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Unit Corp (UNT)

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Dan Shipman

June, 2012

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Unit Corp

Unit Corp-ENERGY EQUIPMENT AND SERVICES

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Unit Corp

Ticker: UNT

Price: $39.40

Market Cap: $1.8B

Beta: 1.52

Dividend: 0

P/B: 0.9

Fair Value:$46.5

Recommendation: Buy

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Recommendation Reasoning

• Stock price has declined lately because of poor commodity prices.
• Similar to last two years performance

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Company Background

• Unit Corp. is engaged in the contract drilling of oil and natural-gas wells. The company also develops, acquires, and produces oil and natural-gas properties and markets natural gas. Unit operates primarily in the Texas Gulf coast and Rocky Mountain regions, as well as in the Anadarko and Arkoma Basins, which cover portions of Oklahoma, Texas, Kansas, and Arkansas. The company owns and operates approximately 75 drilling rigs in these regions. Unit is based in Tulsa, Oklahoma.

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Business Locations

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Key Ratios

• Revenue- $1.21 Mil (37% Growth)
• Gross Profit $353.22 Mil (29.23% Margin)
• EBITDA $641.96 Mil
• Cash from Operations-$608.46Mil
• Cap Ex 2011-$778.56Mil
• Free Cash Flow-(170.1)
• Company took on Long Term Debt to finance CapEx Acquiring new PPE

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Relative Valuation

• Precision Drilling Corp (PDS)- Market Cap: $2.11B P/E:7.98 ROE:11.3% P/S:
• Ensign Energy Services- Market Cap: $2.06B P/E:8.92 ROE:14.05%
• Unit Corp- Market Cap $1.8B P/E:8.94 ROE:11.07%

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SWOT

• Strengths
• Company is agile.
• Able to meet shifting environment
• Consistent asset and Reserve growth
• Strong Outlook in Energy market
• Weaknesses
• Capital Intensive
• Constant Reinvestment Required

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• Opportunities
• Possible Takeover candidate
• Large Oil Find
• Large Liquids Find
• Sharp increase in Prices due to supply/demand shocks
• Threats
• Price volatility
• Sharp decline in Prices “Global Meltdown”
• Competition from other drillers.
• New Forms of Energy

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Business Segments

Unit Corp and its Subsidiaries operate in the following areas of Oil and Natural Gas exploration, production, and refinement.

Contract Drilling

Oil and Natural Gas Drilling & Exploration

Midstream

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Contract Drilling

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Contract Drilling

• Carried out by its subsidiary, Unit Drilling Company and its subsidiaries. This segment contracts to drill onshore oil and natural gas wells for others and for its own account.

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Contract Drilling

• Contract Drilling Revenue is Dependent on Two Factors
• Rigs Utilized
• Rig Usage Day Rate
• Rig Utilization Rates have been increasing since the downturn.
• Of their total 127 an average of 61.4 Rigs were used in FY 2010.
• 2011 Saw a 26% rise to 76.1 Rigs Utilized. Unit corp projects that number to continue to increase.
• As of the end of Q1 81.8 Were being used. This increased Revenue by 42.9 Million over the first quarter from the year earlier.
• Day Rates
• Increased in 2011 from $15478 to $18842/day, a 22% increase YOY
• Day Rates have been steadily climbing since Economic Downturn and are expected to continue to increase.
• Drivers
• Worldwide Oil and Natural Gas Prices

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Expectations and Extrapolations

• Rig Utilization
• 2012 Unit Corp is expected to Average Utilization of 85 Rigs.
• This 11.7% increase will boost Revenue Proportionally.
• Day Rates
• Expected to Rise at a slower pace than 2011
• Expected increase of Aprox 15% to $21670/Day. A 3% YOY increase since 2006

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Oil and Natural Gas Drilling & Exploration

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Oil and Natural Gas Drilling & Exploration�

• Carried out by its subsidiary Unit Petroleum Company. This segment explores, develops, acquires and produces oil and natural gas properties for its own account.

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WTI Five Year Chart

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Oil

• Increased Production in 2011 from 1.52-2.51Million Barrels.
• Oil Reserves increased 16% over last year.
• Drivers
• “Marginal Demand” comes from China, primarily, other emerging markets secondarily.
• Reduced YOY Demand from Developed Nations
• Currently Turmoil in the Oil markets
• Demand Slowing from European “Meltdown”
• China Growth Slowdown (Possible Recession)

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Expectations and Extrapolations

• “Summer Swoon” in the U.S. Markets.
• Markets will resume momentum approaching the Fall.
• Same pattern as last two years.
• Europe will enter Mild to Moderate Recession.
• As a result demand will fall slightly.
• China will enact Fiscal Stimulus as well as monetary easing.
• This will keep Chinese growth around 7% for the year and continue to drive oil.
• These factors should drive down the average price of oil from 2011 to 2012.
• 2011 Average price $87.18
• 2012 Expectation $85
• Oil Production will increase this year at 50% rate vs 2011s %65 Increase.
• Production should increase from 2.51 Million Barrels to 3.76 Million.
• Resulting in an increase in Revenue to $301 Million a 38% increase.

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Natural Gas Liquids

• NGL Reserves increased 37% over last year.
• In 2011 Average Nat Gas Liquids Prices increased 18% from $37.04 to $43.64 per Barrel
• Increased Production in 2011 from 1.55 to 2.3 Million Barrels Equivalent a 45% increase from 2010
• Drivers
• Increased Domestic production
• Increased Industrial and Commercial Utilization

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Expectations and Extrapolations

• Prices will continue to stay elevated around current levels (Projected at least $40/Barrel average in 2012)
• Primarily due to increased demand
• Unit, NGL Production will continue to increase
• Expectation of 35% increase in 2012 to 3.1 Million Barrels
• Resulting in $124 Million a 13.7% increase from 2011

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Dry Natural Gas

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Dry Natural Gas

• Year Over Year production and proven reserve increases.
• Increased Production in 2011 from 40.8-44.1Billion Cubic Feet a 8% increase.
• Nat gas prices down to an average of $4.26/
• Drivers
• Oversupply in United States
• Difficult to transport without Liquefaction or Pipeline
• U.S. Regulations limiting permits for Export Terminals

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Expectations and Extrapolations

• Downward pressure on Dry Gas prices will continue pushing average prices to $3.00/Mcf in 2012
• Unit will continue to expand production at about the same rate of 8%
• Production should increase to 47.6 Mcf in 2012
• Resulting in Revenues of $159 Million (hedged) a 15.4% Drop from 2011

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Mid-Stream

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Midstream

• carried out by their subsidiary Superior Pipeline Company, L.L.C. and its subsidiaries. This segment buys, sells, gathers, processes and treats natural gas for third parties and for its own account.
• The midstream gas business starts at the gathering system. The gathering system is collecting wet natural gas from the well heads and transports it to a gas processing plant.

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Mid-Stream

• Continuing Processing Expansion
• Unit Corp currently owns 3 processing plants.
• 2011 Revenue increased from $154.5 Million to $208.2 Million a 35% increase.
• Expanding Hemphill County facility in Texas, which is currently processing approximately 110 MMcf per day of gas. Installing an additional 50 MMcf per day gas processing plant, which will increase this facility’s processing capacity to approximately 160 MMcf per day. Completion Q2 2012.
• The installation of a new 25 MMcf per day high efficiency turbo-expander processing plant is scheduled to be operational during the second quarter of 2012.
• Recently completed construction of a new gathering system and gas processing plant in Grant County, Oklahoma, adding 30 MMcf per day to processing capacity.

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Expectations and Extrapolations

• Mid-Stream production will continue to increase
• 2012 production should increase by approximately 105 Mcf per day
• Revenue should increase at about the same rate or greater through 2012 leading to a 35% increase in revenue.
• Revenue is projected to be $281 Million in 2012

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Demand

• Energy Supply is only half of the equation.
• Short term demand drives short term prices.
• Four major markets drive energy prices
• U.S.
• Europe
• China (Southeast Asia)
• Middle East (supply)
• U.S. and European energy demand is generally flat to declining
• China (Southeast Asia) Drive “marginal” oil demand

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United States

• Economic picture mixed but stable
• Current market slowdown has happened the last two years as well
• Weekly unemployment stabilizing
• Fed Beige Book was Released June 6, 2011 calls for U.S. economy to “moderately increase” in the coming months. Implying 2-2.5% Growth.

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Europe

• Scary Economic Possibilities
• Greek Exit from Euro
• Banking Collapse
• Euro Dissolution
• Skyrocketing Debt burdens Leading to Sovereign Defaults.
• Political Paralysis
• Positive Signs
• New French Government
• ECB leadership changes
• Germany changing rhetoric. Is now open to tighter fiscal union. Allowing Quantitative easing.
• There is no alternative!!

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China (SE Asia)

• Driver of marginal demand
• Government and analysts calling for slower growth target 7.0% in 2012 lowest level since 1999
• “Retooling” economy toward demand driven
• Economic numbers past 3 months have been worrisome.
• GDP less than expected
• FDI outflows
• Banking/Property sector problems (European banks fund 1/3 of Chinese investment)
• However China has many resources to deal with problems
• Monetary Easing, Fiscal Easing, Interest rate cuts.
• Huge foreign reserves (Over 3 trillion dollars)

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Middle East

• European oil embargo (Iran)
• Potential Israel & US/Iran war.
• Unstable political and economic situations in most producer countries
• Continued reverberations from Arab Spring

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Scenario Asessment

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Bull Case- 70%, 70%, 70%

$68.7 (82.9% Increase)

Base Case-27%, 55%, 55%

$43.3 (15.25% Increase)

Worst Case-15%, 30%, 30%

$29.1 (22.5% Decrease)

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Interpretation

• Bullish Scenario Assumes
• Energy Prices Increase to an average above 2011
• Oil and Natural Gas production exceeds expectations
• All Mid-Stream projects are on time and handle full capacity
• Rig utilization higher than projected
• Mideast Turmoil

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Interpretation

• Base Case Scenario Assumes
• Energy prices hold approximately constant.
• Revenue Projections hold.
• Overall Revenue for the company will be approximately
• Contract-Increase 15%
• Production-Increase 18%
• Mid-Stream-Increase 35%
• If Projections hold Overall Revenue will increase to 1.423 Billion in 2012, a 16.5% increase from 2011.

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Interpretation

• Bear Scenario Assumes
• Europe enters Deep Recession
• China growth stalls dramatically or enters recession
• U.S. Enters another Recession
• Saudi Production stays elevated
• Iraq continues production increases.
• 2.4Mbpd currently Projected to be 6Mbpd by 2015
• U.S. Oil and NGL Production expands faster than anticipated

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Recommendation

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Purchase UNT

Then sell out, or reduce position at a price target of $49.00 (24% increase)

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Thanks for Listening

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Questions??

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By Daniel Shipman

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References

• http://data.cnbc.com/quotes/UNT/tab/4
• http://www.bloomberg.com/news/2012-01-23/u-s-reduces-marcellus-shale-gas-reserve-estimate-by-66-on-revised-data.html
• www.bp.com
• www.cnbc.com
• www.yahoofinance.com
• http://en.wikipedia.org/wiki/Upstream_%28petroleum_industry%29
• http://en.wikipedia.org/wiki/Midstream
• http://en.wikipedia.org/wiki/Downstream_%28petroleum_industry%29

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