Fitch Ratings has affirmed all ratings for Unit Corporation (Unit; NYSE:
UNT) with a Stable Rating Outlook.
Approximately $812 million of debt is affected by today's rating action.
A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Unit's ratings reflect the company's increasing exposure to liquids,
strong reserve replacement history, modestly diversified business mix
(with about 30% of EBITDA coming from non- exploration & production
[E&P] segments), rig fleet rationalization and repositioning efforts,
midstream footprint with an increasingly fee-based contract mix, and
manageable leverage levels. These considerations are offset by the
relatively small size of its proved reserve base and production profile,
continued risk of obsolescence within its onshore rig fleet, and impact
of significantly weaker oil prices on cash flows.
The E&P segment (about 70% of EBITDA) reported net proved reserves (1p)
of 179 million barrels of oil equivalent (MMboe; 76% developed) for the
year-ended 2014 and production of 50.1 thousand boe per day (Mboepd;
46.3% liquids mix), a 9% year-over-year increase, as of Dec. 31, 2014.
This results in a reserve life of nearly 10 years. One-year organic
reserve replacement was strong at 210%, relative to a three-year average
of 174% and management's target of 150%, with an associated
Fitch-calculated finding and development (F&D) cost of just $17.81/boe.
The company's operational metrics highlight its shift to unconventional
drilling, benefits of shale-linked efficiency gains, and improving
The contract drilling segment (nearly 25% of EBITDA) reported a modest
reduction in revenue per day to $17,318, excluding intercompany revenue
(roughly 10%-15% of drilling activities), but the Fitch-calculated rig
day margin, excluding intercompany operations, improved by 4% to $7,328
mainly due to the placement of higher margin, new BOSS rigs into service
during the second half of 2014. Utilization rates in 2014 increased to
63% benefiting from the increase in U.S. onshore activity, as well as
the sale of four larger, idle rigs in the first quarter and removal of
31 older, non-core rigs from service in late December. The rapid decline
in the average number of active Unit rigs from 80.9 during the fourth
quarter of 2014 to 37 rigs as of March 24, 2015 illustrates the rapid
industry-wide release of U.S. onshore rigs. Fitch believes that Unit's
asset quality and mix issues may compound the effects of the downcycle
with some offset provided by the four working and an additional four to
be delivered BOSS rigs.
Credit metrics remained strong for the year ended 2014. The
Fitch-calculated debt/EBITDA, debt/proved developed reserves (PD), and
debt/flowing barrel were approximately 1.1x, $5.95/boe, and $16,200,
respectively. The upstream credit metrics allocate all outstanding debt
to the E&P segment. Fitch expects these metrics to erode over the next
few years as the impact of lower oil prices takes hold. Fitch's base
case, assuming a West Texas Intermediate (WTI) price of $50, forecasts
debt/EBITDA of less than 2.1x in 2015. However, these remain consistent
with or better than similarly rated North American (N.A.) E&P peers.
SHIFTING FROM GROWTH TO RETURNS IN WEAK PRICE ENVIRONMENT
Unit, consistent with other N.A. independent E&P peers, has shifted its
focus from production growth to improving efficiencies and maintaining
activity at its most promising, higher return acreage in its Wilcox and
Southern Oklahoma Hoxbar Oil Trend (SOHOT) plays. The E&P capital
program has been scaled back 60% year-over-year with management
expecting the number of wells participated in to reduce to 70 (gross)
using two to four rigs from 186 (gross; 121 net) using an average of
12.2 rigs in 2014. Production is anticipated to grow 2%-4% with the
liquids mix continuing to improve in 2015 benefiting from completion
DOWNCYCLE HEIGHTENS RIG OBSOLESCENCE RISK
The company has been actively repositioning its drilling fleet through
asset divestitures, retrofits/upgrades, and new-builds to better align
with E&P demand for efficient, horizontal/directional drilling rigs in
the 1,500hp range. Management seems to have recognized that the
downcycle has heighten obsolescence risk for certain rigs and
proactively removed 31 older, non-core rigs from service with most
anticipated to be sold for parts. The new BOSS drilling rig is designed
for efficient horizontal/directional drilling and has had favorable
operating results, but the downcycle is likely to be a newbuild
headwind. Unit has major components ordered for three additional BOSS
rigs but plans to delay construction, as well as associated capital
spending, until the market improves and contracts are secured.
LEVERAGE LEVEL HELPS MODERATE CREDIT RISKS
Management's current leverage levels, in conjunction with its sizing of
the capital budget to be substantially in line with anticipated cash
flows, provide sufficient financial flexibility to manage near-term
credit risks. Fitch's base case, assuming a WTI price of $50, projects
that Unit will be about $90 million free cash flow (FCF) negative in
2015 with the shortfall funded with credit facility borrowings. The
Fitch base case results in debt/EBITDA under 2.1x in 2015. Debt/PD and
debt per flowing barrel metrics are forecast to increase to
approximately $6.45/boe, subject to any revisions, and $17,450,
respectively. Fitch's base case WTI price forecast assumption of $60 in
2016 and $75 long-term suggests that the company may selectively
increase drilling activity in 2016. The Fitch base case considers that
the company will outspend operating cash flow generally consistent with
historical levels in 2016 given supportive pricing signals resulting in
a debt/EBITDA of 1.8x.
Unit utilizes a combination of swap and collared hedges to manage cash
flows and support development funding. As of Dec. 31, 2014, the
company's 2015 oil and gas hedges accounted for less than 10% and 45%,
respectively, of its 2014 production.
ADEQUATE LIQUIDITY POSITION
UNT has historically maintained a nominal cash balance and had
approximately $1 million of cash-on-hand as of Dec. 31, 2014. The
company's primary source of liquidity is its $500 million senior
unsecured credit facility ($334 million available capacity at year-end
2014) due Sept. 2016. The capacity of the revolver may be increased or
decreased subject to the company's borrowing base ($900 million as of
Dec. 31, 2014). The borrowing base is re-determined semi-annually based
on the present value of oil and gas reserves and midstream cash flows
with the next redetermination date scheduled for April 1st. Fitch
believes that the difference ($400 million; about 45%) in the current
borrowing base and elected commitment under the credit facility helps
mitigate near-term redetermination-related liquidity concerns.
Financial covenants, as defined in the credit facility agreement,
require Unit to maintain a current ratio above 1x and debt/EBITDA below
4x. Other covenants across UNT's debt instruments consist of dividend
restrictions (less than 30% of the preceding year's consolidated net
income), additional debt (springing covenant of EBITDA/interest above
2.25x, subject to an investment-grade rating of the notes by any one
rating agency) and lien limitations, transaction restrictions, and
change in control provisions. As of Dec. 31, 2014, Unit was in
compliance with all of its covenants.
LIMITED OTHER LIABILITIES
Unit does not have a defined benefit pension plan. Asset retirement
obligations (AROs) were $101 million, as of Dec. 31, 2014, which is
lower than the $134 million reported at year-end 2013. This is mainly
due to a favorable revision of cost estimates associated with plugging
wells based on actual costs over the preceding year. The company does
not have any material additional liabilities.
Fitch's key assumptions within the rating case for the issuer include:
--WTI oil that trends up from $50/barrel in 2015 to $60/barrel in 2016
and a long-term price of $75/barrel;
--Henry Hub gas that trends up from $3.00/mcf in 2015 to $3.25/mcf in
2016 and a long-term price of $4.50/mcf;
--Production growth of about 3% in 2015 with increased, market
price-driven activity providing mid-single digit growth in 2016 with a
more robust growth profile thereafter;
--Liquids mix improves from 46% in 2014 to 47% in 2015 followed by
incremental improvements thereafter;
--Drilling segment EBITDA is forecast to decline by over 50% in 2015 due
to lower U.S. onshore activity with some BOSS rig newbuild offset;
--Midstream EBITDA shows more resiliency through downturn, but
volumetric and commodity pricing exposure pressures margins;
--Capital spending is forecast to be $477 million in 2015, consistent
with guidance, followed by an operating cash flow outspend generally
consistent with historical levels given supportive pricing signals;
--No asset divestiture proceeds are forecast given the challenged
onshore drilling conditions - the focus of Unit's 'non-core' assets.
Positive: Future developments that may, individually or collectively,
lead to a positive rating action include:
--Increased size, scale, and diversification of Unit's E&P operations
with some combination of the following metrics;
--Mid-cycle debt/EBITDA below 1.25x on a sustained basis;
--Mid-cycle debt/PD of $6.00-$6.50/boe and/or debt/flowing barrel below
$15,000 on a sustained basis;
--Favorable oil & gas services outlook and heightened rig utilization
and day rates signaling an improvement in asset quality and mix.
Future positive rating actions are unlikely without a material increase
to the company's reserve base and production profile, in conjunction
with strong leverage metrics. Fitch does not anticipate E&P operations
to grow sufficiently over the near term to help facilitate a positive
rating action given the current weak pricing environment.
Negative: Future developments that may, individually or collectively,
lead to a negative rating action include:
--Mid-cycle debt/EBITDA above 1.75x-2.0x on a sustained basis;
--Mid-cycle debt/PD of $7.00-$7.50/boe and/or debt/flowing barrel
approaching $20,000 on a sustained basis;
--A persistently weak oil & gas pricing environment without a
corresponding reduction to capex;
--Prolonged period of weak rig dayrates and/or depressed activity levels
that suggest a unfavorable oil & gas services outlook and asset quality
--Acquisitions and/or shareholder-friendly actions inconsistent with the
expected cash flow and leverage profile.
Future negative rating actions remain a possibility and will be closely
linked to the company's ability to retain financial flexibility through
the downcycle. Fitch understands, however, that the company's midstream
assets, if sold or dropped down into an MLP, could generate considerable
liquidity. These types of asset sales due to their valuation resiliency
and marketability have been executed by peers to improve financial
flexibility. While a midstream asset sale is not contemplated in the
rating, Fitch recognizes that embedded liquidity option value is present.
Fitch has affirmed the following ratings and assigned Recovery Ratings
--Long-term Issuer Default Rating at 'BB';
--Bank revolver at 'BB/RR4';
--Senior subordinated notes at 'BB-/RR5'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology Including Short-Term Ratings and Parent
and Subsidiary Linkage' (May 28, 2014);
--'Fitch Oil and Gas Assumptions Summary Feb. 2015' (Feb. 11, 2015);
--'Full Cycle Costs Drop for North American E&Ps (Efficiency Gains Show
Up in 2014 Numbers)' (March 24, 2015);
--'U.S. Rig Counts Under Pressure (Downcycle to Fewer than 1,000 Rigs
Followed by Longer, Slower Recovery)' (Feb. 5, 2015);
--'Shale and North American Energy (European Investor Tour)' (Oct. 23,
--'North American Energy Outlook and LNG' (July 16, 2014);
--'North American Exploration and Production Handbook' (July 16, 2014);
--'Global Impact of US Shale Oil - Rising Production Tempers World
Prices' (Feb. 10, 2014);
--'Cash Flow Trends in the U.S. Energy Sector-Shareholder Activism
Having an Impact' (Feb. 4, 2014);
--'Scenario Analysis: Lifting the U.S. Crude Export Ban' (Jan. 27, 2014).
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
Copyright Business Wire 2015