SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
[Commission File Number 1-9260]
U N I T C O R P O R A T I O N
(Exact name of registrant as specified in its charter)
Delaware 73-1283193
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization)Identification No.)
1000 Kensington Tower I,
7130 South Lewis,
Tulsa, Oklahoma 74136
--------------- -----
(Address of principal executive offices)(Zip Code)
(918) 493-7700
--------------
(Registrant's telephone number, including area code)
None
----
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.20 par value 35,721,725
---------------------------- ----------
Class Outstanding at August 7, 2000
FORM 10-Q
UNIT CORPORATION
TABLE OF CONTENTS
Page
Number
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets
December 31, 1999 and June 30, 2000. . . . . . . . . . 2
Consolidated Condensed Statements of Operations
Three and Six Months Ended June 30, 1999 and 2000. . . 3
Consolidated Condensed Statements of Cash Flows
Six Months Ended June 30, 1999 and 2000. . . . . . . . 4
Notes to Consolidated Condensed Financial Statements. . 5
Report of Review by Independent Accountants . . . . . . 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk . . . . . . . . . . . . . . . . . . . . . . 18
PART II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 19
Item 2. Changes in Securities and Use of Proceeds . . . . . . . 19
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . 19
Item 4. Submission of Matters to a Vote of Security Holders . . 19
Item 5. Other Information . . . . . . . . . . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 20
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ------------------------------
UNIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
December 31, June 30,
1999 2000
----------- ------------
(Restated,
See Note 1)
ASSETS (In thousands)
- ------
Current Assets:
Cash and cash equivalents $ 2,647 $ 688
Accounts receivable 22,070 28,872
Other 5,769 5,059
----------- -----------
Total current assets 30,486 34,619
----------- -----------
Property and Equipment:
Total Cost 500,703 520,149
Less accumulated depreciation, depletion,
amortization and impairment 241,649 254,932
----------- -----------
Net property and equipment 259,054 265,217
----------- -----------
Other Assets 6,027 7,606
----------- -----------
Total Assets $ 295,567 $ 307,442
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current portion of long-term liabilities
and debt $ 2,027 $ 1,816
Accounts payable 14,682 17,646
Accrued liabilities 8,875 8,191
----------- -----------
Total current liabilities 25,584 27,653
----------- -----------
Long-Term Debt 67,239 60,700
----------- -----------
Other Long-Term Liabilities 2,325 3,449
----------- -----------
Deferred Income Taxes 20,914 26,355
----------- -----------
Shareholders' Equity:
Preferred stock, $1.00 par value,
5,000,000 shares authorized, none issued - -
Common stock, $.20 par value, 40,000,000
and 75,000,000 shares authorized,
35,641,307 and 35,721,725 shares issued,
respectively 7,128 7,146
Capital in excess of par value 139,207 139,764
Retained earnings 33,170 42,375
----------- -----------
Total shareholders' equity 179,505 189,285
----------- -----------
Total Liabilities and Shareholders' Equity $ 295,567 $ 307,442
========== ==========
The accompanying notes are an integral part of the
consolidated condensed financial statements.
2
UNIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
(Restated, (Restated,
See See
Note 1) Note 1)
(In thousands except per share amounts)
Revenues:
Contract drilling $ 10,539 $ 24,596 $ 22,370 $ 46,344
Oil and natural gas 9,600 18,921 18,356 33,650
Other 356 70 395 820
--------- --------- --------- ---------
Total revenues 20,495 43,587 41,121 80,814
--------- --------- --------- ---------
Expenses:
Contract drilling:
Operating costs 9,838 19,864 20,252 37,933
Depreciation
and amortization 1,449 2,768 2,811 5,309
Oil and natural gas:
Operating costs 3,607 4,662 7,128 8,638
Depreciation,
depletion and
amortization 3,973 4,413 8,412 8,585
General and
Administrative 1,408 1,545 2,800 3,024
Interest 1,267 1,259 2,525 2,601
--------- --------- --------- ---------
Total expenses 21,542 34,511 43,928 66,090
--------- --------- --------- ---------
Income (Loss) Before
Income Taxes (1,047) 9,076 (2,807) 14,724
--------- --------- --------- ---------
Income Tax Expense
(Benefit):
Current (11) 46 (17) 78
Deferred (380) 3,403 (1,015) 5,441
--------- --------- --------- ---------
Total income
taxes (391) 3,449 (1,032) 5,519
--------- --------- --------- ---------
Net Income (Loss) $ (656) $ 5,627 $ (1,775) $ 9,205
========= ========= ========= =========
Net Income (Loss) Per
Common Share:
Basic $ (.02) $ .16 $ (.06) $ .26
========= ========= ========= =========
Diluted $ (.02) $ .16 $ (.06) $ .26
========= ========= ========= =========
The accompanying notes are an integral part of the
consolidated condensed financial statements.
3
UNIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
----------------------
1999 2000
---------- ----------
(Restated,
See Note 1)
(In thousands)
Cash Flows From Operating Activities:
Net income (loss) $ (1,775) $ 9,205
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Depreciation, depletion, 11,480 14,081
and amortization
Deferred tax expense (1,015) 5,441
Other 66 (187)
Changes in operating assets and
liabilities increasing
(decreasing) cash:
Accounts receivable 773 (6,802)
Accounts payable 2,953 3,439
Other - net 358 (90)
---------- ----------
Net cash provided by
operating activities 12,840 25,087
---------- ----------
Cash Flows From (Used In) Investing
Activities:
Capital expenditures (12,592) (20,939)
Proceeds from disposition of assets 805 1,421
Other-net (66) (364)
---------- ----------
Net cash used in
investing activities (11,853) (19,882)
---------- ----------
Cash Flows From (Used In) Financing
Activities:
Net borrowings (payments) under
line of credit (155) (6,539)
Net payments of notes payable
and other long-term debt (118) (308)
Proceeds from stock 47 133
Book overdrafts - (450)
---------- ----------
Net cash used in financing
activities (226) (7,164)
---------- ----------
Net Increase (Decrease) in Cash
and Cash Equivalents 761 (1,959)
Cash and Cash Equivalents, Beginning
of Year 688 2,647
---------- ----------
Cash and Cash Equivalents, End of Period $ 1,449 $ 688
========== ==========
The accompanying notes are an integral part of the
consolidated condensed financial statements.
4
UNIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PREPARATION AND PRESENTATION
- ----------------------------------------------
The accompanying unaudited consolidated condensed financial
statements include the accounts of the Company and its wholly owned
subsidiaries and have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission. As applicable under these
regulations, certain information and footnote disclosures have been
condensed or omitted and the consolidated condensed financial statements
do not include all disclosures required by generally accepted accounting
principles. In the opinion of the Company, the unaudited consolidated
condensed financial statements contain all adjustments necessary (all
adjustments are of a normal recurring nature) to present fairly the
interim financial information.
On March 20, 2000, the Company acquired, by merger, Questa Oil and
Gas Co. ("Questa")in a transaction accounted for as a pooling of interests.
In accordance with the pooling of interest method of accounting permitted
by Accounting Principles Board Opinion No. 16 "Business Combinations", all
prior period consolidated condensed financial statements presented have been
restated to include the accounts of Questa. In addition, the combined
financial results presented include conforming adjustments to restate
Questa's historical financial results from the successful efforts method of
accounting for oil and natural gas properties to the full cost method,
which is the method utilized by the Company.
Results for the three and six month periods ended June 30, 2000 are
not necessarily indicative of the results to be realized during the full
year. The condensed financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December
31, 1999. Our independent accountants have performed a review of the 2000
interim financial statements in accordance with standards established by
the American Institute of Certified Public Accountants. Pursuant to Rule
436(c) under the Securities Act of 1933 their report of that review
should not be considered as part of any registration statements prepared
or certified by them within the meaning of Section 7 and 11 of that Act.
5
NOTE 2 - EARNINGS PER SHARE
- ---------------------------
The following data shows the amounts used in computing earnings
(loss) per share for the Company.
WEIGHTED
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- ----------
For the Three Months Ended
June 30, 1999:
Basic earnings (loss)
per common share $ (656,000) 27,564,000 $ (0.02)
==========
Effect of dilutive
stock options - -
------------- -------------
Diluted earnings (loss)
per common share $ (656,000) 27,564,000 $ (0.02)
============= ============= ==========
For the Three Months Ended
June 30, 2000:
Basic earnings per
common share $ 5,627,000 35,719,000 $ 0.16
==========
Effect of dilutive
stock options - 431,000
------------- -------------
Diluted earnings per
common share $ 5,627,000 36,150,000 $ 0.16
============= ============= ==========
The following options and their average exercise prices were not
included in the computation of diluted earnings per share for the three
months ended June 30, 1999 because the options are not dilutive due to
the net loss and for the three months ended June 30, 2000 the option
exercise prices were greater than the average market price of common
shares:
1999 2000
---------- ----------
Options 844,000 17,500
========== ==========
Average exercise price $ 4.36 $ 12.19
========== ==========
6
WEIGHTED
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- ----------
For the Six Months Ended
June 30, 1999:
Basic earnings (loss)
per common share $ (1,775,000) 27,527,000 $ (0.06)
==========
Effect of dilutive
stock options - -
------------- -------------
Diluted earnings (loss)
per common share $ (1,775,000) 27,527,000 $ (0.06)
============= ============= ==========
For the Six Months Ended
June 30, 2000:
Basic earnings per
common share $ 9,205,000 35,722,000 $ 0.26
==========
Effect of dilutive
stock options - 364,000
------------- -------------
Diluted earnings per
common share $ 9,205,000 36,086,000 $ 0.26
============= ============= ==========
The following options and their average exercise prices were not
included in the computation of diluted earnings per share for the six
months ended June 30, 1999 because the options are not dilutive due to
the net loss and for the six months ended June 30, 2000 the option
exercise prices were greater than the average market price of common
shares:
1999 2000
---------- ----------
Options 844,000 20,000
========== ==========
Average exercise price $ 4.36 $ 12.08
========== ==========
7
NOTE 3 - MERGER WITH QUESTA
- ---------------------------
On March 20, 2000, the Company completed a merger with Questa Oil
and Gas Co. under which Questa became a wholly owned subsidiary of the
Company. In the merger each of Questa's outstanding shares of common
stock (excluding treasury shares) was converted into .95 shares of Unit
Corporation's common stock. The Company issued approximately 1.8 million
shares as a result of the merger. The merger has been accounted for as a
pooling of interests with the financial statements of the Company
restated to include the results of Questa for all periods presented.
The results of operations for each company and the combined amounts
presented in Unit Corporation's consolidated condensed financial
statements are as follows:
Six Months Three Months Three Months
Ended Ended Ended
June 30, June 30, March 31,
1999 1999 2000
------------ ------------ ------------
(In Thousands)
Revenues:
Unit Corporation $ 39,176 $ 19,479 $ 35,807
Questa 1,945 1,016 1,420
------------ ------------ ------------
Combined $ 41,121 $ 20,495 $ 37,227
============ ============ ============
Net Income:
Unit Corporation $ (2,148) $ (874) $ 3,095
Questa 373 218 483
------------ ------------ ------------
Combined $ (1,775) $ (656) $ 3,578
============ ============ ============
Questa's net income has been adjusted by $55,000 in the first six
months of 1999, $28,000 in the second quarter of 1999 and $12,000 in the
first quarter of 2000 to restate Questa's financial statements to the
full cost method of accounting used by the Company.
8
NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS
- --------------------------------------
On June 15, 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (FAS 133), as
subsequently amended by FAS 137 and 138. FAS 133 is now effective for all
fiscal quarters of fiscal years beginning after June 15, 2000 (January 1,
2001 for Unit). FAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of
hedge transaction. We anticipate that, based on the nature of our use of
derivative instruments, the adoption of FAS 133 will not have a
significant effect on our results of operations or financial position.
NOTE 5 - INDUSTRY SEGMENT INFORMATION
- -------------------------------------
The Company has two business segments: Contract Drilling and Oil
and Natural Gas, representing its two strategic business units offering
different products and services. The Contract Drilling segment provides
land contract drilling of oil and natural gas wells and the Oil and
Natural Gas segment is engaged in the development, acquisition and
production of oil and natural gas properties. The Company evaluates the
performance of its operating segments based on operating income, which is
defined as operating revenues less operating expenses and depreciation,
depletion and amortization. The Company has natural gas production in
Canada which is not significant. Information regarding the Company's
operations by industry segment for the three and six month periods ended
June 30, 1999 and 2000 are as follows:
9
Three Months Ended Six Months Ended
June 30, June 30,
1999 2000 1999 2000
---------- ---------- ---------- ----------
(In thousands)
Revenues:
Contract drilling $ 10,539 $ 24,596 $ 22,370 $ 46,344
Oil and natural gas 9,600 18,921 18,356 33,650
Other 356 70 395 820
---------- ---------- ---------- ----------
Total revenues $ 20,495 $ 43,587 $ 41,121 $ 80,814
========== ========== ========== ==========
Operating Income (1):
Contract drilling $ (748) $ 1,964 $ (693) $ 3,102
Oil and natural gas 2,020 9,846 2,816 16,427
---------- ---------- ---------- ----------
Total operating
Income 1,272 11,810 2,123 19,529
General and
administrative
expense (1,408) (1,545) (2,800) (3,024)
Interest expense (1,267) (1,259) (2,525) (2,601)
Other income
(expense)- net 356 70 395 820
---------- ---------- ---------- ----------
Income (loss)
before income
taxes $ (1,047) $ 9,076 $ (2,807) $ 14,724
========== ========== ========== ==========
(1) Operating income is total operating revenues less operating
expenses, depreciation, depletion and amortization and does not
include non-operating revenues, general corporate expenses, interest
expense or income taxes.
10
REPORT OF REVIEW BY INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Unit Corporation
We have reviewed the accompanying consolidated condensed balance sheet of
Unit Corporation and subsidiaries as of June 30, 2000, and the related
consolidated condensed statements of operations for the three and six month
periods ended June 30, 2000 and cash flows for the six month period ended
June 30, 2000. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial
statements for them to be in conformity with accounting principles
generally accepted in the United States.
PricewaterhouseCoopers L L P
Tulsa, Oklahoma
July 25, 2000
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ---------------------------------------------------------------------------
FINANCIAL CONDITION
- -------------------
On March 20, 2000, we completed the acquisition, by merger, of Questa
Oil and Gas Co.("Questa") under which Questa became a wholly owned
subsidiary of Unit Corporation. In the merger each of Questa's outstanding
shares of common stock (excluding treasury shares) was converted into .95
shares of our common stock. We issued approximately 1.8 million shares as
a result of this merger. The merger has been accounted for as a pooling of
interests and, accordingly, all amounts within this document have been
restated as if the companies had been combined throughout the periods
presented.
Our bank loan agreement provides for a total loan facility of $100
million with a current available borrowing value of $90 million. Each year
on April 1 and October 1 our banks redetermine our available borrowing
value which is an amount equal to a percentage of the discounted future
value of our oil and natural gas reserves plus an amount which is the
greater of (i) 50 percent of the appraised value of our contract drilling
rigs or (ii) two times the previous 12 months cash flow from our contract
drilling rigs, limited, in either case, to $20 million. Our loan agreement
provides for a revolving credit facility which terminates on May 1, 2002
followed by a three year term loan. Borrowings under our loan agreement
totaled $58.7 million at June 30, 2000 and $57.8 million at July 31, 2000.
We are charged a facility fee of .375 of 1 percent on any unused portion of
the available borrowing value.
The interest rate on our bank debt was 7.93 percent at June 30, 2000
and 7.87 percent at July 31, 2000. At our election, any portion of our
outstanding bank debt may be fixed at the London Interbank Offered Rate
("Libor Rate"), as adjusted depending on the level of our debt as a
percentage of the available borrowing value. The Libor Rate may be fixed
for periods of up to 30, 60, 90 or 180 days with the remainder of our bank
debt being subject to the Chase Manhattan Bank, N. A. prime rate. During
any Libor Rate funding period, we may not pay any part of the outstanding
principal balance which is subject to the Libor Rate. Borrowings subject
to the Libor Rate were $58.5 million at June 30, 2000 and 57.5 million at
July 31, 2000.
Our shareholders' equity at June 30, 2000 was $189.3 million giving us
a ratio of long-term debt-to-total capitalization of 25 percent. Our
primary source of funds consists of the cash flow from our operating
activities and borrowings under our bank loan agreement. Net cash provided
by our operating activities in the first six months of 2000 was $25.1
million compared to $12.8 million in 1999. We had working capital of $7.0
million at June 30, 2000. Our first six month 2000 capital expenditures
were $20.9 million of which $13.2 million was spent on our oil and natural
gas operations and $6.5 million on our contract drilling equipment. Our oil
12
and natural gas operations completed 36 wells in the first six months of
2000. If oil and natural gas prices remain favorable, we anticipate that we
will drill approximately 90 total wells during 2000 and spend approximately
$30 million drilling or buying oil and natural gas properties during the
year although this amount may increase depending on the availability of and
our success in acquiring oil and natural gas properties through
acquisitions. We anticipate that we will spend approximately $15 million
this year for drilling rig equipment capital expenditures.
Most of our capital expenditures are discretionary and directed toward
increasing oil and natural gas reserves and future growth. Current
operations do not depend on our ability to obtain funds outside of our loan
agreement. Future decisions to acquire or drill on oil and natural gas
properties will depend on prevailing or anticipated market conditions,
potential return on investment, future drilling potential and the
availability of financing, thus providing us with a large degree of
flexibility in determining when and if to incur such costs.
On September 30, 1999, we completed the acquisition of 13 land
drilling rigs from Parker Drilling Company and Parker Drilling Company
North America, Inc., for 1,000,000 shares of our common stock and
$40,000,000 in cash. The cash part of this acquisition was funded through
a public offering of 7,000,000 shares of our common stock which closed on
September 29, 1999. We received proceeds of $50.1 million from the
offering net of commission fees and other costs.
Due to a settlement agreement which terminated on December 31, 1997,
we have a liability of $877,000 at June 30, 2000, representing proceeds
received from a natural gas purchaser as prepayment for natural gas. The
$877,000 is payable in equal annual payments of approximately $439,000 due
on June 1, 2001 through June 1, 2002.
The prices we received for the sale of our natural gas in the first
six months of 2000 increased 70 percent above the prices we received during
the first six months of 1999. Average oil prices we received over the same
periods increased 91 percent. For the first six months of 2000, the average
natural gas price we received was $2.82 per Mcf and the average oil price
we received was $25.82 per barrel. Natural gas prices are influenced by
weather conditions and supply imbalances, particularly in the domestic
market, and by world wide oil price levels. Domestic oil price levels
continue to be primarily influenced by world market developments. Since
natural gas comprises approximately 88 percent of our total oil and natural
gas reserves, large drops in spot market natural gas prices have a
significant adverse effect on the value of our oil and natural gas reserves
and price declines could cause us to reduce the carrying value of our oil
and natural gas properties. Any price decreases, if sustained, would also
adversely affect our future cash flow by reducing our oil and natural gas
revenues and, if continued over an extended period, could lessen not only
the demand for our contract drilling rigs but also the rate we would
receive. Any declines in natural gas and oil prices could also adversely
affect the semi-annual determination of the borrowing value under our bank
13
loan agreement since this determination is based on the value of our oil
and natural gas reserves and our drilling rigs. Such a reduction would
reduce the amount available to us under our loan agreement which, in turn,
would affect our ability to carry out our capital projects. In the first
quarter of 2000, we entered into swap transactions in an effort to lock in
a portion of our production at the higher oil prices which currently exist.
These transactions apply to approximately 50 percent of our daily oil
production covering the period from April 1, 2000 to July 31, 2000 and 25
percent of our oil production for August and September of 2000, at prices
ranging from $24.42 to $27.01. In the second quarter of 2000, the oil swaps
yielded a reduction in our oil revenues of $199,000.
Generally, during the past 15 years, our contract drilling operations
have encountered significant competition. In the last six months of 1999,
and the first six months of 2000 we have experienced significant
improvement in rig utilization. Despite the recent improvement in rig
demand, we still anticipate that competition within our industry will, for
the foreseeable future, continue to influence the use of our drilling rigs.
In addition to competition, our ability to use our drilling rigs at any
given time depends on a number of other factors, including the price of
both oil and natural gas, the availability of labor and our ability to
supply the type of equipment required.
Although we have not encountered material difficulty in hiring and
retaining qualified rig crews, such shortages have in the past occurred in
the industry. We may experience shortages of qualified personnel to operate
our rigs, which would limit our ability to increase the number of our rigs
working and could have an adverse effect on our financial condition and
results of operations.
In the third quarter of 1994, our board of directors authorized us to
purchase up to 1,000,000 shares of our outstanding common stock on the open
market. Since that time, 160,100 shares were repurchased at prices ranging
from $2.50 to $9.69 per share. In the first quarter of 1998 and 1999, we
used 19,863 and 25,000 of the purchased shares, respectively, as part of
our matching contribution to our 401(k) Employee Thrift Plan. As part of
the requirements for the pooling of interests in the Questa merger the
authorization to purchase treasury shares has been withdrawn. At June 30,
1999 and 2000 we held no treasury shares.
SAFE HARBOR STATEMENT
- ---------------------
Statements in this document as well as information contained in
written material, press releases and oral statements issued by or on behalf
of us contain, or may contain, certain "forward-looking statements" within
the meaning of federal securities laws. All statements, other than
statements of historical facts, included in this document which address
activities, events or developments which we expect or anticipate will or
may occur in the future are forward-looking statements. The words
"believes," "intends," "expects," "anticipates," "projects," "estimates,"
"predicts" and similar expressions are also intended to identify forward-
14
looking statements. These forward-looking statements include, among
others, such things as:
. the amount and nature of future capital expenditures;
. wells to be drilled or reworked;
. oil and natural gas prices to be received and demand for oil and
natural gas;
. exploitation and exploration prospects;
. estimates of proved oil and natural gas reserves;
. reserve potential;
. development and infill drilling potential;
. drilling prospects;
. expansion and other development trends of the oil and natural gas
industry;
. our business strategy;
. production of our oil and natural gas reserves;
. expansion and growth of our business and operations; and
. drilling rig utilization, revenues and costs.
. availability of qualified labor.
These statements are based on certain assumptions and analyses made by
us in light of our experience and our perception of historical trends,
current conditions and expected future developments as well as other
factors we believe are appropriate in the circumstances. However, whether
actual results and developments will conform to our expectations and
predictions is subject to a number of risks and uncertainties which could
cause actual results to differ materially from our expectations, including:
. the risk factors discussed in this document;
. general economic, market or business conditions;
. the nature or lack of business opportunities that may be presented to
and pursued by us;
. demand for land drilling services;
. changes in laws or regulations; and
. other factors, most of which are beyond our control.
A more thorough discussion of forward-looking statements with the
possible impact of some of these risks and uncertainties is provided in our
Annual Report on Form 10-K filed with the Securities and Exchange
Commission. We encourage you to obtain and read that document.
RESULTS OF OPERATIONS
- ---------------------
Second Quarter 2000 versus Second Quarter 1999
- ----------------------------------------------
Our net income for the second quarter of 2000 was $5,627,000, compared
with a net loss of $656,000 in 1999. Higher natural gas and oil prices and
production volumes along with increases in the use of our drilling rigs and
15
the rates we received for the drilling rigs all contributed to the increase
in our net income.
Our revenue from the sale of our oil and natural gas increased 97
percent in the second quarter of 2000 compared to the second quarter of
1999 due to a 81 percent and 58 percent increase in the average prices we
received for natural gas and oil, respectively. Natural gas production
also increased 15 percent and oil production increased 21 percent when
compared to the second quarter of 1999. Production increases from both our
oil and natural gas were due to the acceleration of our development
drilling program as a result of rising prices in the last half of 1999.
In the second quarter of 2000, revenues from our contract drilling
operations increased by 133 percent as the average number of drilling rigs
being used increased from 19.0 in the second quarter of 1999 to 37.4 in
2000. Increased rig utilization resulted from the expansion of our
drilling activity into the Rocky Mountains with the acquisition of the
Parker rigs in September 1999 and from increases in demand for our rigs
located in Oklahoma. Revenues per rig per day increased 18 percent in the
second quarter of 2000 as compared to the same period in 1999. While
dayrates in all of our drilling areas were higher, the Rockies provide
dayrates substantially higher than those achieved in our other market
areas.
Operating margins (revenues less operating costs) for our oil and
natural gas operations were 75 percent in the second quarter of 2000
compared to 62 percent for the same period in 1999. This increase resulted
primarily from the increase in the average oil and natural gas prices we
received. Total operating costs increased 29 percent due to increases in
the net number of wells owned.
Our contract drilling operating margins increased from 7 percent in
the second quarter of 1999 to 19 percent in the second quarter of 2000.
This increase was generally due to increases in rig utilization and revenue
per rig per day. Total contract drilling operating costs were up 102
percent in 2000 versus 1999 due to increased utilization and labor costs.
Depreciation, depletion and amortization ("DD&A") of our oil and
natural gas properties increased 11 percent due to the increase in
production. The increase was partially offset by a 4 percent reduction in
the average DD&A rate per Mcfe to $0.81 in the second quarter of 2000.
Contract drilling depreciation increased 91 percent due to the impact of
higher depreciation per operating day associated with the newly acquired
Parker rigs and an overall increase in rig utilization.
General and administrative expenses increased 10 percent while
interest expense decreased one percent between the comparative periods. The
average interest rate on all long-term debt increased from 6.5 percent in
the second quarter of 1999 to 7.8 percent in the second quarter of 2000
while our average outstanding debt decreased 18 percent.
16
Six Months 2000 versus Six Months 1999
- --------------------------------------
Our net income for the first six months of 2000 was $9,205,000,
compared with a net loss of $1,775,000 in 1999. Higher natural gas and oil
prices and production volumes along with increases in the use of our
drilling rigs and the rates we received for the drilling rigs all
contributed to the increase in our net income.
Our revenue from the sale of our oil and natural gas increased 83
percent in the first six months of 2000 compared to the first six months of
1999 due to a 70 percent and 91 percent increase in average prices we
received for natural gas and oil, respectively. Natural gas production
also increased 8 percent and oil production increased 16 percent when
compared to the first six months of 1999. Production increases from both
our oil and natural gas were due to the acceleration of our development
drilling program as a result of rising prices in the last half of 1999.
In the first six months of 2000, revenues from our contract drilling
operations increased by 107 percent as the average number of drilling rigs
being used increased from 19.5 in the first six months of 1999 to 36.1 in
2000. Increased rig utilization resulted from the expansion of our
drilling activity into the Rocky Mountains with the acquisition of the
Parker rigs in September 1999 and from increases in demand for our rigs
located in Oklahoma. Revenues per rig per day increased 11 percent in the
first six months of 2000 as compared to the same period in 1999. While
dayrates in all of our drilling areas were higher, the Rockies provide
dayrates substantially higher than those achieved in our other market
areas.
Operating margins (revenues less operating costs) for our oil and
natural gas operations were 74 percent in the first six months of 2000
compared to 61 percent for the same period in 1999. This increase resulted
primarily from the increase in the average oil and natural gas prices we
received. Total operating costs increased 21 percent due to increases in
the net number of wells owned.
Our contract drilling operating margins increased from 9 percent in
the first six months of 1999 to 18 percent in the first six months of 2000.
This increase was generally due to increases in rig utilization and revenue
per rig per day. Total contract drilling operating costs were up 87
percent in 2000 versus 1999 due to increased utilization and labor costs.
Depreciation, depletion and amortization ("DD&A") of our oil and
natural gas properties increased 2 percent due to the increase in
production. The increase was partially offset by a 6 percent reduction in
the average DD&A rate per Mcfe to $0.81 in first six months of 2000.
Contract drilling depreciation increased 89 percent due to the impact of
higher depreciation per operating day associated with the newly acquired
Parker rigs and an overall increase in rig utilization.
17
General and administrative expenses increased 8 percent while interest
expense increased 3 percent between the comparative periods. The average
interest rate on all long-term debt increased from 6.5 percent in the first
six months of 1999 to 7.8 percent in the first six months of 2000 while our
average outstanding debt decreased 16 percent.
On May 3, 1999, our contract drilling offices in Moore, Oklahoma were
struck by a tornado destroying two buildings and damaging various vehicles
and drilling equipment. During the first quarter of 2000, we received the
final insurance proceeds totaling $987,000 for the contents of the
buildings destroyed, damaged equipment and clean up costs. As a result, we
recognized a gain of $599,000 recorded as part of other revenues in the
first quarter of 2000.
On June 15, 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133) as amended by FAS
137 and FAS 138. For additional information see, "Note 4 - New Accounting
Pronouncements" in the Notes to Consolidated Condensed Financial
Statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------- ----------------------------------------------------------
Our operations are exposed to market risks due to changes in commodity
prices. The price we receive is primarily driven by the prevailing
worldwide price for crude oil and market prices applicable to our natural
gas production. Historically, prices we have received for our oil and
natural gas production have been volatile and such volatility is expected
to continue.
To reduce the impact of price fluctuations, we periodically use hedging
strategies to hedge the price we will receive for a portion of our future
oil and natural gas production. During the second quarter of 2000 we had
swap transactions applying to approximately 50 percent of our daily oil
production, at prices ranging from $24.42 to $27.01. These transactions
yielded a reduction in our oil revenues of $199,000 in the second quarter
of 2000. During July 2000 we have swap transactions for approximately 50
percent of our daily oil production and for August and September 2000 we
have swap transactions for approximately 25 percent of our oil production,
at prices ranging from $24.42 to $24.91.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Not applicable
Item 2. Changes in Securities and Use of Proceeds
- --------------------------------------------------
Not applicable
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
On May 3, 2000 we held our Annual Meeting of Stockholders. At the
meeting the following matters were voted on, with each receiving the
votes indicated:
I. Election of Nominees John G. Nikkel and John S. Zink to
serve as directors.
Numbers of Against or
Nominee Votes For Withheld
---------------------- ------------ ------------
John G. Nikkel 25,946,900 2,131,978
John S. Zink 25,935,187 2,143,691
The following directors, whose term of office did not expire
at the annual meeting, continue as directors of the Company:
Earle Lamborn, William B. Morgan, John H. Williams,
King P. Kirchner, Don Cook and J. Michael Adcock.
II. Ratification of the appointment of PricewaterhouseCoopers L
L P as the Company=s independent certified public
accountants for the fiscal year 1999.
For - 28,009,140
Against - 44,724
Abstain - 25,014
19
III. Ratification of an amendment to restate our certificate of
incorporation to increase the number of authorized shares of
common stock from 40 million shares to 75 million shares.
For - 25,578,583
Against - 2,455,688
Abstain - 44,607
IV. Ratification of amendments to the Unit Corporation Amended
and Restated Stock Option Plan.
For - 21,994,684
Against - 718,300
Abstain - 97,198
V. Approval of the Unit Corporation 2000 Non-Employee Directors'
Stock Option Plan.
For - 21,244,392
Against - 1,466,189
Abstain - 99,601
Item 5. Other Information
- --------------------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits:
15 Letter re: Unaudited Interim Financial Information.
27 Financial Data Schedule
(b) On May 24, 2000, we filed a report on Form 8-K under Item 5 to
release the financial results of Unit Corporation for April,
2000.
On June 29, 2000, we filed a report on Form 8-K under Items 5
and 7. This report filed as an exhibit the Amended and
Restated Certificate of Incorporation of Unit Corporation,
which increased the authorized shares of common stock of Unit
Corporation from 40,000,000 to 75,000,000, as approved by the
Stockholders at the Annual Meeting of Stockholders of Unit
Corporation held on May 3, 2000.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
UNIT CORPORATION
Date: August 10, 2000 By: /s/ John G. Nikkel
--------------------------- ------------------------------
JOHN G. NIKKEL
President, Chief Operating
Officer and Director
Date: August 10, 2000 By: /s/ Larry D. Pinkston
--------------------------- ------------------------------
LARRY D. PINKSTON
Vice President, Chief
Financial Officer
and Treasurer
21