Unit Corporation (NYSE:UNT) Q3 2018 Earnings Conference Call November 6, 2018 11:00 AM ET
Larry Pinkston - President and Chief Executive Officer
David Merrill - Vice President of Finance
Les Austin - Chief Financial Officer
Frank Young - Senior Vice President of Exploration and Production
John Cromling - Vice-President and Division Manager.
Robert Parks - Manager & President of Superior Pipeline Company LLC
Neal Dingmann - SunTrust Robinson Humphrey
Colin Boese - Leith Wheeler Investment
Hello, and welcome to the Unit Corporation’s Third Quarter 2018 Earnings Call. My name is Mitchell, and I will 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. And please note that today's conference is being recorded.
During the course of the conference call today, the speakers may make statements that are constitute projections, expectations, beliefs or similar forward-looking statements. The Company's actual results could differ materially from the results anticipated or projected in any such forward-looking statements.
Additional detailed information concerning the important factors that could cause actual results to differ materially from the information given today is readily available in today's press release under the heading forward-looking statements.
Additionally, during the conference, the Company will be discussing certain non-GAAP financial measures. The reconciliation of those non-GAAP measures to GAAP measures can also be found in today's press release. This document is available on the Company's website.
I will now turn the call over to Mr. Larry Pinkston, President and CEO. Sir, you may begin.
Thank you, Mitchell. Good morning, everyone. Thank you for joining us this morning. With me today are David Merrill, Les Austin, Frank Young, John Cromling and Bob Parks. Each will be providing you with the updates about their areas of responsibility. We will take questions then at the end of the call.
We noted improvement in the commodity price outlook during the third quarter, which has been supporting in increased activity levels. The enhanced activity level on our part as well as third-parties has helped facilitate growth in each of our business segments.
While we have seen a broadly more and guiding energy industry outlook, many macro-economic factors have contributed to heightened volatility in a broader markets and starting surrounding issues such as rising interest rate, the potential trade wars, the midterm elections and corporate earnings have resulted in the mix index reaching heightened levels. At Unit, we are doing our part of delivering a very good quarter, which we will discuss further.
I now would like to turn the call over to David Merrill.
Thank you Larry, and good morning, everyone. As Larry mentioned, we had a very solid quarter with growth in all three business segments. We believe our progress continues to position our company well, going forward.
Our oil and natural gas segment saw a nice increase in production during the third quarter. We continue to experience success with our BOSS drilling rig and have deployed the 11th and received orders under long-term contracts for the 12th and 13th BOSS rigs, which are now under construction.
Our midstream segment appears to be very well situated to take advantage of organic growth opportunities in many areas. Finally, from a corporate perspective, we recently expanded a turnaround of Units credit facility, which Les Austin will discuss in further detail.
I will now turn the call over to Les.
Thanks David. We reported net income attributable to Unit for the third quarter of $18.9 million or $0.36 per diluted share. Adjusted net income attributable to Unit for the quarter, which excludes the effect of non-cash derivatives, was $15.7 million or $0.30 per diluted share. Our non-GAAP financial measures reconciliation is included in our press release.
For the oil and natural gas segment, revenue for the third quarter increased 9% over the second quarter of this year, with higher oil, natural gas and NGL prices and increased NGL and natural gas volume while oil production was essentially unchanged. Operating costs for the third quarter decreased 1% from the second quarter of this year, because of lower lease operating expense.
For the contract drilling segment, revenue for the third quarter increased 8% over the second quarter of this year, due to increased utilization, day rates and mobilization revenues. Operating cost for the third quarter remained relatively unchanged compared to the second quarter of this year.
For the midstream segment, revenues for the third quarter increased 7% over the second quarter of this year, primarily due to increased liquid recoveries and increased volumes transported combined with increased gas sales liquid and condensate prices. Operating costs for the third quarter increased 9% over the second quarter of this year, because of increased purchase prices and volume.
We ended the third quarter of 2018 with total cash and cash equivalents of $91.6 million and long-term debt of $643.9 million. Long-term debt consists entirely of our senior subordinated notes net of unamortized discount and debt issuance costs. Our net leverage ratio was 1.6 times at the end of the third quarter.
As David mentioned on October 18 Unit amended its credit facility extending the terms through October 18, 2023. The agreement is subject to elected commitment and available borrowing basis, which currently stand at $425 million. In addition to extending the term, the amendment increases Unit’s flexibility around the issuance of new senior notes as well as lowering pricing on future borrowings and fees.
At this time, I will turn the call over to Frank for our oil and natural gas segment update.
Good morning. Total production for the quarter was 4.4 million BOE a 3.5% increase over second quarter production. On a per day basis, third quarter production was 47,400 BOE, 2.4% higher than second quarter production and in-line with the expectations.
During the quarter, production from our wells across Western Oklahoma saw some sporadic curtailment due to higher line pressure events that the resulting production loss was not significant.
However, until Cheniere’s Midship pipeline becomes operational in the third quarter of 2019 gas takeaway capacity in Western Oklahoma will continue to be tight and could result in curtailments. Units forecast for 2018 production is 17.1 million to 17.3 million BOE a 7% to 8% increase over 2017.
In our SOHOT area in Grady County, Oklahoma, we completed two more extended lateral wells the Schenk Trust number 2-17HXL and number 3-17 HXL, which were brought online in August with IP30s of about 1500 BOE per day each and oil cut exceeding 75%.
These wells had laterals lengths greater than 7000 feet. Our rates of return on this play exceed 100% and we will continue running one rig for the foreseeable future with the possibility of adding a second rig in the first quarter of 2019.
In Western Oklahoma, Unit's non-operated stack drilling activity our average working interest is about 5%, has exceeded our expectations and results continue to be very good. Offset well results near our operated dry gas stack areas have very impressive flow rates and reserves and we look forward to potentially beginning an operated drilling program once Cheniere’s Midship pipeline is commissioned and realized gas prices improve.
In 2018 Unit will participate in about 65 non-operated wells in the stack play and we expect this activity level to continue in 2019. In the Texas Panhandle, we drilled and fractured stimulated our first two Granite Wash G extended lateral wells in the Buffalo Wallow field. While too early for any definitive conclusions about the ultimate reserve recovery from these wells most are currently exceeding our top curve.
The G interval well that was completed first is currently flowing over nine million cubic feet equivalent per day with 1250 pounds of flowing pressure. Until now our Unit’s drilling program is focused on the C1 interval, which is one of 11 Granite Wash intervals in Buffalo, Wallow field that provide a healthy inventory of horizontal drilling targets.
All of the gas produced from the Buffalo, Wallow field is gathered and processed by superior Unit’s midstream subsidiary. We plan to operate one drilling rig in the Granite Wash for the foreseeable future with the possibility of adding a second rig for all part of 2019.
On the last conference call, I emphasized the historical success in current prospect depth of our exploration program in the Wilcox, so this quarter I'm just going to give a brief update. Production from the exploration delineation wells in the Wing prospect near Gilly Field in Polk County, Texas has been outstanding and we will continue exploring and developing this area in 2019.
In our Brandt prospect near Goliad, Texas, the Engel #1, our discovery well has performed very well from the Orange Sand. However our subsequent wells the Engel #2 and Albrecht #1 were not commercial in the Orange Sand and we will be testing up hole zones in these two wellbores soon.
In the Cherry Creek prospect, which is located approximately seven miles southwest of the Gilly Field, we have received the pipeline permit from the Army Corps of Engineers and we plan to start the Wolf Pasture #1, a delineation well to the Trinity #1 discovery well in the next few months.
Production from the Trinity #1, which appears to have stack play intervals, continues to be encouraging and we remain cautiously optimistic about the potential size of the Cherry Creek Prospect. Our plans are to continue running one rig program for the foreseeable future with the possibility of adding a second rig for all of our portion of 2019.
At this time, I will now turn the call over to John for the drilling company update.
Thank you, Frank and good morning. The third quarter was very positive for the contract drilling segment. Even though our rig utilization fluctuated during the quarter, our revenue increased rig operating costs decreased and we completed several rig equipment upgrades.
The average day rate for the third quarter was $17,599 an increase of $259 per day over the second quarter. The average total daily revenue before intercompany eliminations was $18,115, an increase of $650 over the second quarter.
Our total daily operating cost before intercompany eliminations decreased by $230 for the third quarter as compared to the second. The average per day operating margin for the third quarter before elimination of intercompany profits was $6291, which is an increase of $879 over the previous quarter. Our non-GAAP reconciliation can be found in today's press release.
Our rig utilization increased throughout the quarter from 34 to 35 rigs and currently there are 34 rigs operating. All 11 of our BOSS rigs are operating with seven of them under term contracts. We were awarded two long-term contracts for 12th and 13th BOSS rig, the first of these two rigs will be completed in the first quarter of 2019 and operate in Wyoming. The operator for this rig also extended contracts on two other BOSS rigs, which are currently drilling for them.
The second new build will also be completed in the first quarter of 2019 and operate in a Oklahoma. During the quarter, we completed the major refurbishment and upgraded one of our 2000 hp SCR rigs, which began operating in October in Oklahoma. We also recently completed upgrading another rig with the skidding system and it is also working in Oklahoma.
Of the 23 SCR rigs operating, 12 are working under long-term contracts. We have several additional SCR rigs which are excellent candidates for refurbishment as the market dictates. It is important to note that all the above projects are being financed by operating cash flow and within the CapEx budget. We continue to be optimistic of our opportunity to grow during the next quarter and into next year.
At this time, I will turn the call over to Bob for the Superior Pipeline update.
Thank you, John. During three quarters of 2018 Superior continue to produce positive results. Total throughput volume increased 6% to 416 million cubic feet per day compared to the second quarter of 2018. The increase was mainly due to connecting additional wells to our existing facilities primarily at Pittsburgh Mills and Cashion.
Gas liquid sold volume increased 4% to 700,523 gallons per day up from the second quarter of 2018. This increase was due to higher processed volumes at our Cashion and Hemphill facilities primarily from new well connect and additional offload volumes with third-parties, along with operating ethane recovery at most of our processed facilities.
Operating profit before depreciation and amortization was $14.7 million for the third quarter of 2018 which was slightly higher compared to the second quarter of this year and was 11% increase over the same quarter last year.
We have invested approximately $29 million in capital projects in the first three quarters of 2018. These expenditures before initiating the construction of an additional processing plant in the Cashion area we call the reading plant the pipeline extension projects with the new well at our Pittsburgh Mills system and for an upgrade to the Buffalo Wallow compressor station.
I will now discuss several key midstream assets. In the Appalachian area at our Pittsburgh Mills gathering facility during the third quarter 2018 our average total gathered volume increased to approximately 142.6 million cubic feet per day. This increase was due to connecting seven new infill wells late in the second quarter and receiving its production for the entire third quarter.
Construction of a new pipeline to connect the next scheduled well pad is operational and complete and the related compressor station upgrade will be completed in the fourth quarter. This new well pad will include seven oil lateral wells and will be connected to our - compressor stations located on the southern portion of our gathering system. We anticipate production from this well pad to be early in the first quarter of 2019.
At our Hemphill facility in the Granite Wash area, the average total throughput volume increased to approximately 74.1 million cubic feet per day for the third quarter of 2018 and total production of natural gas liquids increased to approximately 316,100 gallons per day.
Unit petroleum continues to operate a rig in this area, and we anticipate setting additional well in the fourth quarter. Construction of the Buffalo Wallow compressor station expansion project is complete and we are prepared to add additional compression capacity in order to accommodate future volumes.
At our Cashion processing facility located in Central Oklahoma, the average throughput volume for the third quarter of 2018 was approximately 47.5 million cubic feet per day, and natural gas liquids production increased to approximately 233,700 gallons per day. This system is operating at full processing capacity and we have began the process of adding an additional 15 million cubic feet per day processing plant to the system.
This 50 million cubic feet per day plan will be relocated from our Bellmon facility to Cashion. The $20 million plant construction and compressor project is currently underway and will increase the total processing capacity to approximately 105 million cubic feet per day. This project is expected to be completed and operational in the first quarter of 2019.
In summary, we are pleased with our financial results this year and look forward to being in a position to continue to grow the midstream segment. Our financial results for the third quarter 2018 showed positive increases in several areas and operating profit continues to improve. We feel we are well-positioned to complete the fourth quarter with favorable financial results and look forward to continued success in 2019.
At this time, I will now turn the call back over to Larry for his final comments.
Thank you Bob. As you can tell as we have been over all three of our segments we have had a very good quarter. Our oil and natural gas segment experienced solid quarter-over-quarter production growth and we have demonstrated that we can produce highly economic and competitive results.
We are about the expansion of our BOSS rig fleet with the new contracts to build 12th and 13th rig. I believe the rigs performance has enabled us to see the strong acceptance level in a difficult, but improving rig market with superior partnership is focused on identifying organic and strategic growth opportunities and the third quarter results continue to show the benefits of this focus.
Finally, we are focused on keeping our capital expenditures in-line with cash flow and proceeds from noncore asset sales. This focus has been first time where we feel confident that we will continue to do so.
At this time, we would like to open the call up for questions.
Thank you sir. [Operator Instructions] We do have one question in the queue and it comes from Neal Dingmann with SunTrust. Your line is open sir, pleas begin.
Good morning gentlemen. Larry a question for you or John, you continue to have great margins in the contract drilling segment. Could you talk about just sort of what you see now and for the remainder of the year and going into next year I mean do you see that business at least, holding that or maybe even gain more margin like you have been able to do basically throughout this year?
Yes, thank you, we will see some additional improvements. We know some contracts that we have already completed or not completed - but we completed contracts where we will see rate increases later on. Costs will probably go down a little bit because we are not going to have as many rigs in this quarter that will be out of service for a couple of weeks due to refurbishments on. So I think we will see some modest gains, but may not be as substantial as this quarter, but we will continue to gain on that.
Okay. And then maybe one last one if I could for Frank. Frank so obviously with oil exposure there and just - I guess my question is what is the potential for I know we have talked to you and the guys about organically sort of boosting that. Could you just talk about either organically or external what the potential for growth there is throughout the next year or so?
We are close to having the acreage we need to be able to run two rigs in SOHOT. And then we also have another area in Western Oklahoma that we potentially would be overrun an oil rig on. We understand that it’s important for us to try to become more oily from a cash margin basis and it’s just slow when you do it organically. So we are also looking on the acquisition side to evaluate different acquisitions that are oily and we will continue to do that trying to make a one more - a bigger lead in terms of our oil production.
Okay. good. Thanks guys, nice quarter.
[Operator Instructions] Yes, sir I have no further questions in the queue at this time. I actually one just joined the question. this question comes from Colin Boese from Leith Wheeler. Your line is open.
Thanks gentlemen. With the current strength in your balance sheet and the recently amended credit facility, how do you see your credit - your capital structure evolving over the next six months say?
So as you know that we have got the new credit facility that has been extended for five years, we have got the cash on the balance sheet that we talked about. Our senior notes do not mature until 2021, but we have been looking at the market and as I said in my prepared comments, we did provide more flexibility for the ability to issue senior notes rather than the senior subordinated notes that we currently have outstanding. So we will continue to look at market and evaluate when might be the time to look at refinancing those notes.
Okay, perfect, thanks. And then one follow-up question would be, can you please provide some color on your hedging exposure for Q4 2018 and then as you transition in 2019 and your hedging strategy?
So right now we are currently hedged for 2019 about 30% in the first quarter of 2019 about 25% for the remainder of 2019 for our natural gas hedges. And then for our oil hedges for 2019 we are at about 50% for 2019.
Fourth quarter, he is asking about fourth quarter.
For fourth quarter we are still about 79% of our fourth quarter volumes are hedged for oil, natural gas is about 72% of - 30% for natural gas.
All those information will be in the 10-Q also when its filed, which would be later today.
That is great. I think that’s all from me. Thank you.
Sir, we have no further questions in the queue. I will turn the call back over to Mr. Pinkston for any final remarks.
Thank you Mitchell. Well, thank you everybody for joining us this morning. Of course we are all excited about seeing the results of election today and what happens for the rest of the year. But thank you for joining us and we will hopefully be seeing most of you over the next 60 days or so. Thank you.
Thank you ladies and gentlemen, this concludes today's teleconference. Thank you for participating. You may now disconnect.