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Efficiencies Paving the Way in the Midcontinent

Advancements in Unit Corporation’s (ticker: UNT) drilling program is leading to increased production volumes and reduced expenditures, the company said in a press release on October 6, 2015.

Production guidance for 2015 was revised upward to a range of 6% to 8%, exceeding its previous range of 2% to 4%. Based off of 2014’s average of 50.1 MBOEPD, 2015 volumes are forecasted to reach anywhere from 53.1 to 54.1 MBOEPD. The production growth is consistent with UNT’s story, as the company averaged a compound annual growth rate of 17% from 2010 to 2014. In the same time frame, its proved reserves increased on a compounded annual rate of 14%.

Management attributed the increase to results from its SOHOT (Southern Oklahoma Hoxbar Oil Trend), Wilcox and Granite Wash assets.

“The better-than-expected well performance from three different plays really stands out,” said Brian Velie, Equity Analyst for Capital One Securities, in an interview with Oil & Gas 360®. “The percentage increase is a big jump, especially for being this late in the year as capex spending was guided lower.”

Borrowing Base Redetermination is In

Source: UNT October 2015 Presentation

Source: UNT October 2015 Presentation

Unit Corporation announced its borrowing base has been redetermined at $550 million. At face value, the drop appears to be large, considering its previous base was $725 million. However, the company maintained an elected commitment of $500 million, meaning the redetermination had essentially no effect on planned spending.

“I wouldn’t say anybody was overly concerned with Unit’s leverage, but it’s certainly reassuring that their committed level was not impacted,” said Velie.

Capital expenditures for the year are also expected to be $30 million less than expected due to efficiency gains in its oil and gas segment. Prior to the announcement, UNT’s 2015 drilling and completion capex spending was estimated at $309 million, meaning the latest adjustment carves about 10% off its initial expectations. The Tulsa-based company originally set aside approximately $100 million and $69 million for its contract drilling and midstream segments, respectively. With the savings realized from the upstream segment, its 2015 expenditures total roughly $448 million.

The balance on the credit facility decreased by $18.8MM since 2Q to close out the third quarter with $261.7MM outstanding.

SOHOT Continues to Impress

The SOHOT has evolved from an emerging play in early 2014 to one of Unit’s top two assets in today’s environment. The play, in addition to the Wilcox, were each allotted about 36% of the company’s 2015 upstream budget. Unit management believes SOHOT holds as many as six stacked pay sands, with the shallower Medrano formation offering estimated ultimate recovery of 4.9 Bcfe at costs of $4.4 million. The Medrano is one of UNT’s operational focal points in 2015, but the deeper sands like the Marchand hold greater liquids potential.

“The only negative thing you could say about the SOHOT is that there’s not enough of it,” said Velie, adding that the Marchand formation provides Unit with the upside of oil exposure. In the company’s latest presentation, estimated ultimate recovery of Marchand wells were 480 MBOE at costs of $5.2 million (50% working interest), providing rates of return greater than 100%.

Anywhere from 95 to 120 core locations remain in the SOHOT, with an estimated 35 to 50 located in the Marchand formation. The Gilly Field in the Wilcox formation, on the other hand, has room to run. UNT estimates the formation, located in Southeast Texas, has gross resource potential of 440 Bcfe and only 13% has been produced to date.

Source: UNT October 2015 Presentation

Source: UNT October 2015 Presentation


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