Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 1-9260
UNIT CORPORATION
(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 20,864,749
Class Outstanding at May 1, 1995
UNIT CORPORATION
INDEX
Page
PART I. Financial Information: Number
Item 1 - Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets
March 31, 1995 and December 31, 1994 2
Consolidated Condensed Statements of Operations
Three Months Ended March 31, 1995 and 1994 3
Consolidated Condensed Statements of Cash Flows
Three Months Ended March 31, 1995 and 1994 4
Notes to Consolidated Condensed Financial Statements 5
Report of Review by Independent Accountants 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. Other Information:
Item 1 - Legal Proceedings 11
Item 2 - Changes in Securities 11
Item 3 - Defaults Upon Senior Securities 11
Item 4 - Submission of Matters to a Vote of
Security Holders 11
Item 5 - Other Information 11
Item 6 - Exhibits and Reports on Form 8-K 11
Signatures 12
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, December 31,
1995 1994
---------- ----------
ASSETS (Unaudited)
- ------ (In thousands)
Current Assets:
Cash and cash equivalents $ 3,632 $ 2,749
Accounts receivable 13,356 16,369
Other 2,517 2,720
---------- ----------
Total current assets 19,505 21,838
---------- ----------
Property and Equipment:
Total cost 246,666 244,405
Less accumulated depreciation, depletion,
amortization and impairment 156,370 153,862
---------- ----------
Net property and equipment 90,296 90,543
---------- ----------
Other Assets 41 40
---------- ----------
Total Assets $ 109,842 $ 112,421
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current portion of long-term debt $ 72 $ 496
Current portion of natural gas purchaser
prepayments (Note 2) 1,580 1,580
Accounts payable 12,512 14,593
Accrued liabilities 3,618 3,172
---------- ----------
Total current liabilities 17,782 19,841
---------- ----------
Natural Gas Purchaser Prepayments (Note 2) 1,770 2,149
---------- ----------
Long-Term Debt 36,800 37,824
---------- ----------
Shareholders' Equity:
Preferred stock, $1.00 par value, 5,000,000
shares authorized, none issued - -
Common stock $.20 par value, 40,000,000
shares authorized, 20,933,190 and
20,910,190 shares issued, respectively 4,187 4,182
Capital in excess of par value 50,115 50,086
Accumulated deficit (625) (1,581)
Treasury stock, at cost, 68,441 and
25,100 shares, respectively (187) (80)
---------- ----------
Total shareholders' equity 53,490 52,607
---------- ----------
Total Liabilities and Shareholders' Equity $ 109,842 $ 112,421
========== ==========
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
March 31,
1995 1994
---------- ----------
(In thousands except per
share amounts)
Revenues:
Contract drilling $ 4,325 $ 4,100
Oil and natural gas 7,369 6,507
Natural gas marketing and processing 13,566 12,377
Other 661 21
---------- ----------
Total revenues 25,921 23,005
---------- ----------
Expenses:
Contract drilling:
Operating costs 3,864 3,787
Depreciation 497 494
Oil and natural gas:
Operating costs 2,859 2,089
Depreciation, depletion and amortization 2,599 1,876
Natural gas marketing and processing 13,434 12,342
General and administrative 916 880
Interest 792 322
---------- ----------
Total expenses 24,961 21,790
---------- ----------
Income Before Income Taxes 960 1,215
Income Tax Expense 4 4
---------- ----------
Net Income $ 956 $ 1,211
========== ==========
Net Income Per Common Share $ .05 $ .06
========== ==========
Weighted Average Shares Outstanding 20,885 20,893
(Both primary and fully diluted) ========== ==========
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)
Three Months Ended
March 31,
1995 1994
---------- ----------
(In thousands)
Cash Flows From Operating Activities:
Net income $ 956 $ 1,211
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 3,201 2,478
Other-net (487) 93
Changes in operating assets and liabilities
increasing (decreasing) cash:
Accounts receivable 3,013 1,980
Accounts payable (2,274) 266
Natural gas purchaser prepayments (Note 2) (379) (565)
Other-net 649 415
---------- ----------
Net cash provided by
operating activities 4,679 5,878
---------- ----------
Cash Flows From (Used In) Investing Activities:
Capital expenditures (4,852) (3,141)
Proceeds from disposition of assets 2,735 56
Other-net (1) 14
---------- ----------
Net cash used in investing activities (2,118) (3,071)
---------- ----------
Cash Flows From (Used In) Financing Activities:
Net payments under line of credit (500) (1,200)
Net payments of notes payable
and long-term debt (948) (118)
Other-net (230) -
---------- ----------
Net cash used in financing activities (1,678) (1,318)
---------- ----------
Net Increase in Cash and Cash Equivalents 883 1,489
Cash and Cash Equivalents, Beginning of Year 2,749 3,756
---------- ----------
Cash and Cash Equivalents, End of Period $ 3,632 $ 5,245
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the three months ended March 31, for:
Interest $ 746 $ 324
Income taxes $ - $ -
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
- ----------------------------------------------
In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments necessary (all
adjustments are of a normal recurring nature) to present fairly the financial
position of Unit Corporation as of March 31, 1995 and the results of its
operations and cash flows for the three month periods ended March 31, 1995 and
1994. Results for the three months ended March 31, 1995 are not necessarily
indicative of the results to be realized during the full year. The year end
consolidated condensed balance sheet data was derived from audited financial
statements but does not include all disclosures required by generally accepted
accounting principles. The financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
1994.
NOTE 2 - NATURAL GAS PURCHASER PREPAYMENTS
- -------------------------------------------
In March 1988, the Company entered into a settlement agreement with a
natural gas purchaser. During early 1991, the Company and the natural gas
purchaser superseded the original agreement with a new settlement agreement
effective retroactively to January 1, 1991. Under these settlement agreements,
the Company has a prepayment balance of $3.4 million at March 31, 1995
representing proceeds received from the purchaser as prepayment for natural
gas. This amount is net of natural gas recouped and net of certain amounts
disbursed to other owners (such owners, collectively with the Company are
referred to as the "Committed Interest") for their proportionate share of
the prepayments. The March 31, 1995 prepayment balance is subject to
recoupment in volumes of natural gas for a period ending the earlier of
recoupment or December 31, 1997 (the "Recoupment Period"). The prepayment
amounts are being recorded as liabilities and reflected in revenues as
recoupment occurs. The portion of the prepayments that are estimated to be
recouped in the next twelve months has been included in current liabilities.
Additionally, the purchaser is obligated to make monthly payments on behalf of
the Committed Interest in an amount calculated as a percentage of the Committed
Interest's share of the deliverability of the wells subject to the settlement
agreement, up to a maximum of $211,000 or a minimum of $110,000 per month for
the year 1995. Both the maximum and minimum monthly payments decline annually
through the Recoupment Period. At December 31, 1997, the Committed Interest's
prepayment balance, if any, that has not been fully recouped in natural gas is
subject to a cash repayment limited to a maximum of $3 million to be made in
equal payments over a five year period. At the end of the Recoupment Period,
the terms of the settlement agreement and the natural gas purchase contracts
which are subject to the settlement agreement will terminate.
NOTE 3 - INCOME TAXES
- ---------------------
Income tax expense for the three month periods ended March 31, 1995 and
1994 differs from income tax expense computed by applying the statutory rate
due principally to the utilization of the Company's net operating loss
carryforward.
5
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 March 31, 1995, and the related consoli-
dated condensed statements of operations and cash flows for the three month
periods ended March 31, 1995 and 1994. 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Unit Corporation and subsidiaries
at December 31, 1994, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows for the year then ended (not
presented herein); and our report dated February 22, 1995 expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated condensed
balance sheet at December 31, 1994, is fairly stated in all material respects
in relation to the consolidated balance sheet from which it has been derived.
COOPERS & LYBRAND L. L. P.
Tulsa, Oklahoma
May 5, 1995
6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -------------------------------------------------------------------------
FINANCIAL CONDITION
- -------------------
The Company's credit agreement (the "Agreement") provides for a total
commitment of $50 million, consisting of a revolving credit facility through
January 1, 1997 and a term loan thereafter, maturing on January 1, 2001.
Borrowings under the revolving credit facility are limited to a borrowing base
which is subject to a semi-annual redetermination. The latest borrowing base
determination as of May 1, 1995 established that $47 million of the commitment
is available to the Company. At March 31, 1995 borrowings under the agreement
totaled $36.8 million and the average interest rate paid by the Company in the
first quarter of 1995 had risen to 8.8 percent compared to the average
interest rate of 6.0 percent paid in the first quarter of 1994. A 1/2 of 1
percent facility fee is charged for any unused portion of the borrowing base.
The Company's shareholders' equity at March 31, 1995 was $53.5 million
resulting in a ratio of long-term debt-to-equity of .69 to 1. The Company's
primary source of liquidity and capital resources in the near- and long-term
will consist of cash flow from operating activities and available borrowings
under the Company's Agreement. Net cash provided by operating activities for
the first three months of 1995 was $4.7 million as compared to $5.9 million
for the first three months of 1994. The reduction in 1995, as compared to
1994, was due to significantly lower spot market natural gas prices received
in 1995.
In January 1995, the Company completed an acquisition, which included
ten natural gas wells located in Lipscomb County, Texas, for $2.1 million.
During the first quarter of 1995 the Company elected to limit its development
drilling and focused on paying down a portion of its long-term debt. The
Company plans to focus on development drilling for the remainder of 1995.
Depending, in part, on commodity pricing, the Company anticipates it will
spend approximately $16 million for capital expenditures in 1995. These
expenditures are anticipated to be within the constraints of available cash to
be provided by operating activities and the Company's existing credit
agreement. A large portion of the Company's capital expenditures are
discretionary; therefore, current operations should not be adversely affected
by any inability to obtain funds outside of the Company's current credit
agreement.
The Company has 2.873 million common stock warrants outstanding. The
warrants entitle the holders to purchase one share of common stock at a price
of $4.375 per share. The warrants, subject to certain restrictions, are
callable by the Company, in whole or in part, at $.50 per warrant. By a
Second Amendment to the Warrant Agreement between the Company and the Warrant
Agent, dated May 9, 1994, the term of the warrants was extended until August
30, 1996.
The Company continued to receive monthly payments on behalf of itself
and other parties (collectively the "Committed Interest") from a natural gas
purchaser pursuant to a settlement agreement, as amended (the "Settlement
Agreement"). As a result of the Settlement Agreement, the March 31, 1995
prepayment balance of $3.4 million paid by the purchaser for natural gas not
taken (the "Prepayment Balance") is subject to recoupment in volumes of
natural gas through a period ending on the earlier of recoupment or December
7
31, 1997 (the "Recoupment Period"). Additionally, the purchaser is obligated
to make monthly payments on behalf of the Committed Interest based on their
share of the natural gas deliverability of the wells subject to the Settlement
Agreement, up to a maximum of $211,000 or a minimum of $110,000 per month for
the year 1995. Both the maximum and minimum monthly payments decline annually
through the Recoupment Period. If natural gas is taken during a month, the
value of such natural gas is credited toward the monthly amount the purchaser
is required to pay. In the event the purchaser takes volumes of natural gas
valued in excess of its monthly payment obligations, the value taken in excess
is applied to reduce any then outstanding Prepayment Balance. The Company
currently believes that sufficient natural gas deliverability is available to
enable the Committed Interest to receive substantially all of the maximum
monthly payments during 1995. At the end of the Recoupment Period the
Settlement Agreement and the natural gas purchase contracts which are subject
to the Settlement Agreement will terminate. If the Prepayment Balance is not
fully recouped in natural gas by December 31, 1997 then the unrecouped portion
is subject to cash repayment, limited to a maximum of $3 million, payable in
equal annual installments over a five year period. Under the Settlement
Agreement, the purchaser is entitled to make a monthly determination of the
volumes to be purchased from the wells subject to the Settlement Agreement.
During the first quarter of 1995, the Company in accordance with the terms of
the Settlement Agreement, elected to deliver natural gas at approximately 75
percent of the deliverability of the wells subject to the Settlement
Agreement. First quarter 1994 deliverability was approximately 80 percent of
the deliverability of the wells subject to the Settlement Agreement. However,
because these month-to-month determinations, up to certain maximum levels, are
made by the purchaser, the Company is unable to predict with certainty future
natural gas sales from these wells. In addition, future revenues to be
received by the Company would be impacted by the failure of the purchaser to
meet its obligations, financially or otherwise, under the terms of the
Settlement Agreement or by the ability of the wells to maintain certain
projected deliverability requirements. In the event the wells are unable to
maintain such deliverability, the monthly payments to be received by the
Company under the Settlement Agreement would be decreased. The price per Mcf
under the Settlement Agreement is substantially higher than current spot
market prices.
Average oil prices received by the Company in the first quarter of 1995
were $3.64 per barrel higher than oil prices received in the first quarter of
1994. Average spot market natural gas prices, however, were $.60 lower per
Mcf than the average spot market natural gas prices received in the same
quarter of 1994. Oil prices within the industry remain largely dependent upon
world market developments for crude oil. Prices for natural gas are
influenced by weather conditions and supply imbalances, particularly in the
domestic market, and by world wide oil price levels. Since natural gas
comprises approximately 77 percent of the Company's reserves, large drops in
spot market natural gas prices have a significant adverse effect on the value
of the Company's reserves. Such decreases also adversely effect the Company's
cash flow. Likewise, declines in natural gas or oil prices could adversely
effect the semi-annual borrowing base determination under the Company's
current credit agreement since this determination is, for the most part,
calculated on the value of the Company's oil and natural gas reserves.
The Company's ability to utilize its full complement of drilling rigs,
should economic conditions improve in the future, will be restricted due to
the lack of qualified labor and certain supporting equipment not only within
the Company but in the industry as a whole. The Company's ability to utilize
8
its drilling rigs at any given time is dependent on a number of factors,
including but not limited to, the price of both oil and natural gas, the
availability of labor and the Company's ability to supply the type of
equipment required. The Company's management expects that these factors will
continue to influence the Company's rig utilization throughout 1995.
In the third quarter of 1994, the Company's Board of Directors
authorized the Company to purchase up to 1,000,000 shares of the Company's
outstanding common stock on the open market. At March 31, 1995 115,100 shares
had been repurchased at prices ranging from $2 1/2 to $3 3/8 per share.
Before March 31, 1995, however, 46,659 of the purchased shares were used as
the Company's matching contribution to its 401(K) Employee Thrift Plan.
RESULTS OF OPERATIONS
- ---------------------
The Company reported net income of $956,000 in the first quarter of 1995
as compared to net income of $1,211,000 for the first quarter of 1994. The
1995 net income included a gain of $635,000 from the sale of 44 natural gas
compressors and certain related support equipment which were sold for $2.7
million. The Company leased back a substantial portion of the compressors
sold with lease payment terms which decline periodically over the next 2 1/2
years; therefore, an additional $566,000 of gain was deferred and will be
subsequently amortized to reduce future rental expense. While the Company
continued to increase natural gas production, substantially lower natural gas
prices when compared with the same period in 1994 reduced the net income
attributable to operations, excluding the gain on the sale of the compressors.
Oil and natural gas revenues increased 13 percent in the first quarter
of 1995 as compared to the first quarter of 1994. As a result of the
Company's 1994 producing property acquisitions and development drilling
program, oil and natural gas production increased by 44 and 40 percent,
respectively, between the two quarters. Average oil prices received by the
Company increased 28 percent during the quarter while the average natural gas
prices dropped by 31 percent. The reduction in natural gas prices was caused
by both a $.60 drop in average spot market prices as well as a decline in
production from wells covered by the Settlement Agreement, which provides for
prices higher than current spot market prices, as discussed above. The first
quarter 1995 production from wells covered by the Settlement Agreement
represented 5 percent of the Company's natural gas production as compared to 9
percent in the first quarter of 1994. The impact of the higher price received
under the Settlement Agreement increased pre-tax income by approximately
$370,000 and $420,000 in the first quarters of 1995 and 1994, respectively.
Oil and natural gas operating margins (revenues less operating costs)
declined from 68 percent in the first quarter of 1994 to 61 percent in the
first quarter of 1995. Total operating cost increased 37 percent due to the
additional costs associated with producing properties acquired in December of
1994 and to a lesser extent from increased workover activity in the first
quarter of 1995. Margins were also reduced due to the shutting in of
production on approximately 45 and 35 natural gas properties in the month(s)
of February and March, respectively, due to low spot market natural gas
prices. Depreciation, depletion and amortization ("DD&A") increased 39
percent due to increased production between the comparative quarters. The
Company's average DD&A rate for the first quarter of 1995 was $3.99 compared
with $4.03 in the first quarter of 1994.
9
Contract drilling revenues increased 5 percent for the comparative
quarters due to increased revenue received per day from three rigs operating
in the South Texas Basin. The Company entered this basin, which is a new
market for the Company's contract drilling services, subsequent to the first
quarter of 1994. Rig utilization averaged 9.2 rigs in the first quarter of
1995 and averaged 9.5 rigs in the first quarter of 1994.
Contract drilling operating margins (revenues less operating costs) were
11 percent in the first quarter of 1995 as compared to 8 percent in the first
quarter of 1994. The rigs in the South Texas Basin, while providing higher
day rates, also experience higher expenses per day. This coupled with initial
start up costs incurred in establishing the rigs in this new market area
limited further improvements in operating margins in the first quarter of
1995.
The Company's ability to utilize its drilling rigs and maintain positive
drilling profit margins at any given time will be dependent on a number of
factors, including but not limited to, the price of both oil and natural gas,
the availability of the Company's rigs in the area of the proposed wells,
competition from other drilling contractors, the availability of labor and
drilling supplies at competitive prices and the Company's ability to supply
the equipment required. The Company's management expects that these factors
will continue to influence the Company's rig utilization during the remainder
of 1995.
Natural gas marketing and processing revenues increased 10 percent in
the first quarter of 1995 when compared with the first quarter of 1994.
Natural gas marketing and processing operating margins (revenues less costs)
were 1 percent for the first quarter of 1995 and break-even for the first
quarter of 1994. While achieving substantial growth in revenues in recent
years, the Company's natural gas marketing and processing operations, have not
achieved the size necessary to reach desired levels of profitability.
Consequently, the Company, effective April 1, 1995, completed a business
combination between the Company's marketing operations and a third party also
involved in natural gas marketing activity forming a new company called GED
Gas Services, L.L.C. ("GED"). The Company owns a 34 percent interest in GED
and has agreed to guarantee approximately $2 million of the credit line
obtained by GED. The combination will not adversely affect the operations of
the Company's drilling and oil and natural gas exploration segments or the
profitability of the Company as a whole, although it will result in a
significant reduction in the Company's total revenues and associated costs.
For the year 1994, revenues and costs associated with the Company's natural
gas marketing operations were $43.7 million and $43.6 million, respectively.
General and administrative expenses increased 4 percent in the first
quarter of 1995 when compared with the first quarter of 1994 as all types of
general and administrative expenses showed increases as the Company continues
to grow.
Interest expense increased 146 percent due to increases in the average
interest rate from 6.0 percent in the first quarter of 1994 compared to 8.8
percent in the first quarter of 1995 combined with a 94 percent increase in
average long-term bank debt between the comparative quarters due to producing
property acquisitions in December 1994 and January 1995.
10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Not applicable
Item 2. Changes in Securities
- ------------------------------
Not applicable
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Not applicable
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 December 28, 1994 (as amended by Form 8-K/A filed
February 24, 1995), the Company filed a report on Form 8-K
under Item 2 and Item 5 reporting the purchase of certain
oil and natural gas wells located in Oklahoma, Texas, New
Mexico and Louisiana from Patrick Petroleum Corp. of
Michigan and American National Petroleum Company and the
amending of the Company's credit agreement.
11
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: May 5, 1995 By: /s/ John G. Nikkel
------------------------------ -----------------------------
JOHN G. NIKKEL
President, Chief Operating Officer
and Director
Date: May 5, 1995 By: /s/ Larry D. Pinkston
----------------------------- -----------------------------
LARRY D. PINKSTON
Vice President, Chief Financial
Officer and Treasurer
12