Union Drilling (NYSE: UDRL) provides contract drilling services and equipment (including drilling rigs and their crew) to land-based, natural gas producers in the United States. In 2007, 84% of Union Drilling's $289 million revenue came from "daywork" contracts, where Union Drilling was paid for each day their rigs and crews were used by respective operators. However, plummeting oil prices reduce demand for drilling services, in turn lowering the number of daywork contracts Union Drilling works on. Union Drilling distinguishes itself from other drilling contractors with the ability to drill horizontally and and in difficult, mountainous terrain, such as in key rigging markets like Appalachia. 
Starting in April of 2005, Union Drilling began expanding its national presence by acquiring Thornton Drilling Company which operated in the Arkoma Basin of Oklahoma and Arkansas. Additionally, Union Drilling acquired SPA Drilling L.P. which operated eight rigs, five of which were in the Barnett Shale formation in Northern Texas, the largest natural gas field in Texas.
As a result of these acquisitions, Union Drilling saw a 12% increase in revenue to $289 million in 2007 from $256 million in 2006. Operating expenses, however, increased by 11%, or $16.8 million in FY 2007 and by 52%, or $53 million in FY 2006 as a result of the costs of integrating these acquisitions. Union Drilling's business performance subsequently saw a 7% decrease in net income in FY 2007, from $32 million to $30 million. Union Drilling's performance is also impacted by challenges that arise from changing levels of American development and exploration in onshore natural gas, costly repairs to fix aging equipment, as well as seasonal impediments, such as snow and ice, that limit operations during colder parts of the year.
Union Drilling owns and operates 71 oil rigs capable of operating in unconventional, mostly mountainous, natural gas producing areas. Of these 71 rigs, 50 are equipped for drilling horizontal wells and 44 are rigged to provide underbalanced drilling, allowing for higher penetration rates through harder substances than traditional drilling operations. These capabilities distinguish Union Drilling from other contract drilling services. 
Union Drilling operates in three markets: the Appalachian Basin, the Arkoma Basin, and Northern Texas. Starting in 2005, Union Drilling began expanding its national presence through the acquisition of Thornton Drilling Company and SPA Drilling L.P.  In 2007, Union drilled wells for 114 different customers, a decrease from past years indicating Union Drilling's concentration on fewer customers. Union Drilling's top 20 customers accounted for 76% of total revenue in FY 2007.
In FY 2007, Union Drilling increased revenue by 12% to $289 million from $235 million the previous year. Revenue grew by approximately 81%, or $115 million, in FY 2006 from FY 2005. Increases in revenue are a direct result of Union Drilling's acquisition of Thornton Drilling Company and SPA Drilling, L.P., as well as the addition of new rigs to Union Drilling's Texas operations Operating expenses, however, increased by 11%, or $16.8 million in FY 2007 and by 52%, or $53 million in FY 2006 as a result of the costs of integrating these acquisitions. Net income also decreased by 7% in FY 2007, from $32 million to $30 million.
|Income Statement for FY 2005-2007 (Dollars in thousands)|
|Income from operations||11,214||54,487||53,291|
|Depreciation and amortization||15,121||24,820||39,072|
All of Union Drilling's revenue comes from its land drilling services, with segments only being distinguished by theater of operation. Union Drilling's areas of operation are in the Appalachian Basin, stretching from New York to Tennessee; the Arkoma Basin located in eastern Oklahoma and Arkansas; and the Fort Worth Basin in northern Texas.
The expansion of Union Drilling into the Arkoma Basin and Northern Texas led to an increase in its number of customers from 112 to 148 in FY 2006; however, this number fell back to 114 in FY 2007 as Union Drilling concentrated its drilling activities on fewer customers.
Union Drilling's business and operations are dependent upon the level of American development and exploration in onshore natural gas. In 2001 and 2002, there was an economic downturn in the onshore contract drilling industry resulting in losses in operating results as well as profitability across the entire industry. During this time, natural gas production decreased by over 24%. Conversely, as of 2005, demand for drilling services has been strong, as noted by an increase in customers as well as a 70% increase in the price of drilling products and services.
Politically speaking, the outcome of the 2008 presidential elections and the promotion of political and economic incentives for the development of alternate energy sources challenges the onshore contract drilling industry by diverting resources and exploration efforts towards other energy outlets.. On November 10, 2008, President-elect Barack Obama announced measures to limit gas drilling in the United States, reversing executive orders supportive of the drilling industry signed by President Bush. 
Union Drilling's rig fleet is outdated with many rigs nearing their expiration. Union's rigs were built between the years of 1976 and 1982, the last period of substantial rig construction. Aging equipment requires upgrades and refurbishment, normally taking 60-90 days of work to complete at an excess cost of $200,000. If left unchecked, an idled rig would require between $1.5 to $2.5 million to repair, leaving the machinery inoperable for between 90 to 180 days. Seeing as how 84% of Union Drilling's revenue comes from daywork contracts, or contracts that are paid on a negotiated fixed rate per day while the rig is used, taking time and capital to upgrade and repair rigs is costly. Such repairs and replacements have led to a 38% decrease in earnings for Union Drilling in October 2008 when the company added two new rigs to replace older, idled rigs in the Appalachia.
Land drilling, especially in the Appalachian Basin, is subject to unfavorable weather conditions and often in difficult terrain. Cold, snow and mud hinder Union Drilling's operations, especially during the Winter and Spring. Local and state governments place restrictions, known as "frost laws" on the movement of drilling equipment during various times of the year, namely when roads are vulnerable to damage from the movement of such equipment. Frost laws and winter weather lead to adverse performances in the First and Fourth quarter. Union Drilling's first and fourth quarter for FY 2007 were the lowest performing, indicating in part the impact of these forces.  In FY 2007 and FY 2006, the quarterly highs for the fourth quarter were on average 8% lower than the quarterly highs for the second and third quarter. Also, the quarterly highs for the first quarter during this time period were on average 10% lower than the quarterly highs for the second and third quarter.
Union Drilling distinguishes itself from its competitors by offering horizontal and underbalanced drilling capabilities. Union's competitors are unique to each area of operation in which Union Drilling markets. In the Appalachia, Union Drilling is the largest and only public driller, competing only with smaller companies. In the Arkoma Basin and in northern Texas, Union Drilling competes namely with Nabors Industries (NBR).
|||2007 Total Revenue (In millions)||% Revenue Growth in 2007||2007 Net Profit Margin|
|Grey Wolf ||$906.58||(4.30%)||18.74%|
|Pioneer Drilling Company ||$313.88||(32.59%)||Not available|
Union Drilling only accounted for 5% of the United States' contract drilling market. The market was largely dominated by Nabors Industries (NBR) who is a direct competitor to Union Drilling in the Arkoma Basin in eastern Oklahoma and Arkansas as well as in northern Texas. Union Drilling's other main competitors, namely in northern Texas, are Grey Wolf (GW) and Pioneer Drilling Co (PDC). Grey Wolf had a larger market share than Union Drilling, possessing 9% of the market while both Pioneer Drilling Co (PDC) and Union Drilling possessed 5% market share.