Crude Oil ( ) Brent Crude ( ) Natural Gas ( ) S&P 500 ( ) PHLX Oil ( )

On February 21, 2012 Unit Corporation (NYSE: UNT) announced financial results for Q4 and year-end 2011. For Q4’11, the company reported net income of $51.7 million, or $1.08 per diluted share, as compared to Q4’10 net income of $43.7 million, or $0.92 per diluted share. Revenues for the fourth quarter were $345.6 million, a 37% increase over fourth quarter revenues in 2010.

For fiscal year 2011, the company reported total revenues of $1.21 billion, the second biggest revenue figure in Unit’s 50-year history. Net income for 2011 was $195.9 million, or $4.08 per diluted share, as compared to 2010 net income of $146.5 million, or $3.09 per diluted share. Revenues for 2011 were 37% better than 2010 revenues. Revenues per segment comprised 40% contract drilling, 43% oil and natural gas and 17% mid-stream during 2011.

Production rates for Q4’11 averaged 35.4 MBOEPD, 21% more than the company averaged during the same period in 2010. Oil production increased 43% to 8.1 MBOPD compared to Q4’10. Natural gas liquids (NGLs) and natural gas increased 52% to 6.7 MBOPD and 7% to 123.9 Bcfpd, respectively, compared to the same period in 2010. Production volumes for Q4’11 comprised 23% oil, 19% NGLs and 58% natural gas. The company’s total production for 2011 was 12.1 MMBOE, an increase of 23% over 2010. The 2011 production level sets a new high watermark for Unit’s E&P operating segment.

OAG360 Comments

Drilling, Midstream Segments Drive Revenue
At first glance, one might assume increases in commodity price realizations due to a 43% and 52% increase in oil and NGL production, respectively, led to UNT’s 37% increase in fourth quarter revenue compared to the same period in 2010. However, during Q4’11 rig utilization increased 16% and per day drilling rates increased 17% from Q4’10, contributing to a 45% increase in drilling revenues during Q4’11. Revenues from the company’s midstream segment increased 60% in Q4’11 from the same period in 2010, driven by increases in liquids volumes sold per day, processing volumes per day and gathering volumes per day of 76%, 84% and 37%, respectively. UNT’s oil and gas segment increased revenues 23% in Q4’11 compared to Q4’10.

E&P Segment Drives Earnings
While UNT’s oil and gas segment didn’t drive its 37% revenue increase, it remains the value driver of the company. The company’s gross margin from its oil and gas segment was 73% during Q4’11, compared to 44% from drilling and 12% from midstream. So while oil and gas might not always drive revenues, it is contributing more to the company’s bottom line.

[sam_ad id=”32″ codes=”true”]

Within the E&P segment, a 55% increase in oil and liquids production YOY led to a 5% increase in realized prices, net of hedging, to $41.7 per BOE from $39.8 per BOE despite Henry Hub spot prices decreasing 9% YOY. UNT’s oil and liquids production cut increased 8% to 39% of total production from 31%.

Financials

UNT is currently $50 million drawn on its $750 million maximum credit facility ($250 million commitment amount) and has $250 million in senior notes outstanding. With a debt-to-market cap of 14% as of Q3’11 (13% currently), the company is under-levered with respect to ECI’s 9-company peer set average of 59% (see chart below). OAG360 notes that UNT’s asset intensity is 56%, meaning the company would spend approximately $0.56 of each dollar from its cash flow from operations to keep production flat. We do expect UNT to grow production, as it’s allocating $385 million of its projected 2012 CAPEX of $801 million to its drill plan (see link below per ECI’s note on UNT’s 2012 CAPEX guidance); however we anticipate the company will continue to drill within cash flow from operations which was $608 million in 2011, a 56% increase over 2010. Additionally, the company has $200 million undrawn from the commitment amount on its credit facility to finance any gaps in its budget.

Unit Valuation


UNT is undervalued relative to a nine-company peer set on a P/CFPS basis according to EnerCom’s 5-Factor Regression Model (see below). Because many of the companies in EnerCom’s E&P database have not yet reported, the analysis is based on year-end 2010 or trailing twelve month results at September 30, 2011.


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.

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. 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.