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.

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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%.


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.

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