Unit Corp. (ticker: UNT) announced signing a Purchase and Sale Agreement to purchase 84,000 net acres and production located in the Anadarko Basin from Noble Energy, Inc. (ticker: NBL) for $617.1 million. Unit will use availability under its existing credit facilities and a new $400MM senior subordinated debt offering to complete this all-cash transaction. The western Oklahoma and Texas Panhandle properties include 84,000 net acres with 900 producing wells with associated production and reserves of 60 MMcfe/d and 264 Bcfe, respectively. The production stream breaks out to 65% natural gas, 27% NGLs, and 8% oil.
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OAG360 Comments:
Based on the purchase price, the transaction is valued at approximately $10,283 per flowing Mcfe/d, or $2.34 per proved Mcfe. According to EnerCom’s U.S. E&P database of 89 public companies, as of July 6, 2012, Unit was trading at an enterprise value to trailing twelve months production and enterprise value to 2011 proved reserves of $10,302 per Mcfe/d and $3.07 per Mcfe, respectively.
By comparison, Apache Corp. (ticker: APA) purchased Cordillera Energy Partners III LLC, an Anadarko Basin producer, on January 23, 2012, for $2.85 billion, or $158,333 per flowing BOE of production and approximately $40/BOE of proved reserves. These assets are highly correlated, position-wise, to Unit’s acquisition.
On a same, yet different, base of comparison, LINN Energy (ticker: LINE) announced back on February 27, 2012, it acquired $1.2 billion of Hugoton Basin, Kansas assets. The Hugoton Basin is nearly due north of the Anadarko Basin. LINN purchased 600,000 contiguous net acres and production from BP (ticker: BP). The acquisition added net production of 18.3 MBOE/d (63% natural gas, 37% NGLs) and more than 730 Bcfe (81% PDP) of proved reserves. LINN’s purchase was for $65,574 per flowing BOE of production and $9.86 per BOE of proved reserves. The acquired properties are 81% PDP with a 7% decline rate. LINN disclosed the properties had more than 800 identified drilling locations.
OAG360 notes that the acreage footprint UNT acquired fits Unit Corp.’s current reserve profile, and complements its successful operating areas in the Granite Wash and Marmaton plays. At year-2011, UNT had a total of 696.2 Bcfe of proved reserves with a breakdown of 63.5% natural gas, 19% NGLs, and 17.5% oil, and 19 proved undeveloped. Today’s purchase represents almost 40% of UNT’s year-end 2011 reserves. Pro forma, using year-end 2011 reserves, the acquisition pushes UNT’s reserves to approximately 1 Tcfe.
During Q1’12, UNT produced 19.7 Bcfe, comprised of 58% natural gas, 20% NGLs, and 22% oil. This represents oil production growth of 29% and NGL production growth of 37% year over year. During the company’s conference call discussing the acquisition, management said its total production levels would increase more than 25% from current production on the acquired properties.
Perhaps the most significant aspect of the acquisition is that it again demonstrates the prudent operational and management approach Unit consistently demonstrates. Rather than “chasing the trends” by trying to add acreage in areas outside their operational expertise, Unit elected to focus on adding production and reserves in areas it knows best.
Given that Unit maintains operatorship in the Granite Wash, Marmaton, and Cleveland plays, the company is in a position to accelerate production in the new acreage, just as it has done with its existing western Oklahoma assets. OAG360 reminds readers that for many years, Unit Corporate established a minimum annual reserve replacement target of 150%, and this acquisition should ensure that the company has the inventory to continue meeting or beating this target for 2012 and beyond.
Complementing Existing Operations
OAG360 notes Unit has been one of the industry leaders in the drilling boom which has occurred in western Oklahoma over the past 18 months. With the purchase, UNT adds producing properties and upside drilling locations accretive to its existing production base. Further, the company will be able to leverage its horizontal drilling expertise gained over the last three years to develop the new drilling locations. UNT’s acquisition will add approximately 25,000 net acres to the company’s core area targeting the Granite Wash in the Texas Panhandle – nearly doubling its current position. Further, this purchase adds an additional 617 potential horizontal drilling locations with 95% of the acreage held by production. UNT plans to accelerate drilling activity in the acquired properties over the next 12 to 18 months using seven Unit Drilling rigs from its contract drilling segment, operate the acquired gathering systems and, as appropriate, replace existing third-party processing contracts beginning in 2015.
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Funding the Acquisition:
Unit intends to finance the acquisition through long-term debt, as well as the potential sale of $200 to $300 million worth of assets in the near-term. The deal is scheduled to close in September 2012, with an effective date of April 1, 2012. Regarding the long-term debt, on July 12, 2012, Unit announced it priced a private offering of $400 million aggregate principal amount of senior subordinated notes due 2021, which will bear interest at a rate of 6.625 percent per year. The Notes are being sold at 98.75 percent of par plus accrued interest from May 15, 2012. The size of the Offering was increased to $400 million from the previously announced $350 million.
Valuation:
We looked at the company’s valuation based on two methodologies including proved reserves and production. We note that as of market close on July 13, 2012, shares of UNT were trading at $35.86 per share. Using these two methodologies, we are estimating Unit’s share value to range between $47.54 and $63.61 per share.
Net Asset Value: Proved Reserves
As of December 31, 2011, UNT had proved reserves of 116 MMBOE, 81% of which are proved developed and 36% of which are oil and NGLs. For our valuation, we adjusted the year-end proved reserves to include the 44.0 MMBOE that the company acquired in July 2012, and increased outstanding debt by approximately $617MM to account for the transaction’s financing. The average enterprise value to proved reserves for an operational focused peer group was $11.44 per BOE. Assigning a 90% probability of success to the proved undeveloped and the newly acquired asset value, we estimate UNT shares to be worth $47.48 per share. Our model assumes Unit’s midstream segment, Superior Pipeline, is valued at $513.3 million based on a 12.6x multiple on the estimated 2012 EBITDA. We assigned a value of $981.9MM for Unit Drilling’s 127-rig fleet based on an indexed adjusted value from the April 15, 2011, acquisition of Bronco Drilling by Chesapeake Energy (ticker: CHK) that was completed for $14.3MM per rig. From April 15, 2011 through July 13, 2012, the 10 companies in EnerCom’s land drilling database lost 46% in common equity value. We applied this discount to the $14.3MM per rig to derive a current per rig valuation of $7.7MM. We note we have heard of new build rigs contracts currently being constructed for approximately $23MM to $26MM with a three-year commitment from the operator.
Net Asset Value: Production
For the trailing twelve months ending June 30, 2012, UNT produced an average of 35,531 BOEPD. For our valuation, we increased the production rate to include the 10,000 BOEPD that the company acquired in July 2012, and increased the outstanding debt by $617MM to account for the deal financing. The average enterprise value to flowing production multiple for the same per group used in the proved reserves valuation was $55,694 per BOEPD. Assigning this multiple to UNT’s pro forma production rate and using the same midstream and drilling valuation assumptions as we did in the proved reserves valuation, we estimate UNT shares to be worth $63.61 per share.
Composite Valuation
Assigning an equal weighting to the valuation methodologies, we estimate shares of UNT to be valued at $55.57 per share.
Well Economics
UNT is targeting the Granite Wash in the Texas Panhandle and had first sales on 16 horizontal wells with an initial production stream that was 50% oil and NGLs. UNT’s average Estimated Ultimate Recovery (EUR)for a Granite Wash well is 4.6 Bcfe and an average cost per well of $5.5 million. Using EnerCom’s Granite Wash decline curve with stated UNT data points, EnerCom estimates an internal rate of return (IRR) of 40% in the Granite Wash using $85.00 per barrel of oil and $2.50 per Mcf of gas. Giving no value to the natural gas, a Granite Wash well can generate a 10% IRR, considered breakeven, with a blended rate (crude oil and NGLs) per barrel of $36.96.
In the Marmaton play in Beaver County, Oklahoma, UNT estimates the average EUR on their portion of the Marmaton at 130 MBOE with an average well cost of $2.7 million per well. Based on the initial production data in Unit’s current presentation, 92% of the production volumes were associated with oil or NGLs. Using EnerCom’s Marmaton decline curve with stated UNT data points, EnerCom estimates an IRR of 27% in the Marmaton using $85.00 per barrel oil and $2.50 per Mcf gas. Giving zero value to the natural gas and only delivering the liquids, we estimate Unit generating a 10% IRR using a blended rate of $48.38 per barrel.
