Unit (UNT)

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Unit is a diversified oilfield services firm that also operates a natural gas exploration and production segment. The company owns 129 land drilling rigs, operates 676 miles of petroleum-transporting pipeline, and owns half a trillion cubic feet of natural gas reserves - all in the southern United States. Rising natural gas prices are driving up both revenues and margins for the company's E&P segment, though its onshore oilfield services operations don't feel the benefits quite like the offshore segments of other companies, since land rigs are far more abundant and, therefore, less in demand. Unit has achieved a reserve replacement ratio of over 150% for 24 years, causing its holdings to grow faster than production, and with 48% of its reserves in the gas-swollen Anadarko Basin, the company is set to keep producing for many years to come. Unit competes with Cabot Oil & Gas, Oneok, Kinder Morgan Energy Partners, L.P. (KMP), Atmos Energy, National Fuel Gas Company, and Nabors Industries.

[edit] Business and Financials

Unit is an onshore oilfield services, exploration, and production company operating in the southern United States. The company has three main segments:

• Unit Drilling Company: Unit Drilling owns 129 land rigs with depth ranges from 5,000 feet to 40,000 feet in Wyoming, Utah, Colorado, New Mexico, Texas, Oklahoma, Kansas, and Louisiana. Most of these rigs are designed to drill for natural gas, and are either used by Unit Petroleum or contracted to other E&P companies.^[1] In 2007, Unit Drilling had a capital utilization rate of 80% and its largest customer, Questar, accounted for 13% of the segment's revenues.^[2] In June of the year, the company acquired a privately owned drilling firm in the Texas Panhandle, adding nine drilling rigs to its regional arsenal.
• Unit Petroleum Company: Unit Petroleum explores for and produces oil and natural gas in New Mexico, Oklahoma, Arkansas, Louisiana, and Texas, and has reserves of 514.6 Bcfe; 70% of its reserves are in the Anadarko and Arkoma Basins of Northern Texas, Oklahoma, and Arkansas and 82% of its reserves are filled with natural gas.^[3] For twenty-four years, Unit has had an average replacement ratio (the number of reserves discovered over the number of reserves used up) of over 150%, and 2007 was no different, with the number hitting 171%.^[4]
• Superior Pipeline Company, L.L.C.: Superior Pipeline is a midstream petroleum company that operates 676 miles of pipeline (78 miles of which were added in 2007^[5]), 36 gathering systems (which move petroleum from the well to the pipeline), four natural gas treatment plants (which purify the gas into usable fuel), and eight natural gas processing plants (which convert the gas into liquid natural gas for easier transportation). Oneok contributed 82% of this segment's revenues, while Murphy Energy Company contributed 10%.^[6] Though the revenue for this segment is highly concentrated, Unit believes it has enough potential customers to fill capacity that might be lost if Oneok were to bail on any contracts.

Note: Prices are before hedging

In 2007, Unit saw revenues of $1.159 billion, down from $1.162 billion in 2006; net income was $266 million, down from $312 million.^[8]

[edit] Trends and Forces

[edit] Unit's Exposure to Natural Gas Means that Rising Gas Prices Bring Up the Company's E&P Revenues - and Profits

Unit estimates that for every $0.10/Mcf the price of natural gas rises, the company sees a $339,000 per month increase in its pre-tax operating cash flow, while a $1.00 increase in oil prices would cause a $85,000 per month increase. Furthermore, as the price of natural gas fluctuates a lot, the cost of extracting it doesn't, so when prices rise, margins grow. Oil and gas prices have fluctuated heavily over the past few years, though since mid-2007, the trend has been up. Oil traded on international markets for $120/bbl in early May, while natural gas traded at over $10/Mcf.^[9] While Unit benefits from high prices, the profitability of a high-price market will cause E&P companies to try and increase production; if they are successful, prices will fall.

[edit] Unit's Onshore Drilling Focus Means it is Missing Out on the Dayrate Growth of the Offshore Sector

With oil prices so high, E&P companies are desperate to ramp up production, causing demand for drilling rigs to skyrocket. Rates rise much faster in the offshore segment, however, as 71% of the Earth is covered in water but there are far fewer offshore rigs around the globe than there are onshore rigs - and, in the U.S., the number of offshore rigs has been falling while the number of land rigs has been growing. As of April 25th 2008, the U.S. had 1,842 land rigs, an increase of 95 from April 25th 2007, whereas the U.S. offshore rig count dropped by six, to 67.^[10] In 2007, Unit's average dayrate was $18,663; the average dayrate for an offshore platform rig, the cheapest, simplest, and most abundant of the offshore drilling vessels, is twice that, at $37,009.38, while floating offshore rigs can go as high as $292,000^[11] - and that's not even counting deepwater oil exploration rigs, which can contract above $800,000 per day. Furthermore, offshore dayrates for rigs not in the declining shallow Gulf of Mexico have nearly tripled since the beginning of 2005^[12], while Unit's dayrates grew by about 50% from 2005 to 2006 and then stagnated going into 2007, even decreasing by $104 from 2006. By operating only onshore, Unit Drilling Company is missing out on the segments of the oilfield services industry that are benefiting most from rising oil prices.

[edit] Unit's Reserve Strategy Ensures that the Company's Supplies Will Last for Years

One of Unit's company goals is to achieve a reserve replacement ratio of over 150% every year, and it has done so for 24 years, culminating with 2007's ratio of 171%.^[13] A reserve replacement target above 100% means the company grows its holdings no matter how much production increases; having 48% of its reserves in the Anadarko Basin, which, with over 100 Tcf in natural gas reserves^[14], is one of the largest basins in the country, increases the chances of future exploratory success. At the end of 2007, Unit's average reserve life (reserves over production) was around 9 years; this may seem short, but if the firm continues to imitate its past success at keeping reserve replacement above 150%, reserve life will continue to grow.

[edit] Legislation Supporting the Development of Renewable Energy Threatens the Long-Term Strength of Hydrocarbons in the U.S.

Whether it’s because of the desire for energy independence, the rising price of oil, or fears of climate change, people are attracted to the search for alternatives to petroleum. Environmentalists have been calling for a shift to renewable energy for years, and though the river of change is running slow, it is running deep. The Energy Independence and Security Act of 2007 is the first step towards a grander series of changes. By forcing automakers to achieve 35 mpg by 2020 and setting a Renewable Fuel Standard of 36 billion gallons of biofuels in 2022^[15], the Act has potential to get the ball rolling to greatly reduce American dependence on hydrocarbons - and environmentalists, who have deemed climate change to be "Our Generation’s Defining Moral Challenge", will continue to push for greater change. Already, 26 states across the country have adopted Renewable Energy Standards to increase the share of renewables in their energy mixes, while both Democratic candidates for President have pledged to reduce carbon emissions by 80% below 1990 levels by 2050.^[16][17] While the Republican candidate isn't so tough on climate action, he still supports a strong cap-and-trade system. In emerging markets like China and India, the drive for economic growth supersedes environmental concerns, but since Unit operates only in the U.S., a changing American environmental and energy paradigm will be disastrous to Unit's business without the development of some effective carbon sequestration technology.

[edit] Competition

There are scores of oil and gas companies operating drilling, exploration, and transportation businesses in the U.S., many of which are onshore. A few of Unit's main competitors include:

• Cabot Oil & Gas - Cabot abandoned its offshore operations in favor of developing 1.368 Tcf worth of natural gas reserves across the U.S., including 208 Bcf in the Gulf Coast and 244 Bcf in the Rocky Mountains - both regions where Unit operates.
• Oneok - Despite making up 82% of Unit's midstream revenues by purchasing transported natural gas for utilities distribution, Oneok operates hundreds of miles of pipeline as well as several natural gas treatment and processing plants in Oklahoma and Kansas, among other states.
• Kinder Morgan Energy Partners, L.P. (KMP) - KMP owns 14,700 miles of pipeline, 5,100 miles of which run through Kansas, Colorado, Wyoming, Missouri, and Nebraska, and which are powered by 28 processing stations.^[18]
• Atmos Energy - Atmos operates 76,000 miles of pipeline, 26,400 of which are in the South and 6,800 of which make up the Texas Intrastate Pipeline. This pipeline is connected to lucrative onshore reserves, like the Barnett Shale.
• National Fuel Gas Company - NFG's 205 Bcf of natural gas and 48 MMBbl of oil reserves are focused in Texas, Alabama, and Louisiana.
• Nabors Industries - Nabors is one of the largest onshore drilling companies in the U.S., with 535 land drilling rigs; the company also contracts 51 offshore rigs.^[19] Aside from oilfield services operations, Nabors is one of the few companies that drills for geothermal resources.
• XTO Energy - XTO is an onshore E&P company operating in Texas, Louisiana, and the Rockies with over 650 Bcf in annual production.

[edit] References

1. ↑ Unit Web Site: Rig Fleet Map
2. ↑ UNT 2007 10-K
3. ↑ Unit Web Site: Operations Map
4. ↑ UNT 2007 10-K, Page 3
5. ↑ UNT 2007 10-K, Page 3
6. ↑ UNT 2007 10-K, Page 11
7. ↑ UNT 2007 10-K, Page 36
8. ↑ UNT 2007 10-K, Page 29
9. ↑ Energy Prices Data, Accessed May 7th, 2008
10. ↑ RigZone: "Weekly Land-Based, Offshore Rig Counts Both Increase", April 25th, 2008
11. ↑ RigZone: Offshore Rig Day Rates Page, Accessed May 05, 2008
12. ↑ Energy Current: "Deepwater rig day rates hit new high", November 9th, 2007
13. ↑ UNT 2007 10-K
14. ↑ NZ Oil and Gas, LLC
15. ↑ WhiteHouse.gov, Fact Sheet: Energy Independence and Security Act of 2007
16. ↑ CNN Election Center: Issues: Environment
17. ↑ Washington Post: "A Green(er) Obama"
18. ↑ Reuters Full Description: Kinder Morgan Energy Partners LP KMP (NYSE)
19. ↑ Reuters Full Description: Nabors Industries Ltd NBR (NYSE)