Unit Corporation: Driving Growth And Resilience In The Oil And Gas Industry

Executive Summary

Unit Corporation (OTCQX:UNTC) is an oil and natural gas company operating in two segments: Oil and Natural Gas, and Contract Drilling. Despite its current enterprise value slightly above its 2021 value, Unit offers attractive upside potential and a significant margin of safety for long-term investors. With positive developments including cash flow generation, debt reduction, share repurchases, and dividend payments, Unit continues to demonstrate promising prospects.

Business Overview

Unit Corporation operates in two segments: Oil and Natural Gas, and Contract Drilling. These segments contribute to the company's overall operations and provide diversification within the oil and gas industry.

Oil and Natural Gas Segment:

Unit Petroleum Company, a subsidiary of Unit Corporation, focuses on the exploration, development, and production of oil and natural gas reserves. The company primarily operates in the prolific oil and gas regions of Oklahoma and Texas. Unit holds a significant acreage position across various formations, including the Anadarko Basin, Arkoma Basin, and the Permian Basin.

Unit Petroleum Company has a proven track record in the efficient development of its reserves. The company employs advanced drilling techniques, such as horizontal drilling and hydraulic fracturing, to enhance production and reserves. These techniques allow Unit to tap into unconventional resources and maximize recovery rates from its wells.

The Oil and Natural Gas segment benefits from a diverse portfolio of producing wells and a substantial reserve base. Unit Corporation currently operates 1,345 net wells across its acreage, with over 63 million barrels of oil equivalent (BOE) in reserves. The company's reserves are composed of both oil and natural gas, providing revenue stability through a mix of commodity prices.

In 2022, Unit Petroleum Company generated $315 million in revenue and $124 million in adjusted EBITDA. The segment's strong financial performance is supported by a combination of efficient operations, favorable commodity prices, and a focus on cost control.

Contract Drilling Segment:

Unit Drilling Company, another subsidiary of Unit Corporation, specializes in contract drilling services for exploration and production companies in the oil and gas industry. The company owns and operates a fleet of drilling rigs, which are deployed to drilling locations as per customer requirements.

Unit Drilling Company's fleet consists of 18 drilling rigs, including 14 super-spec BOSS rigs. These rigs are designed to meet the demanding drilling requirements of today's oil and gas wells. The super-spec rigs offer enhanced capabilities, such as increased drilling depth, improved operational efficiency, and advanced technology integration.

The Contract Drilling segment benefits from the strong demand for drilling services in the onshore market. The tightening of the rig market has resulted in increased day-rates, providing Unit Drilling with substantial operating leverage. As exploration and production companies seek to maximize their production potential, they rely on the expertise and equipment provided by Unit Drilling.

The company's skilled and experienced workforce is a significant asset in the Contract Drilling segment. Unit Drilling has built a reputation for delivering safe and efficient drilling operations. This reputation has allowed the company to secure contracts with reputable oil and gas companies and maintain a high level of customer satisfaction.

In 2022, the Contract Drilling segment generated $148 million in revenue and $42 million in EBITDA. The segment's financial performance is driven by a combination of drilling activity levels, day-rates, and operational efficiency.

Overall, Unit Corporation's business model benefits from a balanced presence in both the upstream (exploration and production) and midstream (drilling services) segments of the oil and gas industry. This diversification provides resilience and the ability to capture opportunities across different market conditions. The company's strong operational capabilities, skilled workforce, and strategic asset base position Unit for continued growth and profitability in the dynamic energy sector.

Moat

Unit Corporation's moat lies in its competitive advantages within the oil and natural gas industry. The company has achieved low operating costs through efficient drilling techniques, which enables it to generate strong margins even during periods of lower commodity prices. Additionally, Unit's relatively low decline rates in its oil and natural gas wells contribute to sustained production levels and cash flow. Furthermore, the company benefits from the run-off of below-market oil hedges, allowing it to capture higher oil prices in the current market environment. These factors are expected to contribute to substantial free cash flow generation in the coming years.

Moreover, Unit Corporation's alignment with shareholder value creation is evident through the presence of Phil Frohlich, Managing Partner at Prescott Capital Management, as interim CEO and a board member. Prescott Capital Management, with a 37% stake, serves as Unit's largest shareholder. This alignment ensures that the company's decisions are made with a focus on maximizing long-term shareholder value.

Valuation

Unit Corporation is considered attractively valued, with a trading multiple of 2.1x EV/EBITDA and a free cash flow yield (excluding existing cash balance) of 25%. Using a discounted cash flow model, the company is valued at a target enterprise value of $570 million. When adding the cash balance of $118 million and the expected proceeds from the sale of Superior Pipeline ($20 million), the target value reaches $710 million or $74.00 per share, representing a 72% upside from the current share price.

The company's valuation is supported by its strong financial performance, positive outlook, and potential for continued growth. Unit's solid track record of generating consistent cash flow, reducing debt, and returning capital to shareholders through share repurchases and dividend payments adds to its appeal as an investment opportunity.

Conclusion

Unit Corporation presents an appealing investment opportunity with the potential for significant returns. The company's strong presence in the oil and natural gas industry, coupled with favorable market conditions, positions it for future growth. The board and management team's alignment with creating shareholder value further enhances the investment thesis. With an attractive valuation and various means of distributing excess cash to shareholders, Unit Corporation is a compelling long-term investment option.

Risks

As with any investment, there are certain risks associated with Unit Corporation:

Volatility in oil and natural gas prices can significantly impact the company's revenue and profitability. Fluctuations in commodity prices can be influenced by factors such as global demand, geopolitical events, and economic conditions.

Regulatory changes and environmental concerns pose potential challenges to the company's operations. Compliance with evolving regulations and increased scrutiny on environmental impact may require additional investments or affect the company's ability to operate in certain areas.

Geopolitical factors, including trade disputes and political instability, can affect the company's ability to operate effectively. Changes in government policies and regulations can impact Unit's operations, particularly in regions where it has a significant presence.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.