Description

Unit Corporation was written up by fizz808 in July 2021 and it was an absolute home run.  However, recent events make revisiting the company worthwhile.

First, UNTC announced in October 2021 that it was expanding its divestiture program to include the potential sale of up to all of its upstream oil and gas properties and reserves.  UNTC followed by announcing in January 2022 that it had retained Tudor, Pickering, Holt & Co. as its financial advisor and had launched a process to sell up to all of its oil and gas properties and reserves.

Second, UNTC set the terms of the warrants that were issued in connection with UNTC’s Chapter 11 restructuring, and the warrants began trading in April 2022.

Notwithstanding the stock’s phenomenal run, UNTC still trades at a discount to its asset value, with catalysts that may unlock that value in a reasonable time frame.

Caveat:  UNTC trades in the OTC market.  The average daily volume for the past ninety days is 17,700 shares, so this is most appropriate for smaller funds or PAs.

Company Overview.  UNTC operates in three segments:

Upstream.  UNTC’s subsidiary Unit Petroleum Company engages in the exploration, development, and production of oil and natural gas properties.

Contract Drilling.  UNTC’s subsidiary Unit Drilling Company contracts to drill onshore oil and natural gas wells for UNTC and for others.

Midstream.  UNTC owns a subordinated 50% joint venture interest in a natural gas midstream business operated by Superior Pipeline Company.

Fizz's writeup provides a good review of UNTC’s various businesses, so I won’t repeat that discussion here.  Recent information that may affect valuation is discussed later in this writeup.

Capitalization.  While UNTC currently carries no debt, it has significant derivative liabilities and asset retirement obligations.  UNTC’s enterprise value and shares outstanding are below:

Enterprise Value:

Potential dilution from warrants:

Valuation.

Oil and Gas Properties and Reserves.  UNTC’s oil and gas properties are located primarily in Oklahoma and Texas, in the Anadarko Basin, the Gulf Coast, and the Permian Basin.  The assets are gas-heavy:  proved reserves as of December 31, 2021 were 55% natural gas, 13% oil, and 32% NGLs, while 2021 production was 53% natural gas, 18% oil, and 29% NGLs.

There are a range of published values for the oil and gas assets.

SEC PV-10 as of December 31, 2021, which consisted solely of proved developed reserves, was $571 million.  The prices on which this was calculated were $66.56 oil, $3.60 natural gas, and $44.22 NGLs.

In connection with the sales process initiated in January 2022, Tudor Pickering included an estimate of PDP PV-10 of $765 million, presumably based on the strip.  Given the difference between the strip at YE 2021 and 2021 SEC pricing, this figure seems roughly consistent with UNTC’s SEC PV-10 figure.

Tudor Pickering also included an estimate of 1P PV-10 of $1.4 billion, also presumably based on the strip.  This is blue sky territory.  However, in a Reuter’s article “leaking” UNTC’s initiation of a sales process and engagement of a financial advisor, a valuation of $1 billion was reported.  Still blue sky-y, but perhaps more reasonable.  https://www.reuters.com/business/energy/exclusive-unit-corp-looks-sell-anadarko-gulf-coast-gas-assets-1-bln-sources-2022-01-20/

For purposes of the writeup, I consider the SEC PV-10 number as the floor, the Tudor Pickering PDP PV-10 number as the base, and the $1 billion “wished for price” as the ceiling.  The curve, especially for natural gas, is significantly higher now, so these assumptions don’t seem aggressive.

Drilling.  I value the drilling operations at 5x 2021 EBITDA of $15 million.

Midstream JV.  Valuing UNTC’s 50% interest in the Superior Pipeline joint venture involves some guesswork because of the nature of the joint venture.  UNTC previously owned 100% of the Superior midstream business.  In 2018, UNTC formed the current joint venture and sold 50% of the business to SP Investor Holdings for $300 million.  Under the terms of the joint venture, UNTC’s right to both operating distributions and sales/liquidating distributions are subordinate to SP Investor’s rights.

Beginning in January of this year, SP Investor receives 100% of operating distributions until obligations related to UNTC’s unmet drilling commitments burn off.  As of March 31, 2022, these obligations totaled $62.2 million; accordingly, the next $62.2 million of operating distributions will be paid to SP Investor; thereafter distributions will be split 50/50.  Distributions are currently running at approximately $40 million per year, so the obligation should burn off by the end of 2023, resulting in distributions to UNTC of approximately $20 million per year thereafter.

Beginning April 1, 2023, either JV member may initiate a sale of Superior to a third-party or a liquidation of Superior's assets.  In the event of a sale or liquidation, before any sales or liquidation distribution is paid to UNTC SP Investor is entitled to (1) a return of its original $300 million investment plus (2) cumulative distributions in excess of its original investment sufficient to provide a 7% internal rate of return.  As of March 31, 2022, the total preferred distribution to SP Investor on the account of a sale or liquidation was $358.2 million.  Once this amount is paid to SP Investor, the next $358.2 million would be paid to UNTC.

A sales price equal to a multiple of 8x 2021 EBITDA would be $444 million, with $358 million going to SP Investor and $86 million to UNTC.

So UNTC can expect annual distributions of $20 million per year beginning in 2024 or, if Superior is sold, UNTC can expect to receive $86 million (more or less, depending on the sales multiple).  I took these figures, threw the dart, and landed at $50 million on the valuation dart board.

Valuation Range.

If a sale is consummated, I believe UNTC will receive at least $750 million, although a good case can be made for more.  If a sale is not consummated, UNTC currently trades close to its 2021 SEC PV-10 value, which not a demanding value.  Furthermore, UNTC is minting cash.  UNTC trades at approximately 4x my estimate of 2022 EBITDA and at a FCF yield of over 20%.  And this includes significant headwinds arising from UNTC’s poorly priced 2022 hedges.  UNTC has hedged approximately 56% of its remaining 2022 gas production at $2.60 and 58% of its remaining 2022 oil production at $45.  Assuming the current curve holds, results for 2023 should show improvement as UNTC has hedged only 31% of its 2023 gas production (albeit at $2.46) and 29% of its 2023 oil production (albeit at $43.60).

Warrants.  For those who like additional juice, the warrants issued by UNTC in connection with its Chapter 11 restructuring began trading in April 2022 in the OTC market under the ticker UNTCW.  The strike price is $63.74 and the warrants expire September 3, 2027.

Risks.

Collapse in energy prices.

Failure to consummate a sale.

Poor operational execution by management.

Poor capital allocation by management.

Catalyst

Announcement of agreed sale