is our CFO; Brad Guidry, our Executive Vice President of our Exploration segment; John Cromling, our Executive Vice President of our Contract Drilling Operations; and Bob Parks, he is President of our Mid-Stream segment. Each of these gentlemen will provide you with updates concerning their segments in a few moments. We will take questions after their comments.

We released our second quarter results to the public this morning. We reported a net income of $49.8 million and earnings per share of $1.04 per share. This represents a net income increase of 55% over the second quarter of 2010 and a 21% increase over the first quarter of 2011.

We successfully completed our first ever bond offering there in the second quarter. We are very pleased that the high level of investor participation we received and the results of the offering.

We feel this bond offering positions Unit to better participate and the opportunities we see in the industry today and diversifies our capital structure to provide better shareholder growth potential in the future.

Our contract drilling segment had a good quarter with practically all part showing good growth. And in comparison to the first quarter of 2011, the number of drilling rigs operating was up over 4%, average day work rates were up almost 7%, average daily operating margins were up nearly 4% before elimination of the profits, and we announced contracts to build two additional drilling rigs that should be operating in the fourth quarter of 2011.

This brings our total new build rig count to 7 for 2011. We continue to see a good level of inquiries from operators which indicate strong rig demand is expected to continue through the remainder of 2011.

The E&P industry continues to aggressively pursue liquid rich production with many of those opportunities in Western and Northern Oklahoma and the Texas, Panhandle that (inaudible) 1000 horse power rig market very well.

Our exploration and production segment continue to production growth trend as started in the third quarter of 2010. All the natural gas production increased 9% from the second quarter of 2011 and early 8% on a per day basis over the first quarter of 2011. Since the second quarter of 2010 are all the natural gas production has increased 28%. We continue to make great progress towards increasing our liquids production. We produced 1.2 million barrels of liquids in the second quarter up 12% over the first quarter of 2011 and up 64% over the second quarter of 2010.

Liquids were 39% of our total production in the second quarter of 2011 up from 30% in the second quarter 2010.

The Marmaton and Granite Wash prospects continue to deliver good results as Brad will provide you with some details in a few minutes.

In July, we closed oil and natural gas acquisition and signed a purchase sale agreement on another group of properties. We’re very pleased with these two transactions. The acquisition we closed consisted of Western Oklahoma properties in areas with good upside potential. We acquired 6.6 bcf equivalents approved, developed reserves and 12,000 held by production net acres for $12.3 million.

The properties under the recently signed purchases sale agreement or Eastern Oklahoma natural gas properties which we estimated proved reserves of 31.2 Bcfe and over 55,000 net acres of which 96% is held by production.

Combining the two transactions, we have acquired or signed agreements to acquire a total of 37.8 Bcfe of proved reserves and 67,000 of net held by production acres. If you don’t allocate any value to the acreage associated with these transactions the purchase process of $1.13 per Mcfe.

Our midstream segment also have a good quarter even though financial results were negatively impacted during the quarter for the contract change that one of our processing plants is midst and then in our press release, our operating results continue to show good growth.

Natural gas gathered processed and liquid sold per day increased by 3%, 5% and 9% respectively over the first quarter of 2011. Since the second quarter of 2010 our liquids sold has increased 27% speaks very well for not only increasing the volumes on natural gas process, but also the efficiencies that our midstream group has achieved to squeeze out as much liquids as possible from the natural gas stream.

Now, I would like to turn the call over to Brad to review our oil and natural gas segment.

Brad J. Guidry

Good morning. I'll start out in the Granite Wash play located in the Texas, Panhandle. We continue to have strong results during the second quarter of 2011, including first oil and gas sales on four new operated horizontal Granite Wash wells at an average working interest of 64%.

The 30-day average rate for the wells range between 4.5 million cubic feet of gas to 8 million cubic feet of gas equivalent, which result in an average 30-day rate of approximately 6 million cubic feet equivalent per day.

The overall production stream consists of approximately 8% oil, 39% natural gas liquids and 53% natural gas. Highlighting the second quarter is a horizontal Granite Wash D zone completion, which we own a 35% working interest.

The well had first oil and gas sales on June 29, at a daily rate of 173 barrels of oil per day, 569 barrels of NGLs and 5.3 million cubic feet or a daily equivalent of 9.7 million per day. The 30-day rate for this well was 8 million cubic feet equivalent per day.

Also during the second quarter, we completed a Granite Wash A zone well that had first sales on June 15, 2011. The daily rate for that well was 208 barrels of oil per day, 411 barrels of natural gas liquids and 3.8 million cubic feet of natural gas equivalent daily rate for that well was 7.5 million.

The 30-day rate for the well was 6.4 million equivalent per day and we own at 53% working interest in the well. The remaining two wells with first sales during the quarter were completed from the Granite Wash B and the Granite Wash C zones.

The anticipated reserves from second quarter wells are approximately 4.3 Bcf equivalent and consist of 8% oil, 39% liquids and 53% natural gas. The estimated completion costs increased approximately $200,000 we’re currently AFEs at $5.4 million.

Since the end of second quarter we’ve completed two more Granite Wash wells that have recently been fraced and should have first sales in the upcoming week. In addition, there are three Granite Wash wells at a finished drilling operation that are scheduled to be fraced in August and September. So currently there is also three unit rigs drilling horizontal Granite Wash wells. This drilling program should result in approximately 20 operated wells during 2011. The net capital cost for these wells is approximately $85 million.

Moving over into the Marmaton Oil Play in Beaver County, Oklahoma we continue to execute our drilling program, which is resulted first oil sales on nine operated wells during the second quarter average working interest of those wells was approximately 88%.

For the first half of 2011, we had first oil sales on a total of 18 wells, the 30-day average production range between 20 barrels of oil equivalent per day up to 640 barrels oil equivalent per day and that equates to an average rate of approximately 208 barrels oil equivalent for the 18 wells.

We project the average ultimate gross reserves for Marmaton well still in line with our previous estimate of 130,000 barrels equivalent, which is comprised of approximately 76% oil, 14% natural gas liquids and 10% natural gas.

Current AFE cost is approximately $2.7 million and this is for a typical lateral length of 4,000 feet, 16 stage frac which with approximately 1 million pounds of sand.

Subsequent to the end of second quarter, we fraced four new Marmaton wells and are all currently in their early stages of flow back in addition, there is three new wells that have completed drilling operations and are scheduled to be fraced in August and there are currently two wells that are drilling.

We’re running a two rig program that should equate to approximately nine new wells per quarter or 36 new wells for 2011, and a net capital cost of approximately $60 million. Our lease held position in the play has increased to approximately 70,000 net acres and we are continuing to acquire leases in the play.

Turning to the acquisitions, as outlined in the second quarter press release and Larry’s comments we have been working on two separate acquisitions. First, we acquired oil and gas properties located primarily in Beaver, Harper and Ellis County in Oklahoma and Lipscomb County Texas and secondly, we entered into a purchase of sale agreement to acquire oil and gas properties located principally in Oklahoma, the Arkoma Basin Woodford and Hartshorne Coal plays.

The produce and properties required in both of these transactions come in side very nicely with our existing operations in the acquired 67,000 net leasehold acres compliments our current land positions. The acquisition of these two deals emphasize our commitment to build our operating presence in our core areas within the Mid-continent region.

Finally, we’ve increased our production guidance for 2011 sort of range of 11.3 to 11.6 million barrels of oil equivalent. This equates to a 15% to 18% production growth as compared to 2010. The increase in the revised production guidance is primarily attributable to better that forecast of well performance. This guidance does not include the production expected from the pending Arkoma Basin acquisition, which is expected to close at the end of August.

I'll now turn the call over to John Cromling.

John Cromling

Thank you, Brad. Our drilling division experienced a good second quarter as increasing demand continues along with the increasing day rates. As Larry mentioned earlier, our average rate utilization during the second quarter was 73 rigs. At the end of the second quarter, we had 77 operating rigs and today, that number is 79 and within the next month, it will grow to 81.

Day rates have continued to increase during the second quarter. Our average day rate for the second quarter was 18,861, which is approximately a 7% increase over the end of the first quarter. Our average per day operating margins for the quarter increased by about $300 per day for a 4% increase. Operating costs before elimination of intercompany profits were about $900 per day higher than the second quarter as compared to the first.

Higher costs were attributable primarily to the labor increase at the end of March. We also see daily supplies increasing slightly and the demands of the horizontal drilling will cost some daily cost to escalate. As Larry mentioned, we’re very pleased to announce that we have agreed to build two additional new rigs to be used in Wyoming, these rigs will be very similar in design to the first five rigs that we built this year and these rigs will be put into service at the end of this year and working under three year contracts.

The greatest area for additional growth in Unit is to put some of our stack rigs into service. During the second quarter, we put three mechanical rigs ranging from 650 to 1000 horsepower in to service drilling horizontal wells. The modifications and additions to the equipment provided were part of our refurbishment program.

In addition, during July, two more 800 to 1000 horsepower rigs were put back into service. But 41 of the 80 rigs being under long-term contracts, there’s also the potential to escalate rates on several of rigs as the market allows. We continue to see opportunities in various areas for horizontal exploration, which will allow us to increase our utilization rate with presently owned rigs.

Some of the areas are the Mississippi Lime in Northern Oklahoma, Cleveland in Tonkawa Oil Sands in Western Oklahoma and the Utica Shale in Ohio.

We also believe that we will have the opportunity to build additional new rigs in 2012. Our capital expenditure budget for 2011 was originally $143 million and recently was increased to $174 million, this increase is for the two additional new rigs. Through the second quarter, we have spent about $83 million of this budget.

We will continue with our plans to build the remaining four new rigs and the refurbishments of several other rigs, not only to put additional rigs into service, but also improves operating rigs. This includes new engines, (Inaudible) top drives and skidding systems.

I’ll now turn it over to Bob Parks.

Robert H. Parks

Thank you, John. Our midstream segment continues to be very active and produce strong financial and operational results. For the second quarter of 2011, we had operating profit of $7.6 million, an increase of $200,000 over the second quarter of 2010. The operating profit decreased $3.1 million from the first quarter of 2011 due mainly to a change in contract structure with two producers at one of our processing facilities.

The contracts were changed from a percentage of index to a percentage of proceed structure, which allowed us to receive a seven-year extension of the contract term. During the second quarter, we incurred capital expenditures of approximately $27.7 million, as we continue to construct and complete various midstream projects in both the Mid-Continent and Appalachian regions.

Our midstream segment continues to see strong liquids prices, increased process volumes and improved operational efficiencies. Our second quarter process per day volumes were up 10% compared to the second quarter of 2010 to 90,737 MMBtus per day. Process volume increase was due mainly to increased drilling activity resulting in new wells that were fit to our existing gathering systems.

In addition to the increase in processed volumes, our natural gas liquids sold per day increased 27% in the second quarter of 2010 to 356,484 gallons per day and increased 9% from the first quarter of 2011. This increase is primarily due to upgrading our existing processing facilities and connecting additional gas to our gathering systems. Also our overall gathered volume increased 4% compared to the second quarter of 2010 to 190,921 in MMBtus per day.

I would like now to provide an update on our activities in the Mid-Continent and Appalachia. I’ll speak first about our activity in the Mid-Continent. Our Hemphill processing facility in the Texas Panhandle, our total processing capacity is approximately 100 million cubic feet per day after the successful installation of our fourth processing plant. We are currently processing approximately 58 million cubic feet per day with the expectation of increasing that volume substantially with the addition of a new large volume of gas beginning August 1.

We anticipate approaching our maximum processing capacity of the plant in the fourth quarter of 2011. And our cash and gathering of processing facility in Central Oklahoma, volumes are continuing to approach our maximum processing capacity. We are currently installing a new 25 million cubic foot per day, high efficiency to expand our processing plant to accommodate potential additional volumes and to improve our liquid recovery capabilities.

This new plant will replace our existing 17 million cubic foot per day plant, simultaneously increasing our processing capacity and improving plant efficiency, also at our Cashion facility, we have begun construction on the project to expand the Cashion system to the north to get gas from new wells being drilled in the area.

As for new project development in the Mid-Continent area, we were continuing to develop various projects in North Central Oklahoma in the Mississippi Lime play. We are currently constructing the spring freed gathering system and processing plant in Grant County, Oklahoma. This new gathering system will consist initially of approximately seven miles of pipe and a small (Inaudible) processing plant and will deliver gas in the Southern Star interstate transmission. Construction is progressing and we anticipate completion in the third quarter. Also in the Mississippi Lime play, we’re continuing negotiations with various producers in the area to build both processing plants and gathering facilities.

Turning to the Appalachian region, we’re continuing to bid on and develop various projects. Construction on our 16 miles, 16ish gathering system and compressor station in Preston County, West Virginia is expected to be completed by mid-August. We are currently installing metering equipment and completing the connection to Columbia gas transmission pipeline. This gathering system will have a capacity of approximately 220 million cubic feet per day.

We’re expecting to startup the system in August with flows from the initial wells, drilled and connected to the system. In addition to our gathering system in Preston County, West Virginia, we are completing environmental and right-of-way work on a new gathering system and compressor station in Tioga and Potter Counties in North Central Pennsylvania.

The environmental studies are progressing and we are not anticipating any problems arising from these studies. This gathering system will deliver gas into Dominion Transmission Pipeline. Also in the Appalachian region, we have signed a letter of intent with producer to begin the construction of the Pittsburgh Mills gathering system in Allegheny and Butler Counties in Pennsylvania.

We are working with producer to finalize the gathering agreement. The first phase of this project is underway and we are currently completing right-of-way and survey work.

We anticipate putting the initial stages of this project in to fourth quarter of 2011 or early first quarter 2011. Activity in Pennsylvania and West Virginia continues to be very strong for Superior. Our business development group continues to evaluate many other types of projects in the Marcellus Shale area.

In summary, we are continuing to see a lot of activity in the midstream segment and are continuing to evaluate new business opportunities in both the Mid-Continent and Appalachian areas.

I’ll now turn the call over to David Merrill.

David T. Merrill

Thanks, Bob. Now I want to briefly update you on the financing transaction that was completed during the second quarter that Larry mentioned earlier. In May we completed an underwritten public offering of $250 million principal amount of senior subordinated notes due in 2021 at a coupon rate of six and five days. The notes were sold at 100% par and the net proceeds were primarily used to repay borrowings outstanding under our unsecured credit facility.

We were very pleased with the reception the unit store received from the high yield market investment community, the primary reason for issuing the notes was to provide some diversification to our capital structure while capturing what we believe over time will be an attractive rate for 10-year funds.

It also allows us to further leverage our borrowing base, providing additional funding capacity for opportunities in the oil and gas segment and pipeline construction projects for the midstream segment. We are in the process of renegotiating our unsecured credit facility that matures in May of 2012 and upon completion, it will conclude the financing arrangements, we see necessary for our current operating plans.

We ended the second quarter with a debt to capitalization ratio of 12% and no borrowings outstanding under the credit facility which has no elected available commitment amount of $325 million. Our hedges for the oil and natural gas segments complement our strong balance sheet and during the second quarter, we added to our 2012 and 2013 positions and there were no changes to our 2011 hedge positions.

For 2012, we have hedged 4500 barrels per day of oil production and 45,000 MMBtu per day of natural gas production. The oil and natural gas production is hedged at an average price of $95.91 and $5.23 respectively. For 2013, we have hedged 2,000 barrels per day of oil production at an average price of $102.05. The detail of our hedges is included in our Form 10-Q to be filed with the SEC later this week.

We completed the mid-year review of our operating segment capital expenditures budget for 2011 increasing our original budget by 15% to $695 million excluding acquisitions. Budgets at capital expenditures by segment now are $435 million for the oil and natural gas segment, $174 million for the contract drilling segment and $86 million for the midstream segment.

The effective income tax rate for the 2011 second quarter was 38.7% and we currently estimate no current income taxes for 2011.

Sandra, we would now like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question is from Jim Rollyson from Raymond James. Please go ahead.

James Rollyson – Raymond James

Good morning guys.

Unidentified Company Representative

Hey, Jim.

Unidentified Company Representative

Good morning.

James Rollyson – Raymond James

Nice second quarter results. On the production side, Larry or whomever, it seemed like your updated guidance of 11.3 to 11.6 basically midpoint that’s kind of doubling the first half results and the second half, which I suspect would suggest that you’re expecting production or at least you’re guiding production for the last two quarters to be south of where you were in the second quarter.

Is that just conservatism on your part or kind of what are you thinking there and then maybe related to that, where do you think production ads will be from M&A transactions closing later this quarter?

Larry D. Pinkston

Your assessment is correct. We’re expecting part of the guidance as first half of the year, we probably average nine to 10 rigs running, second half will drop down to about seven rigs running. So that’s a little bit of the production, again, first quarter they ended our fourth quarter 2010, we had a lot of wells fraced that we’re coming on. So we knew first quarter would have some flush that really kind of what we’ve seen as that’s continued over into the second quarter, we’ve seen better well performance than what we had forecasted our production at primarily in the Granite Wash and so that built a pretty strong second quarter, I mean we forecast that we thought the second quarter would be more in line with the first quarter at that time and it came in quite a bit stronger than we expected.

But those are the two primary reasons, the forecast we have in there, the one we have the PSA signed with, we expect that to be between seven and eight million cubic feet equivalent added in for last five months of the year. That’s not in the guidance right now.

James Rollyson – Raymond James

Perfect color and may be on the liquids front, you are up to almost 40% liquids kind of how do you see that trending through the rest of the year or how are you thinking about that as at least as it relates to the guidance, similar range or do you that falls back off a little bit short-term?

Brad J. Guidry

I should say pretty close to that you know the production from a reserve standpoint certainly with these acquisitions, it will lower a little bit because it’s primarily gas reserves but from a production standpoint fuel probably in that 38% to 40% and that’s what I’d expect.

James Rollyson – Raymond James

Okay, helpful. And over on the rig side, number one, you guys have added a couple more rigs on the new build side kind of curious I think you mentioned the opportunities out there for more but just how you feel about where things are on new builds versus spending money to bring some of the older rigs back out, now that the opportunity seems to be there. And may be what the cost are in bringing some of those rigs back?

Brad J. Guidry

It’s really two different markets and as you know the new rigs that we have been other fall then the larger 1,500 horse power rigs either for Bakken or other places in the Rockies. I think where we have the greatest area of growth would be it for some of the smaller mechanical rigs act of work as we have in the last two three months and that would be our preference because you put a lot less money into the refurbishment and you want to do to build a new rig totally and virtually get the same results as far as margins.

So it will be our goal to pursue those and we think that’s where the greater area of growth will be. For us it’s because there is so many new areas for shallower, horizontal work that fix picture for these rig, so that will be our approach and we are opened about options and that’s how we’ve been doing. But the greater benefit to Unit will be to put some of the 1000 horse power rigs back into the marketplace.

James Rollyson – Raymond James

And generally what is that costing you on average and how many rigs do you think you have out there that would fit that mold?

Brad J. Guidry

We probably have 20 remaining and we have those ranked in order of which we think would be better choices and so 10 very good prospects, 10 average. The cost ranges from $2.5 million to $4.5 million and the biggest part of that is the addition of top rise and in the determining factor of whether you make some electric rigs over mechanical rigs which we do sometimes. So that’s a ballpark number.

James Rollyson – Raymond James

Very helpful and last one, David, did the $250 million debt deal that you’ve got the credit facility with CapEx plan this year and kind of how you’re thinking about next year. Do you expect to tap into your credit facility or basically fund off your cash flow?

David T. Merrill

Yeah, we’ll be using some of our credit facility as we execute on our growth opportunities. We will have some borrow.

James Rollyson – Raymond James

Okay. Thanks guys.

Brad J. Guidry

Hey Jim, this is Brad. Let me correct one thing, the production from the acquisitions, they will be through the last four months, September through the end of the year.

James Rollyson – Raymond James

Perfect, helpful.

Operator

Thank you. The next question is from Robert Christensen from Buckingham Research. Please go ahead.

Robert Christensen – Buckingham Research

Good morning and great quarter. Are you learning, maybe for Brad, learning anything new or trying anything new in Marmaton and then the same question for you vis-à-vis the Granite Wash.

Brad J. Guidry

The Marmaton, we’re definitely still in the stage of exploiting the overall acreage position. The quarter the results we saw in the quarter were little down from what we saw in the first quarter but was more of a function of just where we were drilling wells, we are still trying different things out there. What the things we have settled in on is slick water frac, we have tried a number of different types of fracs out there but it looks like at this time the results we’re seeing from the slick water are just as good as the gel fracs, a cost savings. So we have settled in on that.

Realistically, I think we are still ways away from having everything figured out, we are seeing some trends that are developing that appear to be so in the sweet spots but that will continue, I mean we’ve really not drilled very much of our acreage position out there yet. So I would expect as we have always said statistical play, I think we will see the great wells out there and the poor wells next in, but we are pretty comfortable somewhere in that 200 to 230 day IP and then the reserves about 130,000 in BOE.

On the Granite Wash we have been really pleased, the things have gotten very consistent we completed nine wells this year for the two quarters, both of those quarters 30-day rate was right at about 6 million cubic feet a day, we are completing a number of different zones but things appear to be leveling out very nicely and as I mentioned, it is above what we have forecasted.

Robert Christensen – Buckingham Research

A follow-on if I might, you know in some companies I observe in the E&P industry have what they call new ventures acreage, don’t recall you breaking anything out that way. But I guess of your exploration acreage at the moment, if I was looking at annual report and see what it totaled. Is there somewhat you could characterize as new venture acreage where we could a year from now be reading about a new player or two in units exploration or?

Unidentified Company Representative

Absolutely.

Robert Christensen – Buckingham Research

Okay. Any idea you care to tell us how much would qualify as new total new venture acreage?

Unidentified Company Representative

You know, I don’t have that number, Bob right here, but there is a number of new plays that we’re currently working in that, we’ve already leased. Typically we don’t talk about it until we drill the well or some kind of conclusion if its going to be an ongoing project for us, but certainly we’ve built acreage positions in three or four new plays that we have not talked about.

Robert Christensen – Buckingham Research

Okay. And maybe this is a question for Larry or Head of Drilling Operations, but when I sit back and watch a number of companies invest in coil tubing units now, I know this is in the completion phase of the well at the moment, and I wonder if there would be an inkling in your company for adding such units a different aspect of getting involved in the drilling you certainly would seem to have the experienced personnel to consider such an investment is there ever been any thought in that?

Larry D. Pinkston

Bob we’ve looked at it from time to time, it’s gone like the pressure pumping business and we’ve looked at that over the years, several different times and thus far it’s (inaudible) to diversify into something we’d like to diversify and then into something that was tied cyclically to one of the segments that we are in directly it’s when the drilling rig business is bad, the coil tubing business is bad.

Robert Christensen – Buckingham Research

Okay.

Larry D. Pinkston

And it’s kind of like pressure pumping, the drilling business is bad, the pressure pumping business, we tend to like more diversification in that, it’s not saying that there is very good opportunities right now and the coil tubing business, its somewhat specialized still yet, but its growing, its gaining ground on the areas that it can be used and then there might be something there in the future for us. Right now, we're pretty loaded up with building and refurnishing rigs in our drilling segment.

Robert Christensen – Buckingham Research

And if I might just come back to the Marmaton, weren’t you guys going to drill an extended lateral in the Marmaton at some point in time?

Unidentified Company Representative

Yes, we’re still planning on doing it, probably the fourth quarter.

Robert Christensen – Buckingham Research

Okay. Well, thank you very much for you help, appreciate it.

Unidentified Company Representative

Thanks, Bob.

Robert Christensen – Buckingham Research

Yep.

Operator

Thank you. The next question is from (inaudible) from Wells Fargo. Please go ahead.

Unidentified Analyst

Yeah, I just had a question, you had a target leverage in mind that you’re comfortable with in terms of revolver (inaudible) or not?

Unidentified Company Representative

There is not a number out there, that it comes back to the opportunities that we’re seeing in the market for growth and what those, where those opportunities, what kind of cash flow those opportunities bring in, there is not a 35% of market care to 40, 20 or 15 it depends on the common growth and which segment of the growth would be in and there is a lot of factors that would go in to determine, how much that we’re comfortable with, I’m very confident that we’re going to still remain very conservatively financed as a corporation going forward that we are using our balance sheet more today then we have in recent history, but we’re not going to go crazy with it either.

Unidentified Analyst

All right, great. Thank you.

Operator

(Operator Instructions) At this time there are no further questions.

Larry D. Pinkston

In closing, we appreciate the time that you’ve given us this morning very much. As you can tell, we have a lot of exciting things happening right now at Unit, not only at Unit, but also in the industry. We believe Unit is in a great position to hopefully capitalize on these opportunities and continue to provide good shareholder growth. We will be in Denver, Intercom presenting on August 17 and I hope to see many of you all there. Appreciate it and thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.

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