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Unit Corporation (NYSE:UNT)

Q4 FY07 Earnings Call

February 26, 2008, 11:30 AM ET

Executives

Larry D. Pinkston - CEO, President and COO

Brad Guidry - Sr. VP of Exploration, Unit Petroleum Company

David T. Merrill - CFO and Treasurer

Analysts

Marshall Adkins - Raymond James

Raymond Deacon - BMO Capital Markets

Pierre E. Conner III - Capital One Southcoast

Robert Christensen - Buckingham Research

Thomas A. Escott - Pritchard Capital

Operator

Good afternoon. My name is Dougherty and I will be your conference operator today. At this time, I would like to welcome everyone to the Unit Corporation Fourth Quarter and Year-End Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].

This conference 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 call that address the 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 the actual results to differ materially from these statements, including: the productive capabilities of the company's wells; future demand for oil and natural gas; future drilling rig utilization and day rate; the timing of the completion of drilling rigs under construction; projected additions and the date of service to the company's drilling rig fleet; projected growth of the company's oil and natural gas production; our ability to meet our consecutive quarterly positive net income goals, oil and gas reserve information, as well as our ability to meet our future reserve replacement goals; anticipated gas gathering and processing rates and through-put volume; the prospective capabilities of the reserves associated with the company's inventories 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 risk; and other factors described from time-to-time in the company's publicly available SEC report. The company assumes no obligation to update publicly such forward-looking statements, whether as a result of new information, future events or otherwise. Thank you.

I will now turn the conference over to Mr. Larry Pinkston, President and Chief Financial Officer of Unit Corporation. Sir, you may begin.

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

I want to thank you for dialing in this morning and welcome to Unit Corporation's fourth quarter and year-end 2007 conference call. I have with me this morning David Merrill, he is our CFO; Brad Guidry, our Senior Vice President of Oil and Gas Operations; John Cromling, Executive VP of our Drilling Rig Division; and Bob Parks, who manages our Mid-Stream Operations.

We released our 2007 fourth quarter and annual results this morning, a copy of our press release can be found on our website.

Before getting into the specifics of the quarter, I would like to touch on some of the more significant accomplishments for the year. We continue to grow all three of our business segments, achieving our second best financial performance, with revenue of $1.2 billion, net income of $266 million and net income per share of $5.71.

We reported record year in reserves, production and operating margins in Unit Petroleum, we replaced 171% of our production, exceeding our goal of 150% production replacement for the 24th consecutive year, an accomplishment few other E&P companies can claim. We produced a company record 54.7 Bcf equivalent and exited the year with 514.6 Bcfe of proved reserves.

We continue to expand our drilling fleet with the addition of 12 rigs during the year; we purchased 9 rigs and constructed 3, bringing our total year-end count to 129. And finally, we added three natural gas processing plants in Superior Pipeline and expanded our processing capacity by more than 90%. We are very pleased with the quarter and the year and believe we are in a great position to continue to grow each of our business segments in 2008 and beyond.

In our E&P sector, we produced 14.7 Bcf equivalents or 159.3 MMcfe per day during the fourth quarter, consisting of 11 Bcf of natural gas and 3.7 Bcfe of oil and liquids. We participated in 81 wells during the quarter, with the success rate of 90%.

Commodity prices were strong during the quarter at $6.30 per Mcf, 87.93 per barrel of oil and $1.27 per gallon for liquids, for an equivalent price of $7.66 per Mcfe. We generated $86.4 million of operating cash flow, a 76% cash operating margin in our E&P segment during the quarter.

For the year, we produced 54.7 Bcfe, a 149.9 MMcfe per day, consisting of 79% natural gas and 21% liquids. We drilled 253 wells with an 87% success rate. We anticipate drilling 280 wells for 2008; this will be at 11% from 2007.

Our average price during 2007 was $6.30 per Mcf for natural gas, $70.61 per barrel of oil and $1.07 per gallon for liquid, for an overall price of $7.06 per Mcfe. Our E&P segment cash operating margin was $294 million or 75% for the year. This was a 7% improvement over last year and represented 46% of our cash operating margin, up from 41% in 2006.

Now, I would like to turn the call over to Brad Guidry to provide specifics about our exploration production activities.

Brad Guidry - Senior Vice President of Exploration, Unit Petroleum Company

Thanks, Larry and good morning everyone. We had a very successful drilling program in 2007 with 220 successful completions out of 253 wells drilled. Although our operations are located in 13 states, there are three areas in particular I want to discuss today.

As you know, we have been very active in the Panola field in Southeast Oklahoma. In 2007, we completed 10 wells in the field with average working interest of 44% and a success rate of 90%. Since we began drilling here in 2004, we have successfully completed more than 94% of the 39 wells that we've drilled in Panola. In 2007, we spent approximately $23 million and booked reserves at $1.96 Mcfe finding costs. Our current net production in Panola is approximately 21 million cubic feet equivalent a day, or about 13% of our company output.

In Panola, we continue to target both for Lower Atoka Cecil Shay formations and the deeper Wister and Spiro sands. In 2007, we completed four wells from the deeper Spiro Wister sands and then 5 wells from the Cecil Shay and we have one well that was junked and abandoned.

A typical Cecil well is drilled at 12,100 foot and completed at a completed well cost of approximately $3.3 million and will produce somewhere around 2 million to 5 million cubic feet a day.

The Spiro wells have initially averaged 3 million to 6 million cubic feet a day, at a completed well cost of approximately $5 million for 14,800 foot test. We have budgeted approximately $25 million to $30 million to drill up to 10 wells in Panola field in 2008, and the drilling will continue to have one to two rigs working in the field in 2008 and Superior Pipeline will gather and treat the majority of the gas in the field.

Our expansion to the east of Panola is progressing. The 3-D seismic data that we acquired in the third quarter of 2007 has been processed and currently being annualized, another round of 3-D seismic will be completed by the third quarter of 2008. With budgeted to drill one or two wells from the 3-D seismic in 2008, our leasehold position in the eastern flank is more than 62,000 gross and 18,000 net acres.

In the Segno area of the Texas Gulf Coast, we drilled 12 wells in 2007 with average working interest of 88%, and a success rate of 75%. Primary target in the Segno was the Middle Wilcox formation around 10,500 feet to 13,000 feet. We spend approximately $35 million and added reserves at a finding cost of $1.19.

A typical Segno well cost around $3.5 million to drill and complete in a single zone and will have an initial IP of approximately $4 million a day of equivalent gas. We are pleased how we have organically grown from the standing start four years ago to exiting 2007, producing approximately $24 million a day, which is about 15% of the daily company total production.

In January of this year, we acquired additional working interest in the Segno area, given us a 100% working interest across the majority of the area. We plan to drill up to 12 to 15 wells in Segno in 2008 at estimated cost of $40 million to $50 million. We will utilize two Unit Drilling rigs most of the year in Segno. Superior is gathering the natural gas with in the field.

Another high working interest area for us is located in the Texas Panhandle, in the Granite Wash. During 2007, we drilled 24 wells in this play with average working interest of 82%. The Granite Wash is a highly repeatable play, which can be drilled on 40 acre space. We completed a 100% of the wells here in 2007 and added reserves at $2.14 finding cost.

Net production in the Texas Panhandle has increased 133% in 2007, to approximately $9.3 million equivalent per day. The Granite Wash gas that we produce has the high Btu value which is rich in NGLs, which provides significant additional value to the overall project. Again, we are using unit rigs to drill our wells and Superior Pipeline is actively laying gathering lines to move our natural gas. In 2008, we plan to drill approximately 40 Granite Wash wells at an approximate net cost of $50 million to $60 million.

In summary, the combined 2007 drilling results for Panola segment and the Granite Wash area are as follows. We spent approximately $93 million net or 38% of our drilling dollars, we added approximately 57 Bcf of gas equivalent net reserves or 62% of the reserves added this year, all that was at an average drilling finding cost of $1.63, which is very comparable to other industry leaders.

The net daily production at year-end from the 46 gross wells drilled on these three prospects or it equates to 34.5 net wells is approximately $37 million equivalent gas per day. In addition, 40 out of the 46 or 87% of the wells were drilled with unit operative wells and 42 of the 46 or 91% of the wells were drilled with unit rig. Superior Pipeline either gathers processes or treats gas from each of these fields. This level of control for unit allows us to capture as much of the return on capital for every invested dollar. For 2008, we have budgeted between $115 million to $140 million for these three areas.

I will now turn the call back over to Larry.

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

Thanks Brad. On the contract drilling side, we currently have 102 of our 129 rigs under contract or 79% utilization rate. This compares to an 80% utilization rate for the fourth quarter and for the year. As demand softened during the year, so did rig rates. Rig rates were down about 8% from the fourth quarter of 2006 to the fourth quarter of 2007. We anticipate day rates in the first quarter 2008 to be down around $300 a day, similar to the same size reduction we saw in the fourth quarter.

By the end of the first quarter, we believe the industry will have integrated a majority of the new rigs that are being built. And with a 12-month natural gas strip price of $9.50 I believe we will start seeing some higher demand for the rigs, for some of the rigs that have been stacked over the last several months, which should start to stabilization as the day rates during 2008.

The nine rig acquisition we made in Texas Panhandle in June of last year is delivering better than expected results and supports Unit Petroleum's Granite Wash drilling program.

The cash operating margin generated from the drilling business in the fourth quarter of '07 was $79.4 million versus $79.8 million in the third quarter and $103.7 million in the fourth quarter of 2006. For the year, Unit Drilling has generated a cash operating margin of $322.9 million, down 16% from the prior year. Drilling business contributed 51% of our cash operating margin, down from 57% in 2006. We currently plan to put two new rigs to work in the Rocky Mountains during the second quarter of 2008 under three year contracts.

I now wanted to mention the 2007 results of Unit Drilling. We kept our rigs working, we kept our crews hard in trying, we kept our safety record intact and we exited the year with a company record number of rigs.

In our mid-stream business, activity in this segment finished the year on a strong note, continuing the brisk pace of the third quarter. 12 new wells were connected to existing facilities during the fourth quarter, bringing our total new wells connected during 2007 to 56 wells.

As we enter the new year, we continue to connect new wells at a steady pace and expect 2009 to be a strong year as 2007 was for well connections. We continue to add capacity at Spiro Thornton with facility upgrades and three new processing plants during 2007. Our liquid sales volume increased 81% in the fourth quarter of 2007 over the fourth quarter of 2006, as we processed more gas, taking advantage of the higher liquids process.

Our efforts in the mid-stream operation are being focused in 2008 on Greenfield construction of new systems, where we have had great success in the past. We successfully invested over $30 million in construction projects plus jacks [ph] in 2007 and we've budgeted capital expenditures in excess of $33 million for 2008. That excludes any acquisition opportunities that might present themselves during the course of the year.

We continue to assess the potential for expanding the geographical scope for the mid-stream efforts and look forward to potential success in targeted new areas during 2008. The mid-stream segment is growing into steady pace over the previous 3.5 years, in which Unit has owned a 100% of the company and we're setting as a goal, another year of at least 20% growth in 2008.

I would like to now turn the call over to David Merrill, our CFO, to discuss the financial results.

David T. Merrill - Chief Financial Officer and Treasurer

Thank you, Larry and good morning everyone. For the fourth quarter of 2007, Unit had net income of $1.55 per diluted share and increase of 13% from $1.37 per diluted share in the third quarter of 2007 and a decrease of 11% from $1.75 per diluted share in the fourth quarter of 2006.

For the year we had net income of $5.71 per diluted share compared to $6.72 per diluted share in 2006. Revenues for the fourth quarter of 2007 was $308.5 million and for the year revenues were $1.2 billion. 2007 is the second consecutive year that Unit has reported more than $1 billion in revenue, and the fourth quarter of 2007 was the first time quarterly revenues exceeded $300 million in company history.

EBITDA for the fourth quarter of 2007 was $166.6 million, an increase of 10% from the $151.8 million in the third quarter of 2007 and a decrease of 2% from the $170.6 in the fourth quarter of 2006.

For the year EBITDA was $615.9 million compared to $660.6 million in 2006. For the fourth quarter of '07 while the oil and natural gas segment contributed 50% of EBITDA, contract drilling contributed 46%, and mid-stream contributed 4%.

We have hedged approximately 40% of our current daily natural gas production and 77% of our current daily crude oil production for 2008. These hedges consist of a combination of swaps and collars and our prices in excess of the prices we realized for 2007.

Capital expenditures for 2007 were $479 million excluding acquisition. For 2008, our operating capital expenditure program at $511 million, a 7% increase over 2007 and does not include any amounts for acquisition. Capital expenditures by segment for 2008 are $360 million for the oil and natural gas segment, $119 million for the contact drilling segment and $32 million for the mid-stream segment.

The 2008 capital expenditure program is anticipated to be funded from cash flows from operation. The effective tax rate for the fourth quarter was 35.2%, and for 2007 year, it was 35.6% with 55% of tax expense being deferred.

For 2008, we currently estimate the effective tax rate to be 37% with the deferral rate being 70%. Unit has a debt to capitalization ratio as of December 31st of 2007 of 8% with $120.6 billion in long-term debt outstanding. Our working capital at yearend was $40.6 million and we have $154.4 million available on our credit facility. Our balance sheet remains strong allowing us to be in a position to act quickly on an acquisition in any of our business segment, should the right opportunity arise. However, our focus will continue to be organically growing each of our businesses and proving efficiencies and profitability. Dorothy, I would now like to open the call to questions.

Question And Answer

Operator

[Operator Instructions]. Your first quarter comes from the line of Marshall Adkins with Raymond James.

Marshall Adkins - Raymond James

Good morning Larry. You mentioned... well first of all your drilling activity is held up remarkably well for the last several quarters; obviously still seems to be going strong today. You mentioned the $300 decrease in margins for the first quarter and are now projecting beyond that's pretty tough. What's your best guess as we go through the rest of the year? Is it 300 a quarter for the rest of the year or are we going to see that stabilize or flatten third and fourth quarter?

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

Well, we thought we are seeing right now Marshall, I think; it could be minimized some in the second quarter. It may not be down as much, it will be down in the second quarter over first quarter. Then what happens in the second half of the year is going to almost totally depend on what gas prices be during the year. I am pretty optimistic right now about it, because we've had some pretty high prices that some operators have been able to lock in some pretty good futures prices on, and whether the... if the actual price during the summer takes a dip. They've had the opportunity to lock in some pretty nice gas prices for the rest of the year. So second half of the year, it's going to be somewhat determined on gas prices of course. But second quarter will be down also as the first quarter will be.

Marshall Adkins - Raymond James

Okay. Along those lines, in January you'd kind of have given us a update in your hedging, if I recall like 40% of your natural gas was hedged for '08 and nearly 80% of your oil. Any updates on that, is that changed at all in the last month or so?

David T. Merrill - Chief Financial Officer and Treasurer

Marshall, this is David. Now on our natural gas and crude side for'08, that hasn't changed at all. We do have a little bit... we have about 16% of our current daily production hedged for calendar '09 at this point, and in all cases on the natural gas side we have done it at our delivery points. So we've taken the basic risk out of it as well.

Marshall Adkins - Raymond James

Okay.

David T. Merrill - Chief Financial Officer and Treasurer

And for '09 that price is... it's at a NYMEX price of about 853 for 2009 and our basis differential is about $0.50.

Marshall Adkins - Raymond James

Very solid. Now usually on... I mean these percentages are up related to what you have done historically, is that fair?

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

That's correct.

Marshall Adkins - Raymond James

Okay. Last and I will turn it over to someone else. Can you give me update kind of the number of term contracts you have going right now and how we should expect that to change over the coming year?

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

I don't perceive a big change in it, Marshall. We've had very few term contracts in the past and the ones that we got in place now, they all have... the majority of them have quarterly adjustments to pricing based on natural gas price formulas. That... there shouldn't be any big... nothing right now foreseen as the big changes of that.

Marshall Adkins - Raymond James

So in other words, even with these two new rigs coming on their term... they are under term, but we shouldn't think of them acting as a typical fixed price contract?

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

That's correct.

Marshall Adkins - Raymond James

Okay. All right, great. Thank you, guys.

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

Thanks Marshall.

Operator

Your next question comes from the line of Ray Deacon with BMO Capital Markets.

Raymond Deacon - BMO Capital Markets

Yes, hey Brad, I was wondering if you could talk about the 3P reserves and where the growth was versus a year ago. It looks like a pretty big increase from... I think around 450 last year? How did you get to the 690 number?

Brad Guidry - Senior Vice President of Exploration, Unit Petroleum Company

Yes, the increase was about 48% and it's really has come across most of the regions. In the Anadarko, we've just recognized we're going through our leasehold probably a little more methodical than we have done in years passed to recognize the probables in puds there.

In East Texas as we've gotten into some of the Cotton Valley plays, we have certainly recognized more of the probables and possibles in there. And I'd say overall as a company, when you go through the different regions we were up pretty much across all the different regions as we've gone. And, part of that reflects just as stated [ph] a little bit better job of capitalizing those probables and possibles.

Raymond Deacon - BMO Capital Markets

Okay, got it. How about in the Granite Wash from down spacing, did that have much of an impact?

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

The Granite Wash... the... we are still drilling on the Granite Wash at 80 acre spacing right now. The probables and possibles we have on the Granite Wash would probably be more reflective of 40 acres. So there's still room to go in there but that's as far as we want it to bring it down at this point.

Raymond Deacon - BMO Capital Markets

Okay. Got it and then --

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

Go ahead.

Raymond Deacon - BMO Capital Markets

I was just curious about you talked about last quarter. Sorry, I am... in terms of my questions, I guess I was... just two... a question on NGL volumes. What do you think those will look like for the next few quarters and is this quarter fairly representative of their... the realized price there relative to NYMEX, I guess?

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

I think from the NGL growth, it will continue to go up for the petroleum company, the two main drivers are the Segno field and the Granite Wash field which both we have active drilling programs out there. Certainly in the Granite Wash, we are expecting to go up from drilling 24 wells somewhere to 40 wells. So we will see that definitely increase there and Segno's the same way. I mean with our program down there, we expect our gas production increase. As that increases, our NGLs will increase the price. I don't know somebody else may be able to give you an answer on that.

David T. Merrill - Chief Financial Officer and Treasurer

Prices are pretty strong. What we also has done Ray as we have... we have about 75% of our liquids production on the Unit petroleum side of the business, swapped through April of '08 at the nice pricing.

Raymond Deacon - BMO Capital Markets

Great. Okay, got it. And you mentioned... I guess one more question for Brad is, you mentioned the big... your three major projects you are going to spend between 115 and 140. Is the upside number going to be a result of the 3D at Panola.

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

In part. Right know we just have 1 or 2 budget wells budgeted out there. Certainly things are taking a little bit longer out there to get the interpretation finished and to... we are a joint venture with another company; so just tying everything together. In part it will be the Granite Wash also. We have a big acreage block on the south part of the play down there. We drilled two wells, currently drilling the third well, depending on the results from that well. It will dictate whether we hit the high-end of that mark or the low end.

In Segno, we are always trying to expand outside of our area there. So it depends on some deals that we were looking at there. So we just put a range out there. But I think what we have put out is definitely a conservative target.

Raymond Deacon - BMO Capital Markets

Okay. Got it. And your... what was your exit rate for production at year-end? Could you get of the 165 or so or?

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

It has once... that... at year-end it was 159.5.

Raymond Deacon - BMO Capital Markets

159.5, okay, got it. And just one more quick one is, you talked last quarter a bit about potentially having some interest in some special purpose rigs and that might be where the growth in the rig fleet comes from in the future, any other new news on that I guess?

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

Well we are still anticipating if that's going to happen this year. We don't have anything in hand that we start a construction on in rigs. But --

Raymond Deacon - BMO Capital Markets

Got it.

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

Continue to get inquiries from customers and those signs are working.

Raymond Deacon - BMO Capital Markets

Got it. Hey, thanks a lot.

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

Thanks Ray.

Operator

Your next question comes from the line Pierre Conner with Capital One Southcoast.

Pierre E. Conner III - Capital One Southcoast

Good morning gentlemen... excuse me.

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

Hi [indiscernible].

Pierre E. Conner III - Capital One Southcoast

Hey, first, Larry on the rigs will be on the term contract in the Rockies, now talking specifically about rates which anticipate that as those rigs come on they will be accretive to margins or is this a case of locking up a reasonable return for multi-years.

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

There will definitely be accretive to average margins.

Pierre E. Conner III - Capital One Southcoast

Okay. And are you seeing other opportunities like that, now different from what Ray was talking about, with special purpose are you still getting some interest in term contract and was there something that you know's been negotiated a while ago?

David T. Merrill - Chief Financial Officer and Treasurer

No we may... this one's been working for quite a while. I mean the rigs are nearly through completions and being ready to transport it out. So you know we have been working on it for six months. But, we continue to have inquiries and it's... nothing's cast in stone yet, but pretty optimistic that something will happen.

Pierre E. Conner III - Capital One Southcoast

Okay. On mid-stream and I realize the biggest piece but nice sequential improvement and to understanding some of what drives that, with the gas pieces rising here, is there a tendency to process less gas and therefore... or is this just really more driven by the wells hooked up and I am just trying to get a feel for obviously, sequentially, if we do have non-dollar plus, would you tend to try to sell more gas directly?

David T. Merrill - Chief Financial Officer and Treasurer

Pierre, this is David. On our hedging... one of the areas that we have also taken a look at is walking is locking in frac spreads for...

Pierre E. Conner III - Capital One Southcoast

Right.

David T. Merrill - Chief Financial Officer and Treasurer

...processing volumes on the mid-stream side, and we currently have 75% of our processing of volumes hedged through July of '08 and we have another 25% that are locked in through August of '08. So we've tried to... we've been taking a look and we saw how strong margins were and we wanted to capture some of that, so we didn't leave it at risk and as you pointed out, natural gas has certainly had a nice run here lately and that would have lowered those margins during that time period. And we'll continue to monitor what goes on as you get further out. One of things you have to be careful of on the frac spread side is the market's being... the hedging market isn't as liquid as you look further out in the periods and you almost had to kind of wait for the market to come to you before you can look too far out and lock in some of those attractive margin.

Pierre E. Conner III - Capital One Southcoast

Okay. So that was a period there when liquid prices initially ran that hedges were out of the money but now they have become effective so to speak with rising gas prices and so we shouldn't expect to see too much change in that contribution from mid-stream sequentially.

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

That's exactly right, Pierre.

Pierre E. Conner III - Capital One Southcoast

Okay. That's what I was looking for there. A couple more items, and I apologize if you covered some of this early on, I did jump on a little late, but I was interested in sort of activity as a result of Brad processing some of the recent seismic, I believe, that you gotten an extension in, I think, the Segno, right? And just... I was looking for sort of the next major ex... step out exploration and the timing of that.

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

The extension to these, the Panola?

Pierre E. Conner III - Capital One Southcoast

Panola, thank you.

Brad Guidry - Senior Vice President of Exploration, Unit Petroleum Company

That... it's progressing. Well it's been a little bit slower than what we anticipated, but we have the 3D and we are analyzing it, we have a 50% joint partner in there. So I mean it's just takes time for us to get our step together with them. We have the second half of that 3D being shot that will come at... in the late summer of '08. But what we said here is we budgeted one to two wells to drill out to these and that number could change. That... we will definitely get that done and then we will see what we are finding.

Pierre E. Conner III - Capital One Southcoast

And Brad those one to two... thank you; that was what I was looking for. Those one to two would be... we are talking about a third or fourth quarter type --

Brad Guidry - Senior Vice President of Exploration, Unit Petroleum Company

Yes. It may possibly second quarter to third quarter in there for the first one. But it will be mainly over the second half of the year.

Pierre E. Conner III - Capital One Southcoast

Okay. And then the last one is... maybe Brad or more marketing, it's David, but I think one of the things that we look at on the modeling, you guys gave us a pretty good guidance on margins on the rigs and production volumes, et cetera. But realizations are volatile. So on the E&P side particularly with the crude oil this quarter, was that mostly impacted by the hedging or why were realizations so strong?

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

Well we had very little hedging of gas in the fourth quarter of this year. Yes those... I mean those difference in differentials, I mean, they moved... we did some hedges two, three weeks ago. There was $0.50 differential, and we saw some dollar differentials back earlier in January of this year. So that moves around very dramatically. It's --

Pierre E. Conner III - Capital One Southcoast

Is that true on the crude oil side, on the oil side for the E&P as well, Larry, just trying to be opportunistic or --

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

What you have to... Pierre we are going to create a little more transparency on our oil and liquids pricing. Typically what we published... our oil price that we publish has been a blended price with crude oil and liquids.

Pierre E. Conner III - Capital One Southcoast

Okay.

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

So it slipped a lot lower. So for the fourth quarter of '07, our actual crude oil price was averaged $87.93.

Pierre E. Conner III - Capital One Southcoast

And that strictly the crude component and we are going to --

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

Exactly.

Pierre E. Conner III - Capital One Southcoast

...separate NGL going on a go-forward basis.

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

That's exactly right. And you'll see some of that in the 10-K wherever it's filed later this week too.

Pierre E. Conner III - Capital One Southcoast

Well I do appreciate the increased feasibility, thank you. I will turn it back gentlemen.

Operator

Okay. [Operator Instructions]. Your next question comes from the line of Robert Christensen with Buckingham Research.

Robert Christensen - Buckingham Research

Good morning everyone. The inquiries that you are seeing for drilling rigs right now, any particular region, I know you keep track of inquiries... any region is stronger.

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

Not really Bob. I mean one month it will be one region and then another... next month it will be a different one. Because it's more of the customer-based kind of function than it is region for us. The Rockies overall probably aren't as strong as Oklahoma market is. We are seeing lot of movement in the Oklahoma market and that's one of the things that has enabled us to keep our margins up as well as we had. But nothing as far as a big movement.

Robert Christensen - Buckingham Research

So if not regional anything related to the smaller producer showing more interest or less interest or is it bigger companies? Can you put a marker on that?

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

Yes, that's really not. I mean the small guys they really haven't changed a whole lot over the last three or four months. They haven't geared back up to the same level that they were at in '06 yet, and they won't until they foresee the economic incentive or the possibility of not getting rigs when they want them. But mainly been the public entities [ph] and the large independence. That's definitely what's driving the market.

Robert Christensen - Buckingham Research

Going back to East Panola a little bit with the first 3D in and being so interpreted, just wondered for Brad, how many prospects have been sort of illuminated with this 3D over thousands of acres that have been shot?

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

Well Bob the west half has been shot of the deal and the thing that takes more time than you would expect is that we really have two different prospect areas out here. I mean we are looking at the deeper beds which is the spiral and then we are looking at the Atoka portion of the rock which is the shallower.

Down in the spiral, I mean, at this point there are lead areas that we are still working on. We have a number of lead areas out there, I don't have the specific number but at this point it really is still just being worked and then we are doing our work independently and then we'll get together with the other company and then we'll go through and then decide what we feel is drillable and then move ahead at that point. But we are not discouraged at all. I mean it's a exploration type project and it's just taken time to get that data interpreted.

Robert Christensen - Buckingham Research

Are you saying there's multiple leads of it or --?

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

Yes, there... we have --

Robert Christensen - Buckingham Research

20, 30 kind of leads. I mean what kind of numbers are we looking at, at all; you don't want to mention that at all?

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

Yes, we don't really have a number. I mean, at this point we're still in the lead stage... what... where we go forward with this, with our partner whom we give some numbers, get it tied down to what we'll actually drill; we'll glad to talk about it at that point.

Brad Guidry - Senior Vice President of Exploration, Unit Petroleum Company

Our partner [indiscernible] is a major company.

Robert Christensen - Buckingham Research

Sure.

Brad Guidry - Senior Vice President of Exploration, Unit Petroleum Company

And they tend not to move quite as fast as we typically like to move. But it's not all bad either.

Robert Christensen - Buckingham Research

Is the first well a unit operated well or majors operator?

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

The way it's set up in there, we alternate operations. But on --

Robert Christensen - Buckingham Research

Who goes first?

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

I am not real certain who's first on this one but we drilled the last one. So I assume they've probably drilled. But what we've seen in the past and in some other areas that Dave allowed us to operate the wells through the drilling part of it.

Robert Christensen - Buckingham Research

Sure. The cost and the E&P continue to be rising, am I missing something or is it just general cost inflation. I mean I see in your own drilling the day rates easing a little bit, but I see on the E&P side that the cost's going up quite a bit and the fixed line certainly, the DD&A. And care to have a explanation for that for us? We are supposed to be in the golden age according to... obviously [ph] where... the commodities rising and the costs are easing?

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

Well part of the cost you are seeing out there is obviously... we are attempting to get into other projects outside of the three areas that we are talking about; projects that will have an effect for the company in the years upfront, not right the immediate. So I mean part of the costs you are looking at in there certainly caused that... we are trying to plan for the future.

Some of the cost that we're seeing in there certainly from a finding cost standpoint is our pud percentage actually decreased this year than the 21.5%. So, I mean, the finding cost is kind of what it is from the standpoint of what you do with your puds. The other thing I have mentioned in the past is certainly in our Segno area, we drilled quite a few wells out there that have probables behind pipe and they are wells that have a very high potential of production but we complete single well zones out there. So there is additional reserves that we are seeing there. So the cost we... Bob we are definitely focused on it not to the point that we don't want to miss opportunities looking forward but I would say those are probably the biggest drivers.

Robert Christensen - Buckingham Research

Well thank you guys.

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

Thank you Bob.

Operator

Your next question come from the line of Thomas Escott with Pritchard Capital.

Thomas A. Escott - Pritchard Capital

Good morning fellows.

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

Hello Tom

David T. Merrill - Chief Financial Officer and Treasurer

Good morning.

Thomas A. Escott - Pritchard Capital

Just following up on a comment from real early in the presentation to be sure I understood this correctly. I had a note here that you had said that the company you'd expected growth, that there were opportunities for growth in each of your three segments in '08. And I guess that was related to contract drilling. If the margins are a little skinnier in Q1 and maybe kind of stabilized in Q2, can there be enough new rigs going to work and better activity in the second half of the year to make the contract drilling side actually have an increase in '08 over '07 or did I misinterpret that?

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

Well I think we will see opportunities to add rigs during the year. Tom, the... and the level of addition to the rigs is... at 950 gas prices we are going to see more rigs to go to work, enough gas prices will hold, and there will be the demand there for the rigs and whether they are... where the demand... how fast the demand heats up the available supply. And keep in mind that our utilization rate is in 80% range. When you start looking at our 800 to 1,500 horsepower range, our utilization rate in that sized rigs is almost 90%. So we don't have a whole lot of rigs in that horsepower range that are available. So it doesn't take up... doesn't take a whole lot of increase in demand for those rigs to become fully utilized.

Thomas A. Escott - Pritchard Capital

Now, in such a high fixed cost business that I guess even a moderate... a few rigs going to work at current rates, it's probably a great deal that that drops down to the bottom-line, doesn't it?

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

Yes, sure.

Thomas A. Escott - Pritchard Capital

All right, thank you. That's it. Keep it up.

Operator

At this time there are no further questions

Larry D. Pinkston - Chief Executive Officer, President and Chief Operating Officer

I want to thank everyone for joining us. We are going to be showing up at a lot of conferences over the next three or four months and hope to see many of you all at the different conference, I guess the next one... next coming up is the Raymond James conference in Orlando. Appreciate your attendance and thank you again.

Operator

This concludes today's Unit Corporation's fourth quarter and year-end results earnings call. You may now disconnect.

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Source: Unit Corp. Q4 2007 Earnings Call Transcript
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