Unit Corp. Q1 2008 Earnings Call Transcript

| About: Unit Corporation (UNT)

Unit Corporation (NYSE:UNT)

Q1 FY08 Earnings Call

May 06, 2008, 11:00 AM ET


Larry D. Pinkston - President and CEO

Bradford J. Guidry - Sr. VP of Exploration for Unit Petroleum

David T. Merrill - CFO and Treasurer


Marshall Adkins - Raymond James


Good morning. My name is Kristel and I will be your conference operator today. At this time, I would like to welcome everyone to the Unit Corp First Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. There will be a question-and-answer session at the end of the conference today. [Operator Instructions].

This conference call contains forward-looking statements within the meanings of the Private Securities Litigation Reform Act. All statements, 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 productive capabilities of the company's wells, future demand for oil and natural gas, future drilling rig utilization and day rates, the timing of the completion of drilling rigs currently under construction, projected additions and days 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 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, 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. Thank you. Mr. Pinkston, you may begin your conference.

Larry D. Pinkston - President and Chief Executive Officer

Thank you Kristel. Thank you for dialing in and welcome to Unit Corporation's first quarter 2008 conference call. With me today… I have David Merrill, our CFO, Brad Guidry, our Senior Vice President of Exploration for Unit Petroleum, John Cromling, Executive Vice President Drilling Operations and Bob Parks President of Midstream operations.

We released our first quarter report to the public this morning for reference our news releases can be found at our corporate website and on many other web-based financial sites. I'd like to spend a few minutes recapping Unit Corporation's first quarter 2008 results versus 2007; it was a very good quarter for the company and our shareholders.

Unit Corporation delivered double-digit growth for the first quarter in revenues, net income, net income per share, and cash flow as well as production. Unit grew net income 19% in the first quarter of 2008, with $77.1 million or $1.65 per diluted share compared with $64.5 million or $1.39 per diluted share a year ago.

EBITDA for the first quarter of 2008 was $177.9 million, 22% growth from the $146.4 million recorded in the first quarter of 2007. We achieved a 15% increase in equivalent natural gas production when comparing the two quarters. In the quarter, we drilled 57 wells completed 49 for an 86% success rate.

Our current production rate at the end of the quarter was more than 167 MMcfe per day. Later in this conference call, Brad Guidry will provide some details on some of the key wells completed in the first quarter.

What's important for 2008 and beyond is now that Unit has a very strong inventory drilling prospects. At year-end, we had 1478 prospects in inventory, over 12,00 of those prospects would be classified as 2b and 3b reserves. We estimate there is approximately 687-Bcf equivalent of reserves associated with these prospects, which is a 133% of our current reserves.

At the end of the first quarter, our E&P group had drilled 37 wells; they have 37 wells drilling or being completed. Our 2008 E&P plan is to drill 280 wells and spend somewhere around $360 million. A metric to think about in Units growth on a daily adjusted per share basis. For the period 2004 to 2007, Unit grew its production 64% and reserves 48%, very good indicators of our accretive growth.

This will be a good time for me to turn the call over to Brad relating to update you on some of our key operations.

Bradford J. Guidry - Senior Vice President of Exploration for Unit Petroleum

Good morning everyone. We are off to a good start in 2008 drilling program. As Larry said, we began drilling operations on 73 wells during the first quarter, completed 57 of those wells for 86% success rate. We had an additional 37 wells that we are drilling and completing. The average net working interest in the 57 wells was 50.1% as compared to 42.5% in the first quarter of 2007. This 7.6% increase indicates a trend towards drilling more of our own operated properties where we generally have a higher working interest and control of the operations.

Here are some of the highlights that occurred during the first quarter on several of those properties. Our Granite wash and mono play in the Texas Panhandle continues to accelerate as we now have four unit rigs drilling with plans at a fifth rig in June at this year.

Net daily production for the first quarter of 2008 increased to an average of 11.6 million equivalent a day or 158% increase as compared to the first quarter of 2007, average of 4.5 million equivalents per day. We have continued that growth into April and achieved a company record net production averaging 16.4 million cubic feet equivalent for the month, which was 41% increase over the 2008 first quarter average. We had first gas sales on seven Granite Wash wells during the first quarter and three additional wells in April at encouraging initial potential rates. One of the notable Granite Wash wells is our Walmer C No. 6 [ph] which we own a 100% that is selling 2.1 million cubic feet a day and 137 barrels of oil.

As I mentioned before, most of our Granite Wash wells are drilled to the Morrow formation, which is approximately 700 feet deeper. The Morrow is a higher risk play than the Granite Wash, with small incremental growing cost of approximately $80,000 is easily justified by the excellent potential of the Morrow holes. We have completed one Morrow well during the first quarter and two additional Morrow wells in April. All three Morrow wells are producing at commercial rates with the best well selling at a rate of 2.5 million a day and 20 barrels of oil with plans to franc the well in the near future.

Our staff has done an excellent job to increase production and controlling cost as we developed this prospects. The high feet Btu value of the gas at the Granite Wash yields even more upside value to an already profitable project. We anticipate that under our current plans, we will drill approximately 47 verticals and three horizontal Granite Wash wells in 2008 and spend an approximate net cost of $75 million.

We are also having great results in our Segno field area of the Texas Gulf Coast. The primary target is Middleville COX formation around 10,500 feet to 13,000 feet. As we previously reported, we were successful in acquiring a 50% interest in a 68,000 acre block located on the south part of our Segno area. That purchase gives us 100% of acreage block and control of the operations.

In addition to that acquisition, we have also been successful in adding another 19,000 gross acres, 16,600 net acres in our Segno prospect lead area. This brings our total leasehold added this year to 25,800 gross acres and 20,000 net acres. The total acreage position in our Segno area is now approximately 67,000 gross acres and 59,000 net acres. Our Houston staff has done an outstanding job of both identifying drillable prospects and acquiring leases in this area.

We will commence drilling the new acreage block in midsummer and combined with our original Segno area, we anticipate having three unit rigs drilling by midsummer. On the completion side in the Segno area, we had sales on our Hickwood No. 1, on March 4, 2008 at an initial rate of 3.4 million a day and 148 barrels of oil a day from a natural completion. We own a 100% of this well and have recently started the completion of the offset well, which we also own 100%. We currently expect to drill 15 to 20 wells in the Segno area and spend approximately $50 million to $60 million in 2008. The third area I want to talk about is our Panola field in southeast Oklahoma. Our high volume seesaw wells previously drilled continue to produce strongly and provide a great production base for the field.

The 13 high volume seesaw wells now... have now produced approximately 112 Bcf in 3.5 years and are still making around 57 million cubic feet per day. The overall production profile from these wells is now indicating a hyperbolic trend, which should result in a lesser decline, no doubt these wells have been very successful, but that is not the end of story for Panola field. Our staff continues to successfully unravel the secrets of this remarkable feel and we're now focused on exploring the deeper Wister and Spiral formations and have reasonably completed an exceptional spiral well.

The Hawthorne No. 3 which we own 58% working interest in the spiral has been producing a steady rate of 10.5 million cubic feet per day with 1950 pounds flowing casing pressure for the past three weeks. In addition, this well also has an excellent section of gas pay behind pipe in the Wister formation. We'll spud an offset in the upcoming months of this well. We are currently drilling three spiral wells with unit rigs and will participate in the fourth well that is also utilizing the Unit rig.

In 2008, we anticipate drilling approximately 12 wells primarily targeting the Wister and Spiral formation and spent approximately $30 million net. Our expansion to the east of Panola is progressing. The first well based on the newly acquired 3D will begin in approximately one month and the second phase of the 3D is been surveyed and should be completed in the third quarter of 2008.

One last area I'll mention is the Bakken oil play located in McKenzie County North Dakota. We have an average 20% working interest in approximately 27,000 gross acres. Three wells have now been completed since September of 2007 with initial rates of approximately 400 barrels to 600 barrels of oil per day. Two additional wells are currently awaiting completion and one well is drilling. The development plan in this prospect is to keep one right drilling for the remainder of 2008.

I'll now turn the call back over to Larry.

Larry D. Pinkston - President and Chief Executive Officer

Thank you Brad. I've talked in the past about how Unit is very unique having three profitable growing business segments. Brad just covered our growing… set on E&P assets a few more points for [inaudible]. Earlier this year, we talked about production range of 59 Bcf to 61 Bcf equivalents for 2008. We got up to a very strong first quarter with production up 15% from the first quarter last year and we currently have a company record number wells to drills during the remainder of 2008. We feel very comfortable with our production range.

Our drilling rigs continue to be very active in many of the most drilled base in the United States. We are moving two new built rigs to the Pandale Basin to drill our very active customers, those rigs are under two-year contracts and brings to nine number of Unit rigs working in the Pandale.

First quarter to 2008 average rig day rates were $17,997 a day, a $117 less than our day rates in the fourth quarter of 2007. Year-over year, first-quarter average day rates were down only 7%. No one ever likes to report a decrease, but I'm very proud of how we kept our rigs working and we are able to keep our day rates at these levels.

Regarding margins, cash flow in the first quarter was $8772 per rig per day, down $372 from the fourth quarter of '07. As is typical, operating costs in the first quarter are higher due primarily to employment taxes restating at the beginning of each year.

With the addition of the two rigs, Unit will now have 131 rigs. As mentioned in our press release, the demand for 800 horsepower to 2000 horsepower rigs has greatly increased. Based on the contracts and the commitments that we currently have, we believe of the 83 rigs that we have, that fit in this horsepower range, we will have 80 of those working by the end of the second quarter, a 96% utilization. We will be adding two additional 1500 horsepower rigs during the fourth quarter, one of which is already contracted to a customer in the Bakken Play in North Dakota.

We believe with the growth and the demand that we are currently seeing in day rates in the second quarter will be flat to only down slightly if commodity prices remain strong we can start realizing upward movement in day rates during the third quarter. The mid-stream segment is off to a very strong start in 2008, Superior achieved record earnings as in the first quarter driven by record volumes of gas process and liquids recovered in its gas processing facilities, Superior is reaping the benefits of a timely facility expansions and new plans constructed in 2007. We continue to expand Superior's processing capacity as another 20 million cubic feet per day processing plant is being constructed at our existing site in the Texas Panhandle to handle the increasing volumes. This plan should become operational during the third quarter of 2008.

As mentioned in the previous call, Superior is focusing its business development efforts on Greenfield construction. We're on the final stages of negotiation for two possible construction projects in the mid continent one of which was included in the new gas processing plant. Superior has recently opened a business development office in Pittsburgh, Pennsylvania and we are engaged in multiple conversation with Appalachian based producers regarding the potential of construction of pipelines to serve the area’s increasing drilling activity. Superior is currently outpaced to invest at least the budgeted $32 million in capital expenditures in 2008.

David Merrill will now provide you with the detail on our financial aspects of the company.

David T. Merrill - Chief Financial Officer and Treasurer

Thank you, Larry and good morning everyone. As Larry previously mentioned, EBITDA for the first quarter of 2008 was $177.9 million, an increase of 22% from the $146.4 million in the first quarter of 2007, and an increase of 7% from $166.6 million in the fourth quarter of 2007. For the first quarter 2008, the oil and natural gas segment contributed 56% of EBITDA, contract drilling contributed 39% and mid-stream 5%. For our E&P segment we have hedged approximately 40% of our current daily natural gas production and 72% of our current daily crude production for 2008.

These hedges consist of a combination of swaps and collars and are at prices in excess of the prices we realized in 2007. Our natural gas swaps are at an equivalent NYMEX price of $8.46 and are executed at our delivery point with an average differential reduction of $0.94. The natural gas collars are at an equivalent NYMEX score of $7.76 and a ceiling of $9.17 and are also executed at our delivery point with an average differential reduction of $0.54. The crude oil swaps are at $91.32 and the collars average a floor of $86.67 and a ceiling $100.

For 2009 the hedges we have in place are collars or only natural gas and cover the period January through December and approximately 16% of our current daily natural gas production. The collars will add an equivalent NYMEX price of $8.53 and are executed at our delivery points with an average basis differential reduction of $0.50.

The effective income tax rate for the first quarter of 2008 was 37% and is what we currently estimate for the year with the deferral rate being 66%. Unit has a debt-to-capitalization ratio as of March 31, '08 of 7% with $116.6 million in long-term debt outstanding. The borrowing base associate with our credit facility is currently $500 million based on a recently determination by our bank group. However, in order to save commitment fee charges, we have elected a current commitment amount of $275 million. Our working capital at the end of first quarter was $36.1 million and our balance sheet remained strong and we have adequate cash flow and available credit to fully fund our 2008 capital program.

I would now like to turn the call back to Larry for some closing remarks.

Larry D. Pinkston - President and Chief Executive Officer

Thank you, Dave. In closing, we see very good fundamentals for each of our operating groups and positive momentum for the rest of 2008. Some of the momentum that includes higher production levels, better than expected realized commodity prices, very active drilling rig environment increasing natural gas throughput, as the company unit will invest about 511 million across the three business units, EMP $360 million which includes the seismic and leasehold acquisition and contract drilling segment $119 million and our midstream operations 32 million.

We will drill a company record 280 wells in 2008. We expect to replace more than 150% of our production for the 25th consecutive year. And as we have done in the past, we will add rigs as our customer needs to expand. 200 rigs are currently being put to work in Pandale and we are adding the two additional rigs in the fourth quarter.

That concludes our prepared remarks. Operator, we will now take some questions.

Question and Answer


Thank you. [Operator Instructions]. Your first question comes from Marshall Adkins with Raymond James.

Marshall Adkins - Raymond James

Good morning. Couple of quick questions. First, Larry, it sounded like on the day rate and margin side for the rigs, that you are looking for day rates to bottom kind of in the second quarter and start moving up again in the third. Likewise I guess maybe on a margin basis, you may have already bottomed in the first quarter just because of the costs were a little bit higher maybe the margins have already bottomed. Is that accurate reading of what you are saying?

Larry D. Pinkston - President and Chief Executive Officer

Yes, I think it is very probable, Marshall.

Marshall Adkins - Raymond James

Okay. And obviously it seems like the strength in those rigs is in the higher horsepower 1000 to 1500 horsepower as well, is that correct?

Larry D. Pinkston - President and Chief Executive Officer

Yes, very correct.

Marshall Adkins - Raymond James

Okay. On the production side, you mentioned in the press release you had some downtime associated with I guess a processing unit. Was that kind of a one-time deal or is that going to happen all the time?

Larry D. Pinkston - President and Chief Executive Officer

Well, you say one time, I mean it is good news bad news kind of scenario, Marshall. As we keep adding production down there they keep having that capacity. So the good news would be if they have the same problem this time next year to handle our additional capacity, but we are not expecting any more shutdowns like this in the near future. They should be able to handle our production for quite some time down there.

Marshall Adkins - Raymond James

As you all know, I am certainly expert on the E&P side you guys gave pretty good overview where you are active. Seems like E&P company has a shale play or three in their portfolio. You mentioned you are moving some assets towards the Marcellus, but are you all looking at any of these shale areas in detail?

Bradford J. Guidry - Senior Vice President of Exploration for Unit Petroleum

Hi Marshall, this is Brad. Yes we are. We are definitely looking at the Marcellus. We have a pretty decent position in the Woodford and we'll actually be drilling... operating our first Woodford well starting in about a month. We are constantly looking at shale plays and we are looking to add that to our mix and I'm confident certainly that will have probably this year.

Marshall Adkins - Raymond James

So I presume that means the economics look pretty favorable.

Larry D. Pinkston - President and Chief Executive Officer

Yes. As Shale plays do until you get into, for a while it is hard to know the exact economics of what you got. But in the Arkoma basin, that's kind of our backyard and we participated in probably 25, 30 horizontal wells... Woodford wells in there. And the economics, they are not great, but they are certainly commercial. We will try our hand at operating it and if that works we have about 15,000 net acres in there that we could develop through the basin. So we'll see how that goes.

Marshall Adkins - Raymond James


Larry D. Pinkston - President and Chief Executive Officer

Also important those Shale plays, as they heat up the acreage costs for those things are still crazy. And we've refused to get caught up in the frenzy of outrageous prices per acreage. And the unique thing about the Woodford is, it's moving towards some of our legacy production is... and that it's moving towards our acreage play and we didn't go, have to go out and pay these real hot prices for the leaseholds. So, yes, we are pretty optimistic about some of that movement.

Marshall Adkins - Raymond James

Okay. Last quick one. Just point of clarification. You mentioned in the release you had a 111 rigs in the contract, and 106 for drilling and in terms of how we look at it utilization if it's... if it's under contract or you are getting paid is that account is a fully utilized rig or should we deliver more at the 106 drilling as the real utilization number?

Larry D. Pinkston - President and Chief Executive Officer

Yes. No the 106 is what we are currently being paid on today. The 111 is where our optimism about drilling all the additional 1500 horsepower rigs to work by the end of the second quarter.

Marshall Adkins - Raymond James

Terrific. Thanks guys.


[Operator Instructions]. At this time there are no questions.

Larry D. Pinkston - President and Chief Executive Officer

Well, we certainly appreciate your participation this morning. As you can tell, we are very excited about the prospects at Unit, we are very excited about the remainder of 2008. I think all three segments are clicking along very, very well and we look forward to listening if not seeing most of you in the near future. Thank you again.


This concludes today's Unit Corp first quarter 2008 earnings call. You may now disconnect.

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