Unit Corporation (NYSE:UNT) is a diversified oil and gas company engaged in the exploration and production of oil and natural gas, contract drilling of onshore oil and natural gas wells, and the gathering and processing of natural gas. UNT's primary areas of operations are located in the Mid-Continent region, including the Anadarko, Arkoma, Permian, Rocky Mountains and Gulf Coast Basins.
On May 1, 2012, UNT reported Q1'12 net income of $52.4 million, or $1.09 per share, an increase of 28% compared to $41.0 million, or $0.86 per share, during Q1'11. Company revenues during Q1'12 totaled $332.4 million, an increase of 34% compared to $247.4 million in total revenues reported during Q1'11.
Click here for the news release.
Click here for EnerCom's Sum of the Parts Valuation of Unit Corporation.
Contract Drilling Segment Generates 42% of Q1'12 Revenues
One of the first things we noticed in the earnings announcement was that UNT's rig utilization rate decreased from Q4'11 to Q1'12 (from 65% to 64%), the first time since Q4'10 to Q1'11; however, UNT offset this decline by reporting its eighth straight quarter of increased per day operating margins during Q1'12. Average per day operating margins increased 17% to $9,414 this quarter compared to the same quarter last year. OAG360 notes that even though rig utilization is down from last quarter, UNT is utilizing 6% more of its land rig fleet from the last quarter over quarter decline in utilization mentioned above.
As we've noted in the past, a few catalysts to keep your eye on is UNT's movement of rigs out of the dry gas regions to work in oil and liquids regions, as well as demand for smaller rigs in the 800 to 1,000-horsepower range to drill shallower horizontal liquid rich wells. The Mississippian play in Kansas and Oklahoma is one example of a play that does not require high horsepower horizontal rigs.
Other Key Contract Drilling Updates from Q1'12:
- Average number of drilling rigs used during Q1'12 was 81.5, an increase of 16% over the Q1'11.
- Approximately 96% of UNT's drilling rigs working are drilling for oil or natural gas liquids.
- Approximately 97% of UNT's working rigs are drilling horizontal or directional wells.
Exploration and Production Segment - 40% of Q1'12 Revenues
One thing we wanted to make note of was UNT remarks about how possible production curtailments could be possible during 2012 due to low natural gas prices and high storage levels. The company however, maintained its 2012 production guidance of 13.2 to 13.5 MMBoe which would represent an increase of 9% to 12% year over year. Production during Q1'12 increased 20% from Q1'11 to 3.3 MMBoe. Approximately 42% of first quarter 2012 production was oil and NGLs compared to 38% for the first quarter of 2011.
Other Key E&P Updates from Q1'12:
- Reported the ninth consecutive quarter of increased liquids (oil and NGLs) production.
- Unit's average natural gas price, including the effects of hedges, during the quarter decreased 22% to $3.36 per Mcf as compared to Q1'11.
- Unit's average oil price, including the effects of hedges, during the quarter increased 14% to $95.81 per barrel Q1'11.
Regional Operating Update
Horizontal Marmaton Update (Beaver County, Oklahoma): In the Marmaton, UNT has reduced its well costs from upwards of $3.5 million to approximately $2.7 million and continues to make strides on reducing drill times on its horizontal wells. The company has certainly reported varying production results out of the Marmaton; however, management noted on the conference call that as the play progresses, UNT expects to report more consistent production data.
Below are a few additional Marmaton highlights from the quarter:
- Unit had first sales on six wells (75% average WI) which recorded average 30-day IP rates from 30 BOEPD to 580 BOEPD.
- Average EURs for a Marmaton horizontal well is estimated to be 130 MBoe, which is comprised of approximately 78% oil, 14% NGLs, and 8% natural gas. The average completed well cost is approximately $2.7 million. Using EnerCom's Marmaton decline curve with stated UNT data points, EnerCom estimates a rate of return of 23% in the Marmaton using $90 per barrel oil and $3.00 per Mcf gas. Comparatively, APA reports gross EURs in the Marmaton of 228 MBOE with well costs near $4.4 million. In Apache's acquisition presentation made on January 24, 2012, APA estimates rates of return from its Marmaton wells at 25% assuming $90 per barrel oil and $3.00 per Mcf gas. Click here for the APA presentation slides.
- Production in this play for the first quarter 2012 increased 29% over the first quarter 2011.
- For 2012, Unit anticipates running a two drilling rig program in this play that should result in 30 to 35 gross wells at an approximate net cost of $70 million. Unit currently has leases on approximately 102,822 net acres in this play.
Granite Wash Update (Texas Panhandle): To date, UNT has now drilled seven different zones in the Texas Panhandle. Management noted on its conference call that the same operational efficiencies are being generated in the GW as in the Marmaton.
- Unit had first oil and gas sales on 11 horizontal wells (84% average WI) with average 30-day average production rates ranging from 1.3 MMcfe per day to 10.0 MMcfe per day.
- The net production from Unit's GW operated wells for the first quarter 2012 averaged 1,363 barrels of oil per day, 3,115 barrels of NGLs per day and 25.7 MMcf per day, or an equivalent rate of 52.6 MMcfe per day, an increase of 8% over the fourth quarter 2011 and a 19% increase over the first quarter 2011.
- The average ultimate recovery for a GW horizontal well is estimated to be 4.2 to 4.6 Bcfe with an average completed well cost of approximately $5.5 million. Based on a EUR of 4.2 Bcfe, a Unit Granite Wash well can generate an IRR of 61.4%. This is using a commodity price deck of $90.00 oil and $3.00 for natural gas. Assuming no realizations for natural gas production and $90.00 oil, the company's Granite Wash wells can still generate a 38.5% IRR.
- Unit expects to run three to four Unit drilling rigs drilling horizontal wells in 2012 resulting in approximately 20 to 25 new operated GW wells at an approximate net cost of $90 to $100 million.
Mississippian Play Update (Reno County, Kansas):
- Unit has 60,000 net acres where the company recently completed drilling operations on its first horizontal Mississippian well. The well was recently fracture stimulated and is currently in the early stages of flowing back. Unit's current plans are to drill two to three additional horizontal Mississippian wells in the next six months and evaluate the results before planning any further drilling in this play. Other operators in the region include: SandRidge Energy (NYSE:SD), Chesapeake Energy (NYSE:CHK), Equal Energy (NYSE:EQU), and Range Resources (NYSE:RRC).
Midstream Segment - 17% of Q1'12 Revenues
The increase drilling activity in the central U.S., South Texas, and Marcellus continues to drive demand for UNT's midstream segment for processing and gathering. Since 2004, Unit's midstream business has posted a 263% increase in daily processed and a 661% increase in sold liquids.
The company is planning to add an additional 45 MMcf/d gas processing capabilities near its Hemphill, Texas facility in Q2'12. UNT's Hemphill County facility in Texas is currently processing approximately 100 MMcf per day. Responding to the Mississippian play activity in North Central Oklahoma, UNT completed a new gathering and processing plant in Grant County, Oklahoma with seven miles of gathering systems. A new gathering system and plant is planned for Noble and Kay Counties Oklahoma consisting of 10 miles of gathering systems and an initial 10 MMcf/d of capacity.
Key updates for Superior Pipeline from Q1'12:
- Increased Q1'12 liquids sold per day volumes, processed volumes per day, and gathered volumes per day by 59%, 79% and 35%, respectively, over Q1'11.
- Operating profit increased 26% compared to Q4'11 primarily due to increased volumes.
- Unit plans to invest more than $200 million to expand Superior Pipelines asset base. The company has 35 active gathering systems with nearly 1,000 miles of pipeline, three natural gas treatment plans and 10 natural gas processing plants.
Disclosure: I am long UNT.
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