EnerCom, Inc. traveled with Unit Corporation (ticker: UNT) executives to meet with investors in Dallas to complement similar trips undertaken with the company during 2013 in other energy investment centers, including London. Click here for the latest corporate presentation.
Unit Corporation is a $2.2 billion market cap company comprised of an Exploration and Production Segment, a Contract Drilling Segment and a Midstream Segment. 2013 appears to be a watershed year in terms of investors’ views about Unit Corporation in the context of its current operations and the large Granite Wash acquisition the company made in 2012.
As we normally do in Notes from the Road pieces, questions investors commonly asked the management team appear later in this article. But OAG 360 noted throughout 2013 a shift in investor receptiveness to this particular idea, measured partially in terms of nuances to the questions commonly asked, as well as an apparent increase in interest from energy investors in Unit Corporation’s expanding Granite Wash drilling program and its Wilcox oil play in South Texas. Less time has been spent during recent investor meetings on rig counts, rig fleet utilization and midstream cash flows, as the bulk of investor interest seems to have shifted to the expanding footprint of Unit Corporation’s E&P operations. This may be part of a larger trend observed by EnerCom in marketing energy companies, namely that there seems to be a palpable interest in gaining exposure to conventional liquids plays operated by niche players like Unit Corporation, who can demonstrate compelling operational metrics competitive with many of the more well-known plays such as the Eagle Ford and Bakken. We believe this is indicative of a slow-but-steady shift in the market, not necessarily away from resource plays, but toward those companies and underexploited basins which are delivering results for companies like Unit as a way of providing some level of diversity within a core oil and gas investment strategy.
One common observation during recent investor meetings is that portfolio managers and analysts seem to now recognize that the scale of Unit’s E&P portfolio has reached some level of critical mass in terms of drilling inventory, whereas in the past this was a point of contention. It was as if the company was failing because they purposefully chose not to be a land bank, but rather preferred to build the company that would benefit investors over a longer time horizon. With nearly 800 locations in the Granite Wash and a sizeable inventory of multi-zone prospects in its Wilcox Play in South Texas, investors now understand that Unit’s E&P segment represents a potentially attractive addition to a portfolio, with the additional prospective upside of Kansas Mississippian Lime and the steady performance of its Marmaton oil play of Western Oklahoma. We believe this may reflect the slight shift we alluded to earlier, namely that in the short term the market likely still prefers repeatability and inventory over rates of return, but for the long-only energy investor, Unit’s strategy of drilling to achieve a minimum 15% rate of return per well on a manageable leasehold inventory acquired at a reasonable per-acre rate, which either already is or can relatively quickly be held by production, seems to be particularly appealing based upon investor sentiment during recent meetings. Our observation is that Unit only buys acreage to turn it to production, and it would seem the market is beginning to warm to this effective strategy.
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Common questions included:
- How would Unit accelerate production and reserves growth and how would corporate capital be allocated between the Granite Wash, Wilcox and Marmaton?
- Are there other Gilly Fields that might represent similar success to the fields Unit has already discovered in the Wilcox play?
- How many different sands are you encountering in the Granite Wash?
- How many potential zones are there between the upper and lower Wilcox?
- What was your 2012 post-mortem on return of capital employed?
- How does the new BOSS rig design compare to other advanced rigs being deployed by Unit’s drilling competition?
- Under what circumstances would management consider executing a change of strategy regarding the midstream segment?
- What does management consider to be suitable conditions under which the midstream segment might be able to operate as its own stand-alone entity outside the Unit Corporation corporate umbrella?
- How are you going to move toward more fee-based midstream contracts?
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. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. As of the report date, an EnerCom employee had a financial interest in Unit Corporation.