Unit Corporation (ticker: UNT) is a unique company in the oil and natural gas industry. The company is a diversified energy company through its subsidiaries Unit Petroleum Co, Unit Drilling Co and Superior Pipeline Co. As such, there are a number of ways to look at how to value UNT. In this write-up, OAG360 will be looking at production and proved reserves.
First – A Look Back at 2012
UNT provided a glimpse into portions of their year-end results in their most recent press release on February 7, 2013. Unit reported 150 MMBOE of reserves, an increase of 29% over the 2011 proved reserves of 116 MMBOE. This increase also represents a 337% production replacement percentage. 2012 reserves were 15% oil, 23% natural gas liquids (NGLs), and 62% natural gas.
Unit reported production during the fourth quarter 2012 was 912,000 barrels of oil, 782,000 barrels of NGLs, and 14.5 Bcf of natural gas, or 4.1 MMBoe, an increase of 18% and 26% over the third quarter 2012 and the fourth quarter 2011, respectively. Production for 2012 was 14.2 MMBoe, an increase of 18% from 12.1 MMBoe produced in 2011. 2012 production included a 28% increase in oil and NGLs.
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At the end of Q3’12 Unit Drilling, the company’s contract drilling segment, had 127 drilling rigs in its fleet and Superior Pipeline Co., Unit’s pipeline segment, had over 1,100 miles of gas gathering pipeline to go along with 11 processing plants and four treatment plants.
Here is the 2012 year-end reserves and production data press release.
In July 2012, Unit acquired from Noble Energy (ticker: NBL) approximately 84,000 net acres primarily in the Granite Wash, Cleveland, and Marmaton plays in western Oklahoma and the Texas Panhandle. The assets included estimated proved reserves of 44 MMBOE, a 38% increase to Unit Petroleum’s proved reserves at December 31, 2011. Here is the acquisition news release.
E&P Will Set New Marks in 2012 into 2013
Unit produced a company-record 4.1 MMBOE (44.6 MBOEPD) in Q4’12. This was the 12th consecutive quarter for Unit to post higher production totals. For 2013, Unit’s preliminary annual production guidance is 16.0 MMBoe to 16.5 MMBoe, an increase of 13% to 16% over 2012. UNT’s latest corporate presentation can be found here.
Unit’s E&P operations are focused on acquiring and developing acreage positions which offer immediate production and cash flow, with a large percentage of the acreage being HBP. This thinking gives UNT the time to evaluate and identify under-exploited or explored zones and develop a long-term, continuous drilling program. This strategy dovetails into a hallmark of Unit’s E&P business segment – its ability to replace 150% or more of its production each year. The company achieved this mark every year (excluding 2010 when the rules for measuring the reservoir changed) since 1984. The company’s E&P group generates a high degree of cash flow. For the trailing twelve months ended Q3’12, for every dollar of investment Unit’s E&P group generates $2.11 of cash flow.
Below OAG360 has highlighted a few key operational highlights.
Crude Oil & NGLs Percentage
Currently, crude oil and NGLs comprise 44% of UNT’s total daily production. We expect UNT’s recent acquisition of 84,000 net acres ($617.1MM) from Noble Energy will support and shift that figure further during the later-half of 2013. Approximately 97% of the 600 well locations purchased from Noble will be focused on the liquids-rich Granite Wash.
UNT’s asset intensity is 44%, compared to EnerCom’s E&P database average of 90%. With 54% of cash flow left after maintaining current operations, Unit can invest more capital than its peers back into its current operations. The recent acreage expansion in the Granite Wash is a good example of exercising the benefits of having low asset intense operations.
TTM OPEX & G&A ($/BOE)
Costs are extremely important in the oil and natural gas industry. Unit’s OPEX & G&A cost of $13.03 per BOE compares well to EnerCom’s E&P database average of $24.36 per BOE. The integration of Unit’s business segments – drilling, E&P and gathering – are all contributors to cost containment and EBITDA generation. For the TTM, Unit’s EBITDA/BOE was $49.02 versus an average of $30.48 for the companies in EnerCom’s database.
Debt can, and usually does, become a burden for many companies in the oil and natural gas industry. Despite its three operating segments that require serious capital allocations, UNT manages to keep its debt in line. As of February 1, 2013, UNT had a Debt/Market Cap value of 27% compared to the E&P Database average of 103%.
UNT’s EBITDA margin for their E&P division is 74% for the nine months ending Q3’12. As Unit expands its forces on the E&P segment though the recent NBL acquisition, the total corporate EBITDA margin should increase.
Though Unit Drilling Company (UDC) is a lower margin business segment than the E&P business the segment compares favorably to drilling companies. For the nine months ending Q3’12 Unit Drilling Company generated an EBITDA margin of 44% outperforming the peer average. (EBITDA Margin as of 9/30/12. Peer group includes: ESI CN, HP, PDC, PD CN, PKD, PTEN, TDG CN, UDRL, and XDC).
The company announced its CAPEX budget for 2013 of $789MM for all three business units. Looking at each segment, Unit Petroleum receives $586MM, Unit Drilling receives $98MM and Superior Pipeline receives $105MM. Unit is set to release its fourth quarter and year-end 2012 earnings on Tuesday February 19th.
Valuation: A Look at Unit Corporation
Below, we look at UNT’s valuation based on two methodologies including reserves and production. OAG360 notes that our valuation model can also use acreage as a methodology for companies that do not have production as well as EnerCom’s Five Factor Model (5FM) when applicable. As of market close February 1, 2013, shares of UNT were trading at $48.46. Using our two methodologies outlined below, Unit’s shares could be valued between $58.70 and $89.33 per share.
Valuation One: Net Asset Value: Proved Reserves
As of December 31, 2012, UNT had proved reserves of 150 MMBOE, 21% of which are proved undeveloped, and 14% of which are oil. The average enterprise value to proved reserves from a group of Unit’s peers was $16.79 per BOE. A probability of success is assigned to the proved value, and assigning a $1,684.50 per acre value to the 8,694 net undeveloped acres in the Bakken, we estimate UNT shares to be worth $58.70. We did not give value to the undeveloped Marcellus acreage due to the non-cash ceiling test write down described in the February 7th press release. Our model estimates a midstream segment value of $335,380,000 and a drilling segment value of $878,840,000 to account for the different business units that make up Unit Corp.
Valuation Two: Net Asset Value: Production
For the year ending December 31, 2012, UNT produced an average of 38,798 BOEPD. The average enterprise value to flowing production multiple for the same peer group used in the proved reserves valuation was $96,744 per BOEPD. Assigning this multiple to UNT’s production rate along with the same undeveloped acreage, midstream and drilling valuations used in the proved reserves valuation, OAG360 estimates UNT shares to be worth $89.33 per share.
Assigning a weighted average of 50% to both reserves and production, OAG360 estimates shares of UNT to could be valued at $74.02 per share. We reiterate that as of market close February 1, 2012 shares of UNT were trading at $48.46.
Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication. As of the report date, an employee of EnerCom has a long-only equity position in Unit Corp.