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, 1997
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 24,176,734
Class Outstanding at May 5, 1997
UNIT CORPORATION
INDEX
Page
PART I. Financial Information: Number
Item 1 - Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets
March 31, 1997 and December 31, 1996 2
Consolidated Condensed Statements of Operations
Three Months Ended March 31, 1997 and 1996 3
Consolidated Condensed Statements of Cash Flows
Three Months Ended March 31, 1997 and 1996 4
Notes to Consolidated Condensed Financial Statements 5
Report of Review by Independent Accountants 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. Other Information:
Item 1 - Legal Proceedings 12
Item 2 - Changes in Securities 12
Item 3 - Defaults Upon Senior Securities 12
Item 4 - Submission of Matters to a Vote of
Security Holders 12
Item 5 - Other Information 12
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 13
1
Item 1. Financial Statements
UNIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, December 31,
1997 1996
---------- ----------
ASSETS (Unaudited)
- ------ (In thousands)
Current Assets:
Cash and cash equivalents $ 2,880 $ 547
Accounts receivable 13,901 15,842
Other 3,852 3,766
---------- ----------
Total current assets 20,633 20,155
---------- ----------
Property and Equipment:
Total cost 299,785 293,917
Less accumulated depreciation, depletion,
amortization and impairment 180,000 176,211
---------- ----------
Net property and equipment 119,785 117,706
---------- ----------
Other Assets 291 132
---------- ----------
Total Assets $ 140,709 $ 137,993
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current portion of long-term debt $ - $ -
Accounts payable 8,944 6,893
Accrued liabilities 5,707 5,816
---------- ----------
Total current liabilities 14,651 12,709
---------- ----------
Natural Gas Purchaser Prepayments (Note 2) 2,112 2,276
---------- ----------
Long-Term Debt 35,000 40,600
---------- ----------
Deferred Income Taxes 6,363 4,198
---------- ----------
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, 24,186,597 and
24,157,312 shares issued, respectively 4,837 4,831
Capital in excess of par value 63,180 62,735
Retained earnings 14,625 10,751
Treasury stock, at cost, 9,863 and
28,755 shares, respectively (59) (107)
---------- ----------
Total shareholders' equity 82,583 78,210
---------- ----------
Total Liabilities and Shareholders' Equity $ 140,709 $ 137,993
========== ==========
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,
1997 1996
---------- ----------
(In thousands except per
share amounts)
Revenues:
Contract drilling $ 11,037 $ 6,086
Oil and natural gas 13,259 9,763
Other 26 22
---------- ----------
Total revenues 24,322 15,871
---------- ----------
Expenses:
Contract drilling:
Operating costs 8,729 5,373
Depreciation 912 631
Oil and natural gas:
Operating costs 3,528 3,387
Depreciation, depletion and
amortization 3,157 2,607
General and administrative 1,117 1,116
Interest 660 805
---------- ----------
Total expenses 18,103 13,919
---------- ----------
Income Before Income Taxes 6,219 1,952
---------- ----------
Income Tax Expense:
Current 43 15
Deferred 2,302 718
---------- ----------
Total income taxes 2,345 733
---------- ----------
Net Income $ 3,874 $ 1,219
========== ==========
Net Income Per Common Share:
Primary $ .16 $ .06
========== ==========
Fully diluted $ .16 $ .06
========== ==========
Weighted Average Shares Outstanding:
Primary 24,531 21,404
========== ==========
Fully diluted 24,531 21,488
========== ==========
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,
1997 1996
---------- ----------
(In thousands)
Cash Flows From Operating Activities:
Net income $ 3,874 $ 1,219
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation, depletion and amortization 4,153 3,319
Other-net 223 205
Deferred income tax expense 2,302 718
Changes in operating assets and liabilities
increasing (decreasing) cash:
Accounts receivable 1,941 (834)
Accounts payable 4,073 1,281
Natural gas purchaser prepayments (Note 2) (164) (265)
Other-net (195) (391)
---------- ----------
Net cash provided by
operating activities 16,207 5,252
---------- ----------
Cash Flows From (Used In) Investing Activities:
Capital expenditures (8,293) (5,740)
Proceeds from disposition of assets 58 121
Other-net (159) 134
---------- ----------
Net cash used in investing activities (8,394) (5,485)
---------- ----------
Cash Flows From (Used In) Financing Activities:
Net borrowings (payments) under line of credit (5,600) 200
Net payments of notes payable
and long-term debt - (7)
Other-net 120 90
---------- ----------
Net cash from (used in)
financing activities (5,480) 283
---------- ----------
Net Increase in Cash and Cash Equivalents 2,333 50
Cash and Cash Equivalents, Beginning of Year 547 534
---------- ----------
Cash and Cash Equivalents, End of Period $ 2,880 $ 584
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the three months ended March 31, for:
Interest $ 73 $ 590
Income taxes $ - $ 5
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, 1997 and the results of its
operations and cash flows for the three month periods ended March 31, 1997 and
1996. Results for the three months ended March 31, 1997 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 condensed financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
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 $2.1 million at March 31,
1997 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, 1997 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"). During 1997, 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 $156,000 or a minimum of $80,000 per month. 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,
with the first payment due June 1, 1998. The prepayment amounts subject to
recoupment from future production by the purchaser are being recorded as
liabilities and are reflected in revenues as recoupment occurs. The Company
anticipates the maximum balance of $3 million will be unrecouped at
December 31, 1997 and accordingly, the prepayment balance at March 31, 1997 is
reported as a long-term liability. 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 - NEW ACCOUNTING PRONOUNCEMENTS
- --------------------------------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("FAS
128"). FAS 128 will change the computation, presentation and disclosure
5
requirements for earnings per share. FAS 128 requires the presentation of
"basic" and "diluted" earnings per share, as defined, for all entities with
complex capital structures. FAS 128 is effective for financial statements
issued for periods ending after December 31, 1997, and requires restatement of
all prior period earnings per share amounts. The Company has not yet
determined the impact that FAS 128 will have on its earnings per share when
adopted.
6
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, 1997, and the related consoli-
dated condensed statements of operations and cash flows for the three month
periods ended March 31, 1997 and 1996. 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, 1996, 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 18, 1997 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, 1996, 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
April 28, 1997
7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -------------------------------------------------------------------------
FINANCIAL CONDITION
- -------------------
The Company's bank loan agreement (the "Credit Agreement") provides for
a total commitment of $75 million, consisting of a revolving credit facility
through August 1, 1999 and a term loan thereafter, maturing on August 1, 2003.
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 indicated $52 million of the commitment is available to the
Company. At March 31, 1997 borrowings under the Credit Agreement totaled
$35.0 million and the average interest rate in the first quarter of 1997 was
7.1 percent compared to the average interest rate of 7.8 percent in the first
quarter of 1996. 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, 1997 was $82.6 million
resulting in a ratio of long-term debt-to-equity of .42 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 Credit Agreement. Net cash provided by operating
activities for the first three months of 1997 was $16.2 million as compared to
$5.3 million for the first three months of 1996. The increase in 1997, as
compared to 1996, was primarily due to higher spot market natural gas prices,
natural gas production, contract drilling dayrates and drilling rig
utilization combined with decreases in accounts receivable and increases in
accounts payable.
During the first quarter of 1997, the Company had capital expenditures
of $6.3 million. Approximately 73 percent of the expenditures were for oil
and natural gas exploration and development drilling and the remainder was for
the Company's contract drilling operations. The Company plans to continue its
focus on development drilling during the remainder of 1997. Depending, in
part, on commodity pricing, the Company anticipates it will spend
approximately $31 million on its exploration capital expenditures program in
1997 and approximately $6 million on drilling capital expenditures. 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. Since a large portion of the Company's capital expenditures are
discretionary and directed toward increasing reserves and future growth,
current operations are not dependent on the Company's ability to obtain funds
outside of the Company's current Credit Agreement.
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, 1997
prepayment balance of $2.1 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
31, 1997 (the "Recoupment Period"). During 1997, 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
8
Agreement, up to a maximum of $156,000 or a minimum of $80,000 per month. The
monthly payments will end at the end of 1997. 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.
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 with the first payment due June 1, 1998. Whether the
maximum balance of $3 million will be unrecouped at December 31, 1997 will
depend on the election of the purchaser during the balance of 1997. The price
per Mcf under the Settlement Agreement is substantially higher than current
spot market prices. The impact of the higher price received under the
Settlement Agreement increased pre-tax income approximately $165,000 and
$295,000 in the first quarters of 1997 and 1996, respectively.
Both average oil and spot market natural gas prices received during the
first quarter of 1997 were substantially higher than during the same period in
1996. The average oil price received by the Company during the first quarter
of 1997 was $21.56 per barrel which was a $3.60 per barrel increase. Average
spot market natural gas prices increased to $2.71 per Mcf a $.83 per Mcf
increase. However, by the end of the first quarter of 1997, oil prices
received by the Company had dropped to approximately $20.50 per barrel and
spot market natural gas prices had declined to approximately $1.60 per Mcf.
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 81
percent of the Company's reserves, the large drop in spot market natural gas
prices had a significant adverse effect on the value of the Company's reserves
at the end on the quarter and further price declines could cause the Company
to reduce the carrying value of its oil and natural gas properties. Such
decreases, if sustained, will also adversely effect the Company's cash flow in
future quarters and possibly beyond due to reduced oil and natural gas
revenues and if continued over an extended period will adversely impact demand
for the Company's contract drilling rigs. Declines in natural gas and oil
prices could also adversely effect the semi-annual borrowing base
determination under the Company's current Credit Agreement since this
determination is 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 is
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 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
1997.
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. Since that time, 125,100 shares
9
have been repurchased at prices ranging from $2.50 to $8.275 per share.
During the first quarters of 1997 and 1996, 23,892 and 44,686 of the purchased
shares, respectively, were used as the Company's matching contribution to its
401(K) Employee Thrift Plan. At March 31, 1997 9,863 treasury shares were
held by the Company.
SAFE HARBOR STATEMENT
- ---------------------
With the exception of historical information many of the matters
discussed in this report are forward looking statements that involve risks and
uncertainties and actual results could differ materially from those discussed.
Generally, these statements relate to projections involving the anticipated
revenues to be received from the Company's oil and natural gas production, the
utilization rate of its drilling rigs, growth of its oil and natural gas
reserves and well performance and the Company's anticipated bank debt. As with
any forward looking statement, these statements are subject to a number of
factors that may tend to influence the accuracy of the statements and the
projections upon which the statements are based. All phases of the Company's
operations are subject to a number of influences outside the control of the
Company, any one of which, or a combination of which, could materially affect
the results of the Company's operations. A more thorough discussion of some
of these factors and their possible impact on the Company is provided in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996
filed with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
- ---------------------
The Company reported net income of $3,874,000 in the first quarter of
1997 as compared to net income of $1,219,000 for the first quarter of 1996.
Increased spot market natural gas prices when compared with the same period in
1996 along with increased natural gas production, contract drilling dayrates
and drilling rig utilization all contributed to the increase in net income.
Oil and natural gas revenues increased 36 percent in the first quarter
of 1997 as compared to the first quarter of 1996. As a result of the
Company's 1996 development drilling program, natural gas production increased
by 11 percent. Oil production decreased 16 percent due primarily to reduced
production from several high volume wells in southeast New Mexico. These
wells had produced beyond their allowable production rate during 1995 and as a
result, their production has been curtailed between the comparative quarters.
Average oil prices received by the Company increased 20 percent partially
offsetting the decline in oil volumes produced while average natural gas
prices received by the Company increased 39 percent between the comparative
quarters. The increase in natural gas prices was caused by a $.83 rise in
average spot market prices and was partially offset by 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
1997 production from wells covered by the Settlement Agreement represented 3
percent of the Company's natural gas production as compared to 4 percent in
the first quarter of 1996. The impact of the higher price received under the
Settlement Agreement increased pre-tax income by approximately $165,000 and
$295,000 in the first quarters of 1997 and 1996, respectively.
10
Oil and natural gas operating margins (revenues less operating costs)
improved from 65 percent in the first quarter of 1996 to 73 percent in the
first quarter of 1997. Total operating costs increased 4 percent. Total
depreciation, depletion and amortization ("DD&A") increased 21 percent between
the comparative quarters due to increased production and an increase in the
Company's DD&A rate. The Company's average DD&A rate per equivalent barrel
increased from $3.77 in the first quarter of 1996 to $4.36 in the first
quarter of 1997.
Contract drilling revenues increased 81 percent for the comparative
quarters due to increases in both rig utilization and dayrates. Rig
utilization averaged 20.1 rigs in the first quarter of 1997 as opposed to 13.1
rigs in the first quarter of 1996 while average revenue per rig per operating
day for all types of contracts increased by over 16 percent. Contract drilling
operating margins (revenues less operating costs) were 21 percent in the first
quarter of 1997 as compared to 12 percent in the first quarter of 1996.
Interest expense decreased 18 percent as average long-term bank debt
decreased 11 percent between the first quarter of 1997 and the first quarter
of 1996 and the average interest rate incurred by the Company dropped from 7.8
percent to 7.1 percent.
11
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) No reports on Form 8-K were filed during the quarter ended
March 31, 1997.
12
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 6, 1997 By: /s/ John G. Nikkel
---------------------- -----------------------------
JOHN G. NIKKEL
President, Chief Operating Officer
and Director
Date: May 6, 1997 By: /s/ Larry D. Pinkston
---------------------- -----------------------------
LARRY D. PINKSTON
Vice President, Chief Financial
Officer and Treasurer
13