Unit Corporation (ticker: UNT) is a diversified energy company engaged through its subsidiaries in the exploration for and production of oil and natural gas, the acquisition of producing oil and natural gas properties, the contract drilling of onshore oil and natural gas wells, and the gathering and processing of natural gas. The company is celebrating its 50th Anniversary in 2013.
On December 4, 2013, Unit hosted an analyst day in New York City and discussed its 2014 plan to drill125 net wells based upon an expected capital expenditures program of $600 million to $725 million in its upstream segment. Overall, the company sees upside potential in its core plays consisting of 1,600 to 2,100 gross wells with 564 MMBOE to 726 MMBOE of reserves, with 47% liquids. Working interest in these areas is approximately 73% and management mentioned there is no active effort to pursue a joint venture within its core plays next year. The Board of Directors will meet later in December to formally determine the allocation of its 2014 corporate budget, which is estimated to be between $800 million and $900 million.
2014 Plans Build upon 2013 Achievements
Unit’s 2013 accomplishments include a 22% increase in year-to-date production compared to 2012 despite lowering its capital expenditures budget during 2013. The company is preparing to deploy its BOSS rig in 2014 and experienced cash flow growth of 34% in its midstream segment. UNT plans on operating 12 rigs in 2014 and expects its production guidance for 2014 to reach 15% to 18%, largely due to organic growth. UNT’s previous growth expectation was 13% to 16%, but Larry Pinkston, President and CEO of Unit Corp., said, “We have never had an inventory like this.”
Historically Unit Corporation had limited running room in its upstream division but the company diligently worked to high-grade and add to its drilling prospect inventory. Following the $617 million Noble Acquisition in 2012 and the focus next year on expanding operations in some of its existing core areas, Unit management believes the company has, for the first time in its history, demonstrated the visible growth inventory of drilling locations for the next few years. Unit’s familiarity with the areas is a major asset, says Brad Guidry, Executive Vice President of Exploration and Production. “The places we were most efficient in were the places we had the most history in.”
Operations Overview
The Buffalo Wallow was discussed at length and management believes its resource potential of 2.1 to 2.7 Tcfe is a conservative estimate. All resource potential wells are mapped and currently 80 wells are producing, so the area is believed to be adequately de-risked. Results from testing are expected in late Q1’14 or early Q2’14.
UNT expects to operate two rigs in the Marmaton next year. UNT is utilizing the extended lateral drilling technique on its infill wells which should reduce costs by 25% as the company produces higher volumes. The company expects drilling about one to three wells per section, but the natural fracturing in the Marmaton produces varying results between the Upper and Lower Marmaton levels.
UNT described an emerging Anadarko Basin play in its portfolio during the analyst day within an area where the company is actively adding to its acreage position. The company currently holds 15,000 acres and will run two rigs with 12 net wells in 2014. Five to seven zones are expected to be prospective and three have been drilled with success to date. The majority of the play is held by production.
UNT expects to increase production in its Wilcox play (the Gilly Field) by as much as 49% in 2014. UNT believes nine pay zones are in the region and a total of 8 to 10 wells are scheduled to be drilled in Q4’13 in order to expedite production growth. Initial rates are between $5 million to $10 million a day equivalent, with EURs in the range of 15 Bcfe to 20 Bcfe.
Other Assets Compliment UNT’s Reserve Growth
UNT wholly-owned pipeline company, Superior Pipeline Co., LLC (SPC), expects to exit 2013 with a company-record segment operating cash flow of $49 million. Its current operations consist of 39 gathering systems and three treatment plants for a total capacity of 345 MMcf/d. SPC may consider expanding its services to the Permian in 2015 or 2016. Significantly, approximately 68% of SPC’s business in 2013 was through third parties, contrary to a commonly-held investor view that Superior is mainly processing hydrocarbons produced by Unit’s upstream segment.
UNT also continues to monetize its non-core assets and re-invest into its core rigs. Approximately $90 million of non-core assets were sold by Q3’13 and an additional $100 million is anticipated to be sold in 2014. The company continues to be active in the marketing of its under-utilized rigs and has sold 19 rigs since 2009. An additional 20 rigs are expected to be sold in the next few years, with the majority perhaps destined for Mexico. A total of $90 million was invested in upgrading 48 rigs in 2009 and these upgrade costs were mainly absorbed within the contract terms negotiated for the upgraded rigs.
UNT management was excited to describe the company’s entry into the high-spec rig market through the development of the BOSS rig. The BOSS rig design excels in horizontal drilling and will be the prototype for the future expansion of Unit’s fleet, representing Unit’s first foray into the advanc
ed purpose-built rig market. In its Q3’13 earnings release call, UNT disclosed that it will deploy the first BOSS rig to the Granite Wash to drill Unit wells, which will allow the company to demonstrate the proof-of-concept before building and deploying BOSS rigs for third party customers. Two additional rigs are expected to be placed into service in March and August of 2014. The efficiency of each BOSS rig efficiency projects to save operators up to $693,000 per year. UNT can build up to six such rigs per year, dependent on industry interest.
Research Commentary
Oil & Gas 360® compiled a few paragraphs from research analysts who wrote on Unit Corp. following the event. OAG360 suggests that you contact the analyst and/or salesperson to receive a complete copy of the report. Please read the important disclosures at the end of this note.
Howard Weil Morning Energy Commentary Note – (12.6.13)
Quick Take: UNT laid out an impressive 2014 outlook with value-driving catalysts beginning to take shape in each business segment. Granite Wash-lead growth in the E&P business in 2014 is better than we were expecting although CAPEX was slightly higher than our estimate as well. The new BOSS rig is nearing its fourth order even before the first is placed into service. We will look for the book to continue to build over the next several months to the point where UNT can commit to a continuous newbuild program and explore ways to scale the rig construction effort further. The midstream segment growth could also surprise in 2014 and 2015 as UNT has multiple projects lined up. The next several months should be exciting as the Company begins to execute a well considered plan to prove a higher value across each segment. We are raising our price target from $55 to $57 to reflect higher growth assumptions going forward.
E&P Growth Robust in 2014: Guidance for 2014 E&P CAPEX and production growth were both higher than we expected, but capital efficiency is increasing. Annual production growth of 15-18% is materially better than the 10% we were assuming, with CAPEX guidance of $600-$725MM vs. our $650MM. The Granite Wash is the driver with current production from the play up 22% from 3Q13 avg., reflecting the impact of the back end weighted completion schedule. Production could be lumpy going forward with UNT drilling 3-well pads and taking a breather mid-year to allow the completions to catch up. In the Marmaton, UNT will test a lower bench concept in 2014 that could expand inventory. The Company’s first Wilcox horizontal well came on line at 3.5 MMcfpd and 80 Bopd, but the well could improve further as flowing tubing pressure is 7,800 psi. We think this is a promising start but will wait for further information about the well performance and consistency before assigning horizontal credit. UNT also announced a new oily Anadarko Basin play with an initial 15,000 prospective net acres. While details were not released and the Company is continuing to try to build the position, this could be another stacked pay play, possibly a combination of the Meramec and Woodford as other operators have recently discussed.
BOSS Rig Order Book Starting to Build: The first BOSS rig is expected to be delivered later this month, with the second and third contracted and set for delivery in March 2014 and May/June 2014. A fourth contract may be close behind but has not been formally announced. We suspect UNT could get another 2-3 orders on the books by early 2014 to get to a total of 6-7 committed rigs for 2014. This should be getting close to an order level where UNT has enough confidence in the rig’s market acceptance to take on a continuous newbuild program. Currently, the Company can deliver about six BOSS rigs per year, as some equipment such as drawworks are taking up to 5-6 months for delivery. A commitment to a newbuild program could lead to greater scalability with the ability to order all the needed equipment ahead of time. Looking at the rest of the fleet, the Company announced contracts to sell another four 2,000+ HP rigs. The larger HP rig sales have been generating $5-$7.5MM per rig. This capital will be reinvested into the Company’s newbuilds, as well as any proceeds that arise from the selling of some of the Company’s lower horsepower rigs.
Midstream Segment Growing Organically Into 2015: We are adjusting our model to reflect better growth from the midstream segment as UNT has a number of inexpensive projects lined up to increase cash flow. A 9 mile pipeline in the Granite Wash could allow the Company to fill an additional ~30 MMcfpd of existing processing capacity when the current contract rolls off in 1Q15. We think the Company will look at its options for the segment in that timeframe as EBITDA could be closer to $70-$80MM.
Revisions to Estimates: We are increasing our 2014 production growth estimate to 16% from ~10%, which yields an increase to our 2014 EPS and CFPS to $4.54 and $14.82 from $4.33 and $14.12.
Capital One Securities Morning Energy Summary – (12.6.13)
Our takeaways from UNT’s Tuesday analyst day are positive, overall. We thought UNT’s comments on the structure of its three business lines were particularly interesting given the activist investor filing earlier this week. Management stated that the three segments are set up like they are for a purpose but that they recognize that the E&P and contract drilling segments are big enough to act as stand-alone entities. Management stated that they are focused on increasing shareholder value and are open to separating the business lines if certain triggering events occur, but we wouldn’t expect structural changes any time soon. UNT issued preliminary 2014 CAPEX guidance of $800MM – $900MM (vs $829MM/$751MM St/COS estimates). The preliminary E&P CAPEX of $600MM – $725MM assumes 15% – 18% y/y production growth and is based on an avg 12-rig program and 125 net wells. UNT noted that the 2014 production guidance is solely driven by organic growth while estimated 2013 growth of 15% – 18% is partially attributable to the NBL acquisition
UNT believes that its new BOSS rig will be a game changer for the company as it will expand the company’s current customer base. UNT previously has not supplied an AC rig, and the company cited this as the reason that only two out of the top ten operators are current customers. UNT does not expect to see an improvement in overall utilization rates, and therefore it expects increased market share to be the driver of contract drilling growth. The first of the three BOSS rigs that have been contracted (even before the rig show) is expected to be delivered to the Granite Wash at the end of this year. The BOSS rig will be most beneficial in areas with multi-well pad locations with relatively short days to drill where pad-to-pad move is critical. We recognize that the BOSS rig represents a positive turning point in UNT’s contract drilling segment, and it is a welcome although late transition into the AC rig business.
Although limited, UNT did supply some data on its emerging play, which is located in the Anadarko Basin. The company has 15,000 net acres and is adding to this. The play has potential for 5 – 7 stacked pays, which include a mix of oil and liquids-rich gas zones. Although we view the initial results as less than overwhelming, UNT believes the play will be a part of next year’s growth story.
UNT is moving towards fee-based contracts to reduce exposure to commodity prices. The goal of the new contracts is to maintain similar margins as the previous POP contracts while reducing risk (as well as upside potential) to lock in cash flows. Based on volumes, 73% of UNT’s midstream contracts are fee based (vs 51% in 2010), and UNT plans to increase this as POP contracts expire.
UNT reported a lower oil mix in the Granite Wash than our model but a greater oil mix in the Marmaton.
What to Watch:
Expect Buffalo Wallow results at the end of 1Q14 and into 2Q14. Two-thirds of UNT’s potential panhandle locations lie within the 11 stacked pay areas of its 12,000 Buffalo Wallow net acres (total panhandle net acres of ~48K).
UNT drilled its first horizontal well in the Basal Wilcox, which has been online for only a couple of days. UNT is encouraged by initial results (3.5 MMcf/d vs 1.5 – 2.0 MMcf/d for the vertical Basal Wilcox wells) and expects to drill more horizontals in 2014. We will be looking to see if UNT can repeat or exceed its Upper and Middle Wilcox results in the Basal Wilcox.
U.S. Capital Advisors Friday E&P Recap Note – (12.6.13)
Overview: We attended UNT’s analyst day in NYC this week and outline the key highlights below. Net, we walked away with a slightly more positive view owing to higher-than-expected ’14 production guidance, a better appreciation for the upside opportunity in the Granite Wash Buffalo Wallow Field and further clarity on the company’s rig fleet rationalization plans.
Corporate Structure: While nothing imminent was announced, the company highlighted capital demands and long-term disconnect in market valuation as two strategic triggering events that could lead to a re-assessment of the current three segment business model. The obvious spin-off candidate is the midstream business, though in our view likely needs further incubation before it has critical mass to stand-alone (~$45 mm of EBITDA in ’13). If a midstream spin were to occur, we see ’15 as most likely timing given EBITDA could approach the $100 mm run-rate, bolstered by redirecting Granite Wash volumes to UNT’s Hemphill County processing facility after a third-party contract expires.
Preliminary ’14 Guidance: Co unveiled preliminary ’14 spending guidance of $800-$900 mm, in line with our $870 mm estimate. Allocation is 78% to E&P, 8% to midstream and 14% to drilling. On the production front, preliminary growth guidance set at 15-18% (12 rigs, 125 net wells), positive vs. the 10-15% we had expected. The delta vs. our number likely attributable to stronger-than-forecasted Wilcox production growth as the full impact of the prolific Gilly Field development is felt.
Drilling Segment: Emphasis was on repositioning of the drilling segment to meet evolving customer demand. Co highlighted that of the top 10 onshore operators, only two are UNT customers as most operators are demanding AC rigs. This was the impetus for UNT’s new BOSS AC rig line, the first of which will be delivered to UNT E&P by the end of December. Second and third BOSS rigs will go to work in 1H14 to outside operators who interestingly signed two year contracts before they saw a working model. Co holding a BOSS rig show in the next couple of weeks and said would be surprised if it didn’t get another couple contracts as a result. In current environment, UNT likely maxed out at six BOSS newbuilds per annum. Co also rationalizing other parts of the fleet, with four >2,000 HP rigs contracted for sale and plans to sell ~20 of its 400-700 HP rigs as well as some of its 1,000 HP mechanical rigs over the next couple of years. Co fighting its way into the Permian market with third 1,500 HP rig recently contracted. Other areas UNT wants to grow drilling footprint are Niobrara, SCOOP and Eagle Ford.
Midstream Segment: Co highlighted move toward more fee based contracts, with 73% of volume now fee vs. 51% in ’10. Not seeing any margin degradation in this process, though obviously giving up commodity upside. Think some were underwhelmed by $70 mm earmarked for midstream spend in ’14, but co emphasized these are identified deals and there is probably another $70 mm of highly probable projects in existing core areas. Outside of core areas, UNT Midstream is also trying to break into the Permian, Eaglebine and the TMS.
Granite Wash: Focus was on ~15,000 net acre position in the Buffalo Wallow Field, in which co believes 595 gross locations have been identified. UNT running two rigs here drilling three well pads, the first of which started flowing back this week. Co drew rock property analogies to several other Granite Wash wells, including a LINE well that IP’d at 17 Mmfcpd + 400 Bopd condensate and a recent UNT well in the Mendota field that came on at 1,000 Bopd condensate + 3.5 Mmcfpd gas. While we still need to see UNT-operated results here, think Buffalo Wallow Field is one of the biggest sources of upside in the model if co can prove up productivity that is superior to its 3.8 Bcfe average Granite Wash EUR.
Marmaton: Most interesting takeaway for us was talk about potential for lower Marmaton prospectivity on ~half of UNT’s 120,000 net acres. Lower Marmaton well drilled by COG tracking a 175 Mboe EUR vs. offset UNT upper Marmaton tracking 96 Mboe EUR. UNT has drilled its first lower Marmaton test and will have results in Q1’14. As co only has ~4 years of inventory left in the upper member, lower prospectivity could double inventory here (~90 incremental locations assuming 60,000 acres and 640-acre spacing).
Wilcox: Hard not to be impressed by productivity of Gilly Field wells (2011 discovery), with co showing type curve for two of these wells in the Blackwood Sand tracking ~13 Bcfe each and generating nearly 1,000% IRRs (flat at 7-10 Mmcfpd for ~2 years). Key to productivity at Gilly Field was accessing the Basal Wilcox sands, which UNT is now trying to do at the Wing Deep Field. Co also talked about first horizontal well testing the Magic Sand at nearly ~15,000’ TVD. Well has only been on for a couple days, but most recent rate was 3.5 Mmcfpd of gas + 80 Bopd of condensate. Not a headline grabbing rate, but flowing tubing pressure was 7,800 lbs, so would think rate should hold up well. Still too early to make a call on horizontal prospectivity here, but we will get more data in ’14 with UNT planning four more horizontal tests.
Mississippian: CAPEX more than doubling here in ’14 to $110 mm with a 2 rig program and 38 net wells. We did not gain much incremental confidence on the prospects of the Miss from UNT’s analyst day as results from nine wells to date show high degree of productivity/composition variability (liquids content ranging from 25-90%). Good news is this area has half to a third the water cut compared to the OK Miss, with wells initially seeing 2,000-2,500 Bwpd and dropping to 500-1,500 Bwpd in 6 months (vs. 6,000-8,000 Bwpd in many parts of OK).
New Ventures: Co announced it has 15,000 net acres in an emerging play in the Anadarko Basin and plans to spend $58 mm testing this area in ’14 with 1-2 rigs. UNT has identified three target zones (A-C) with 175 total locations. Preliminary type curves show Zone A generating 5.1 Bcfe EURs (35% liquids) for $4.3 mm, Zone B recovering 365 Mboe (87% liquids) for $7.0 mm and Zone C generating 6.0 Bcfe EURs (25% liquids) for $9 mm. Based on permit activity, we think UNT is chasing the Medrano and Hoxbar formations in/around Grady County, OK, which is same area where an EOG Hoxbar test recently IP’d at ~1,660 Boepd (93% oil).
KLR Group Note – (12.6.13)
Investment thesis
We are upgrading UNT to Accumulate and increasing our target price $8 to $58 per share. The increase in target price is attributable to ~20% improvement in E&P capital productivity and stronger midstream EBITDA growth ($5-$10 million per annum) partly offset by ~7.5% higher gas composition associated with E&P capital spending.
We anticipate drilling fleet utilization increases slightly next year (~53%) while drilling margins approximate this year (~40%). Our ’14 E&P production growth expectation of ~15% is at the low end of company guidance (15%-18%).
Granite Wash forms the cornerstone of development activity
In ’14, the company plans to conduct a two to five-rig program and drill ~29 net Granite Wash wells. Granite Wash wells (4,000-4,500’ laterals, 10-15 frac stages) recover almost 4 Bcfe (~55% gas, ~25% NGLs, ~20% oil) for a cost of ~$5.5 million (~25% IRR).
Solidly economic East Texas Wilcox development/delineation
Unit has ~53,000 net acres in the Wilcox play comprising ~25,000 net acres in Polk, Tyler and Hardin Counties (Jazz area) and ~28,000 net acres in Newton County (Newton area). In ’14, Unit plans to conduct a two to three-rig program and drill 16 net wells in the Wilcox play including four horizontal tests. The drilling program contemplates continued development of three field discoveries, including the Gilly field in southwest Polk County, along with exploration in Tyler, Hardin and Newton Counties. Wilcox wells in the Gilly field recover ~13 Bcfe (~40% liquids) for a cost of $5+ million.
Promising emerging Anadarko Basin liquids horizons
Unit has ~15,000 net acres prospective in the various liquids-prone horizons in the Anadarko Basin. The company plans to conduct a one to two-rig program and drill 12 net wells in this emerging play next year. Targeted development includes “Zone A” with well recoveries of ~5 Bcfe (~35% liquids) for a cost of $4+ million and “Zone B” with well recoveries of ~360 Mboe (~85% liquids) for a cost of ~$7 million.
Minor value contribution from Marmaton/Mississippian development
In the Marmaton play, Unit is conducting a two-rig program with the large majority of wells utilizing ~4,500’ laterals due to spacing constraints. The company plans to drill ~25 net Marmaton wells in ’14. Shorter lateral Marmaton wells (~4,500’ laterals, 16 frac stages) recover ~110 Mboe (~80% oil, ~10% NGLs, ~10% gas) for a cost of ~$2.8 million (~15% IRR). In the Mississippian play, the company plans to conduct a two rig program and drill 38 net wells in ’14. Horizontal Mississippian wells (~4,300’ lateral, 10-15 frac stages) recover ~175 Mboe (~70% liquids) for a cost of ~$3 million (~15% IRR).
[sam_ad id=”32″ codes=”true”]
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. A member of EnerCom, Inc. has a long-only position with Unit Corp.
