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 June 30, 1999
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 25,745,160
Class Outstanding at August 10, 1999
UNIT CORPORATION
INDEX
Page
PART I. Financial Information: Number
Item 1 - Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets
June 30, 1999 and December 31, 1998 2
Consolidated Condensed Statements of Operations
Three and Six Months Ended June 30, 1999
and 1998 3
Consolidated Condensed Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998 4
Notes to Consolidated Condensed Financial Statements 5
Report of Review by Independent Accountants 9
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. Other Information:
Item 1 - Legal Proceedings 16
Item 2 - Changes in Securities 16
Item 3 - Defaults Upon Senior Securities 16
Item 4 - Submission of Matters to a Vote of
Security Holders 16
Item 5 - Other Information 16
Item 6 - Exhibits and Reports on Form 8-K 17
Signatures 18
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, December 31,
1999 1998
ASSETS ---------- ----------
- ------ (Unaudited)
Current Assets: (In thousands)
Cash and cash equivalents $ 455 $ 446
Accounts receivable 12,526 13,149
Other 5,208 5,948
---------- ----------
Total current assets 18,189 19,543
---------- ----------
Property and Equipment:
Total cost 413,977 405,043
Less accumulated depreciation, depletion,
amortization and impairment 218,046 207,883
---------- ----------
Net property and equipment 195,931 197,160
---------- ----------
Other Assets 6,305 6,361
---------- ----------
Total Assets $ 220,425 $ 223,064
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current portion of long-term debt $ 1,735 $ 1,801
Accounts payable 9,044 8,517
Accrued liabilities 7,274 7,672
---------- ----------
Total current liabilities 18,053 17,990
---------- ----------
Long-Term Debt 72,900 72,900
---------- ----------
Other Long-Term Liabilities 2,069 2,301
---------- ----------
Deferred Income Taxes 17,415 18,583
---------- ----------
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, 25,740,160 and
25,563,165 shares issued, respectively 5,148 5,113
Capital in excess of par value 82,867 82,187
Retained earnings 21,973 24,121
Treasury stock, at cost, 0 and
25,000 shares, respectively - (131)
---------- ----------
Total shareholders' equity 109,988 111,290
---------- ----------
Total Liabilities and Shareholders' Equity $ 220,425 $ 223,064
========== ==========
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 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands except per share amounts)
Revenues:
Contract drilling $ 10,539 $ 15,495 $ 22,370 $ 30,383
Oil and natural gas 8,601 10,408 16,436 19,759
Other 339 151 370 161
---------- ---------- ---------- ----------
Total revenues 19,479 26,054 39,176 50,303
---------- ---------- ---------- ----------
Expenses:
Contract drilling:
Operating costs 9,838 12,053 20,252 24,540
Depreciation
and amortization 1,449 1,479 2,811 2,874
Oil and natural gas:
Operating costs 3,364 3,900 6,595 7,276
Depreciation, depletion
and amortization 3,740 4,021 7,943 7,531
General and administrative 1,222 1,272 2,474 2,507
Interest 1,221 1,276 2,432 2,359
---------- ---------- ---------- ----------
Total expenses 20,834 24,001 42,507 47,087
---------- ---------- ---------- ----------
Income (Loss) Before
Income Taxes (1,355) 2,053 (3,331) 3,216
---------- ---------- ---------- ----------
Income Tax Expense (Benefit):
Current (7) 10 (17) 57
Deferred (474) 808 (1,166) 1,199
---------- ---------- ---------- ----------
Total income taxes (481) 818 (1,183) 1,256
---------- ---------- ---------- ----------
Net Income (Loss) $ (874) $ 1,235 $ (2,148) $ 1,960
========== ========== ========== ==========
Net Income (Loss) Per
Common Share:
Basic $ (.03) $ .05 $ (.08) $ .08
========== ========== ========== ==========
Diluted $ (.03) $ .05 $ (.08) $ .08
========== ========== ========== ==========
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 1998
---------- ----------
(In thousands)
Cash Flows From Operating Activities:
Net Income (Loss) $ (2,148) $ 1,960
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Depreciation, depletion and amortization 10,909 10,569
Deferred income tax expense (1,166) 1,199
Other-net 64 219
Changes in operating assets and liabilities
increasing (decreasing) cash:
Accounts receivable 623 5,155
Accounts payable 2,772 3,824
Other-net 517 (1,314)
---------- ----------
Net cash provided by
operating activities 11,571 21,612
---------- ----------
Cash Flows From (Used In) Investing Activities:
Capital expenditures (12,144) (34,567)
Proceeds from disposition of assets 711 463
Other-net (66) (118)
---------- ----------
Net cash used in investing activities (11,499) (34,222)
---------- ----------
Cash Flows From (Used In) Financing Activities:
Net borrowings (payments) under line of credit - 13,000
Net payments of notes payable
and long-term debt (110) (214)
Other-net 47 (40)
---------- ----------
Net cash provided by (used in)
financing activities (63) 12,746
---------- ----------
Net Increase in Cash and Cash Equivalents 9 136
Cash and Cash Equivalents, Beginning of Year 446 458
---------- ----------
Cash and Cash Equivalents, End of Period $ 455 $ 594
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the six months ended June 30, for:
Interest $ 2,663 $ 2,057
Income taxes $ - $ 20
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 consolidated
financial position of Unit Corporation and subsidiaries as of June 30, 1999 and
the results of their operations for the three and six month periods ended June
30, 1999 and 1998 and cash flows for the six months ended June 30, 1999 and
1998. Results for the three and six months ended June 30, 1999 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, 1998. Our independent accountants have performed a review of
these 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 a part of any registration statements prepared or certified by them
within the meaning of Sections 7 and 11 of that Act.
NOTE 2 - EARNINGS PER SHARE
- ---------------------------
The following data shows the amounts used in computing earnings (loss) per
share for the Company.
For the Three Months Ended June 30, 1999
-------------------------------------------
INCOME WEIGHTED SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ---------------- ----------
Basic loss per
common share $ (874,000) 25,738,000 $ (0.03)
==========
Effect of dilutive
stock options - -
------------ ------------
Diluted loss per
common share $ (874,000) 25,738,000 $ (0.03)
============ ============ ==========
5
For the Three Months Ended June 30, 1998
-------------------------------------------
INCOME WEIGHTED SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ---------------- ----------
Basic earnings per
common share $ 1,235,000 25,546,000 $ 0.05
==========
Effect of dilutive
stock options - 298,000
------------ ------------
Diluted earnings per
common share $ 1,235,000 25,844,000 $ 0.05
============ ============ ==========
The following options to purchase shares of common stock have been excluded
from the computation of diluted earnings per share for the three months ended
June 30, 1999 due to the net loss and for the three months ended June 30, 1998
due to the options exercise prices being greater than the average market price
of common shares:
1999 1998
---------- ----------
Options 844,000 171,000
========== ==========
Average exercise price $ 4.36 $ 8.80
========== ==========
For the Six Months Ended June 30, 1999
-------------------------------------------
INCOME WEIGHTED SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ---------------- ----------
Basic loss per
common share $(2,148,000) 25,701,000 $ (0.08)
==========
Effect of dilutive
stock options - -
------------ ------------
Diluted loss per
common share $(2,148,000) 25,701,000 $ (0.08)
============ ============ ==========
For the Six Months Ended June 30, 1998
-------------------------------------------
INCOME WEIGHTED SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ---------------- ----------
Basic earnings per
common share $ 1,960,000 25,546,000 $ 0.08
==========
Effect of dilutive
stock options - 295,000
------------ ------------
Diluted earnings per
common share $ 1,960,000 25,841,000 $ 0.08
============ ============ ==========
6
The following options to purchase shares of common stock have been excluded
from the computation of diluted earnings per share for the six months ended June
30, 1999 due to the net loss and for the six months ended June 30, 1998 due to
the options exercise prices being greater than the average market price of
common shares:
1999 1998
---------- ----------
Options 844,000 171,000
========== ==========
Average exercise price $ 4.36 $ 8.80
========== ==========
NOTE 3 - 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). In June 1999, FAS 133 was amended
by FAS 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133 - an amendment of FASB
Statement No. 133 (FAS 137). FAS 133 is now effective for all fiscal quarters of
fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company).
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. Management of the Company
anticipates that, due to its limited use of derivative instruments, the adoption
of FAS 133 will not have a significant effect on the Company's results of
operations or its financial position.
7
NOTE 4 - 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 months ended
June 30, 1999 and 1998 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
(In thousands)
Revenues:
Contract drilling $ 10,539 $ 15,495 $ 22,370 $ 30,383
Oil and natural gas 8,601 10,408 16,436 19,759
Other 339 151 370 161
--------- --------- --------- ---------
Total revenues $ 19,479 $ 26,054 $ 39,176 $ 50,303
========= ========= ========= =========
Operating Income (Loss)(1):
Contract drilling $ (748) $ 1,963 $ (693) $ 2,969
Oil and natural gas 1,497 2,487 1,898 4,952
--------- --------- --------- ---------
Total operating
income 749 4,450 1,205 7,921
General and
administrative expense (1,222) (1,272) (2,474) (2,507)
Interest expense (1,221) (1,276) (2,432) (2,359)
Other income - net 339 151 370 161
--------- --------- --------- ---------
(Loss) income before
income taxes $ (1,355) $ 2,053 $ (3,331) $ 3,216
========= ========= ========= =========
(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.
8
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, 1999, and the related consolidated
condensed statements of operations for the three and six month periods ended
June 30, 1999 and 1998 and cash flows for the six month periods ended June 30,
1999 and 1998. 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, 1998, 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 23, 1999 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, 1998, is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
PricewaterhouseCoopers L L P
Tulsa, Oklahoma
August 9, 1999
9
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 loan facility of $100 million with a current available borrowing value
(the "Loan Value") of $85 million. The Loan Value under the revolving credit
facility is subject to a semi-annual redetermination, each April 1 and October
1, calculated as the sum of a percentage of the discounted future value of the
Company's oil and natural gas reserves, as determined by the banks, plus the
greater of (i) 50 percent of the appraised value of the Company's contract
drilling rigs or (ii) two times the previous 12 months cash flow from the
contract drilling rigs, limited in either case to $20 million. The revolving
credit facility covers four years with a three year term loan thereafter. At
June 30, 1999 borrowings under the Credit Agreement totaled $69.9 million. The
average bank debt interest rate in the second quarter of 1999 was 6.4 percent
compared to the average interest rate of 7.0 percent in the second quarter of
1998. A facility fee of .375 of 1 percent is charged for any unused portion of
the Loan Value.
The Company's shareholders' equity at June 30, 1999 was $110.0 million
resulting in a ratio of long-term debt-to-equity of .68 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. At June 30, 1999 and December 31, 1998,
the Company had working capital of $136,000 and $1.6 million, respectively. Net
cash provided by operating activities for the first six months of 1999 was $11.6
million as compared to $21.6 million for the first six months of 1998. During
the first six months of 1998 net cash provided by operations contained a $5.2
million dollar reduction in accounts receivable while the 1999 net cash provided
by operations was negatively effected by lower net income due to lower natural
gas prices, lower contract drilling utilization and dayrates.
During the first six months of 1999, the Company had capital additions of
$9.9 million of which approximately 74 percent was for oil and natural gas
exploration and development drilling while the remainder was used in the
Company's contract drilling operations. Due to lower natural gas prices, the
Company slowed its development drilling during the first six months of 1999.
Depending, in part, on commodity pricing, the Company anticipates it will spend
approximately $20 million on its oil and natural gas capital expenditures
program in 1999 and approximately $5.0 million on its current domestic contract
drilling fleet. These expenditures are anticipated to be within the constraints
of available cash to be provided by the Company's operating activities and its
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 Credit Agreement.
On August 12, 1999, the Company signed a definitive agreement with Parker
Drilling Company, a Tulsa Oklahoma based contract drilling company, to purchase
13 drilling rigs and certain related equipment and yards for $40.0 million in
cash and 1 million shares of common stock. The 13 rigs are electric "SCR" deep
drilling rigs, with power ratings from 1,000 to 4,000 horsepower and drilling
depth capabilities from 16,000 to 30,000 plus feet. Seven of the rigs are
10
currently under contract with various operators and located in the Rocky
Mountains. Three of the remaining rigs are located in South Louisiana and three
are located in South Texas. The acquisition will open new market areas for the
Company's contract drilling segment and increase its rig fleet to 47 rigs.
Closing of this purchase is subject to several conditions including the
Company's securing any required governmental approvals, any required third party
consents and financing for the cash portion of the purchase price.
On November 20, 1997, the Company acquired Hickman Drilling Company,
pursuant to an Agreement and Plan of Merger ("the Merger Agreement") entered
into by and between the Company, Hickman Drilling Company and all of the holders
of the outstanding capital stock of Hickman Drilling Company (the "Selling
Stockholders"). As part of this acquisition, the Selling Stockholders hold, as
of June 30, 1999, promissory notes in the aggregate principal amount of
$4,000,000. These notes are payable in equal annual installments on January 2,
2000 through January 2, 2003. The notes bear interest at the Chase Prime Rate
which at December 31, 1998 and June 30, 1999 was 7.75 percent.
Due to a settlement agreement which terminated at December 31, 1997, the
Company has a liability of $1.3 million at June 30, 1999 representing proceeds
received from a natural gas purchaser as prepayment for natural gas. The $1.3
million is payable in equal annual payments from June 1, 2000 to June 1, 2002.
The average spot market natural gas prices received by the Company during
the first six months of 1999 was $1.69 per Mcf, $.25 per Mcf less than during
the same period in 1998. The average oil price received by the Company during
the first six months of 1999 was $13.62 per barrel, $.16 per barrel less than
the average received in 1998. Prices for natural gas 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 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 and further price declines could also cause the Company to
reduce the carrying value of its oil and natural gas properties. Such
decreases, if sustained, would also adversely effect the Company's future cash
flow due to reduced oil and natural gas revenues and if continued over an
extended period would adversely impact the demand for the Company's contract
drilling rigs. Declines in natural gas and oil prices could also adversely
effect the semi-annual determination of the loan value under the Company's
Credit Agreement since this determination is calculated on the value of the
Company's oil and natural gas reserves and its drilling rigs. Any such
reduction would reduce the amount available to the Company under the Credit
Agreement which, in turn, would impact the Company's ability to carry out its
capital projects.
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, competition from
other contractors, 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 1999 and into 2000.
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, 160,100 shares have been
repurchased at prices ranging from $2.50 to $9.69 per share. In the first
11
quarter of 1999 and 1998, 25,000 and 19,863 of the purchased shares,
respectively, were used as the Company's matching contribution to its 401(K)
Employee Thrift Plan. At December 31, 1998, 25,000 treasury shares were held by
the Company and at June 30, 1999 no such shares were held.
YEAR 2000 STATEMENT
- -------------------
The Company has initiated a comprehensive assessment of its information
technology ("IT") and non-information technology ("non-IT") systems to try and
ensure that such systems will be Year 2000 compliant. The Year 2000 problem
exists because many existing computer programs use only the last two digits to
define the year. Therefore, these computer programs do not recognize years that
begin with a "20" and assume that all years begin with a "19". If not corrected
many computer applications could fail or create erroneous results which could
cause disruption of operations not only for the Company but also for its
customers and suppliers, so the Company has also initiated an assessment of its
customers' and suppliers' efforts to become year 2000 compliant.
Evaluation of the Company's IT systems began in house during 1997. The
Company's IT systems consist mainly of office computers, related computer
programs and mangement financial information software. The Company believes
nearly all of the Company's hardware is Year 2000 compliant and during the first
week in April 1999 converted its related computer programs, software and data
base on the AS400 computer system making it Year 2000 compliant. The Company
has expended approximately $130,000 bringing its systems compliant by the end of
the second quarter of 1999.
The Company's non-IT systems consist of office equipment and other systems
associated with its oil and natural gas properties and its drilling rigs. The
Company began assessing these non-IT systems and the associated cost during the
fourth quarter of 1998 and the assessment was not completed by the end of the
second quarter of 1999. Currently, the Company anticipates that the cost and
replacement of any such equipment due to the ongoing assessment will be minimal
and completed prior to December 31, 1999.
During the third quarter of 1998, the Company issued questionnaires to its
key suppliers and customers to assess their preparation for Year 2000
compliance. The Company received responses from 41 percent of these entities.
During the first quarter of 1999, the Company issued second request
questionnaires to those key suppliers and customers who did not respond to the
questionnaires issued during the third quarter of 1998. At July 31, 1999, the
Company had received responses from 67 percent of the entities targeted in the
two questionnaires. Approximately 90 percent of the responses indicated the
entities were aware of and are in the process of resolving their Year 2000
issues.
As noted, the Company currently believes that nearly all of its internal
systems and equipment are Year 2000 compliant at the end of the second quarter
of 1999 and the associated costs have not had a material adverse effect on the
Company's results of operations and financial condition. However, the failure
to properly assess or timely implement a material Year 2000 problem could result
in a disruption in the Company's normal business activities or operations. Such
failures, depending on the extent and nature, could materially and adversely
effect the Company's operations and financial condition. As a result, the
Company will continue to evaluate its Year 2000 exposure, both internally and
externally. Since a portion of the Company's overall evaluation of its Year
12
2000 readiness will, of necessity, be based on the information to be supplied by
and the readiness of the Company's key suppliers and customers, the Company
cannot currently determine the impact, if any, such third parties will have on
the Company's Year 2000 exposure. As noted, the Company intends to evaluate
this information as, if and when it is made available to it. Contingency plans
will be customized as required to minimize disruption in the Company's normal
business activities or operations.
SAFE HARBOR STATEMENT
- ---------------------
With the exception of historical information many of the matters discussed
in this report are forward looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, that involve risks and uncertainties
which could cause the actual results of the Company's operations (financial and
otherwise) to differ materially from those discussed in this report. Generally,
forward looking statements relate to projections involving the anticipated
revenues to be received from the Company's oil and natural gas production,
sources of capital, the utilization rate of its drilling rigs, rates to be
received under its drilling contracts, growth of its oil and natural gas
reserves, oil and natural gas well production or reserve amounts and the
Company's anticipated debt. In addition, much of the Company's Year 2000
disclosure regarding the estimated costs (both internal costs as well as the
cost associated with any business disruption caused by third parties non-
compliance) are forward looking statements. 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, 1998 as filed with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS
- ---------------------
Second Quarter 1999 versus Second Quarter 1998
- ----------------------------------------------
The Company reported a net loss of $874,000 in the second quarter of 1999
as compared to net income of $1,235,000 for the second quarter of 1998.
Decreases in both natural gas prices received, oil and natural gas production
volumes, contract drilling dayrates and rig utilization all contributed to the
net loss. The net loss was partially offset by a $315,000 gain from insurance
proceeds received as a result of tornado damage.
Oil and natural gas revenues decreased 17 percent in the second quarter
of 1999 as compared to the second quarter of 1998. Natural gas production
decreased 11 percent and oil production decreased 21 percent between the two
quarters while average natural gas prices received by the Company decreased 11
percent. Average oil prices increased 23 percent between the two quarters.
Natural gas production was lower due to reduced natural gas reserve replacement
as the Company reduced its development drilling program in response to declining
natural gas prices while oil production has declined due to the Company's focus
on replacing natural gas reserves as opposed to oil reserves over the past
several years.
13
Oil and natural gas operating margins (revenues less operating costs)
decreased to 61 percent in the second quarter of 1999 as compared to 63 percent
in the second quarter of 1998. Margins were adversely affected by declines in
average natural gas prices. Total operating costs decreased 14 percent.
Depreciation, depletion and amortization ("DD&A") decreased 7 percent due to the
decrease in production. The decrease was partially offset by an increase in the
Company's average DD&A rate per equivalent barrel to $5.24 for the second
quarter of 1999 as compared with $4.97 in the second quarter of 1998.
Contract drilling revenues decreased 32 percent for the comparative
quarters due to decreases in both the number of rigs utilized and dayrates. As
the price for natural gas dropped, the demand for contract drilling rigs
declined and the Company experienced downward pressure on dayrates. Rig
utilization averaged 19.0 rigs in the second quarter of 1999 as compared to 25.7
rigs in the second quarter of 1998. Contract drilling operating margins
(revenues less operating costs) were 7 percent in the second quarter of 1999 and
22 percent in the second quarter of 1998.
General and administrative expense decreased 4 percent in the second
quarter of 1999 when compared with the second quarter of 1998. Interest expense
decreased 4 percent as the average interest rate incurred by the Company
decreased from 7.1 percent to 6.5 percent for the comparative quarters. The
average long-term debt outstanding increased 13 percent between the comparative
quarters.
On May 3, 1999, the Company's contract drilling offices in Moore, Oklahoma
were struck by a tornado destroying two Company buildings and damaging various
Company vehicles and drilling equipment. In May 1999, the Company received
$500,000 of insurance proceeds related to the destruction of the buildings and
as result, in the second quarter of 1999 recognized a gain of $315,000 recorded
as part of other revenues. Other claims relating to the contents of the two
buildings and damaged equipment and damage removal covered under other insurance
policies are in the process of being filed. At this time, the proceeds the
Company will receive is not determinable under the additional claims, but the
Company does not expect any financial loss to be incurred from these claims.
Six Months 1999 versus Six Months 1998
- -------------------------------------------------
The Company had a net loss for the first six months of 1999 of $2,148,000
as compared to net income of $1,960,000 for the first six months of 1998.
Declines in natural gas prices, oil and natural gas production, contract
drilling dayrates and rig utilization all contributed to the net loss and were
partially offset by a $315,000 gain from insurance proceeds received as a result
of tornado damage as discussed above.
Oil and natural gas revenues decreased 17 percent in the first six
months of 1999 as compared to the first six months of 1998. Oil and natural gas
production decreased 20 and 2 percent, respectively between the comparative
periods, while average oil and natural gas prices received by the Company
decreased 1 and 15 percent, respectively. Natural gas production was lower due
to reduced natural gas reserve replacement as the Company reduced its
development drilling program in response to declining natural gas prices while
oil production has declined due to the Company's focus on replacing natural gas
reserves as opposed to oil reserves over the past several years.
14
Oil and natural gas operating margins (revenues less operating costs)
declined from 63 percent in the first six months of 1998 to 60 percent in the
first six months of 1999 due to lower natural gas and oil prices and production
in 1999. Total operating costs decreased 9 percent. Depreciation, depletion and
amortization ("DD&A") increased 5 percent between the comparative periods due to
an increase in the Company's average DD&A rate per equivalent barrel from $4.87
in the first six months of 1998 to $5.34 for the first six months of 1999.
Contract drilling revenues decreased 26 percent for the comparative six
month periods as rig utilization decreased from an average of 25.3 rigs
operating in the first six months of 1998 to 19.5 rigs in the first six months
of 1999 and dayrates on daywork contracts dropped 10 percent. Contract drilling
operating margins (revenue less operating costs) dropped from 19 percent to 9
percent between the comparative periods.
General and administrative expense decreased 1 percent during the
comparative six month periods. Interest expense increased 3 percent due to a 22
percent increase in the average long-term debt outstanding in the first six
months of 1999 compared to the first six months of 1998. The average interest
rate incurred by the Company decreased from 7.5 percent to 6.5 percent.
15
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
- ------------------------------------------------------------
On May 5, 1999 the Company held its Annual Meeting of Stockholders. At
the meeting the following matters were voted on, with each receiving
the votes indicated:
I. Election of Nominees King P. Kirchner, Don Cook and
J. Michael Adcock to serve as directors.
Numbers of Against or
Nominee Votes For Withheld
-------------- ------------ ----------
King P. Kirchner 20,288,126 231,782
Don Cook 20,281,174 238,734
J. Michael Adcock 20,282,245 237,663
The following directors, whose term of office did not expire
at the annual meeting, continue as directors of the Company:
John G. Nikkel, John S. Zink, Earle Lamborn, William B.
Morgan and John H. Williams.
II. Ratification of the appointment of PricewaterhouseCoopers
L L P as the Company's independent certified public
accountants for the fiscal year 1999.
For - 20,450,821
Against - 38,424
Abstain - 30,663
Item 5. Other Information
- -----------------------------
Not applicable
16
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 June
30, 1999.
17
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 12, 1999 By: /s/ John G. Nikkel
--------------------------- ------------------------
JOHN G. NIKKEL
President, Chief Operating
Officer and Director
Date: August 12, 1999 By: /s/ Larry D. Pinkston
--------------------------- ------------------------
LARRY D. PINKSTON
Vice President, Chief
Financial Officer
and Treasurer
18