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 September 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 33,815,676
Class Outstanding at November 8, 1999
UNIT CORPORATION
INDEX
Page
PART I. Financial Information: Number
Item 1 - Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets
September 30, 1999 and December 31, 1998 2
Consolidated Condensed Statements of Operations
Three and Nine Months
Ended September 30, 1999 and 1998 3
Consolidated Condensed Statements of Cash Flows
Nine Months Ended September 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 16
Signatures 17
Item 1. Financial Statements
UNIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31,
1999 1998
---------- ----------
ASSETS (Unaudited)
- ------ (In thousands)
Current Assets:
Cash and cash equivalents $ 1,863 $ 446
Accounts receivable 12,325 13,149
Other 5,980 5,948
---------- ----------
Total current assets 20,168 19,543
---------- ----------
Property and Equipment:
Total cost 467,414 405,043
Less accumulated depreciation, depletion,
amortization and impairment 223,521 207,883
---------- ----------
Net property and equipment 243,893 197,160
---------- ----------
Other Assets 6,324 6,361
---------- ----------
Total Assets $ 270,385 $ 223,064
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current portion of long-term debt $ 1,730 $ 1,801
Accounts payable 8,564 8,517
Accrued liabilities 8,755 7,672
---------- ----------
Total current liabilities 19,049 17,990
---------- ----------
Long-Term Debt 62,100 72,900
---------- ----------
Other Long-Term Liabilities 2,195 2,301
---------- ----------
Deferred Income Taxes 17,945 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, 33,815,676 and
25,563,165 shares issued, respectively 6,749 5,113
Capital in excess of par value 139,684 82,187
Retained earnings 22,663 24,121
Treasury stock, at cost, 0 and
25,000 shares, respectively - (131)
---------- ----------
Total shareholders' equity 169,096 111,290
---------- ----------
Total Liabilities and Shareholders' Equity $ 270,385 $ 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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands except per share amounts)
Revenues:
Contract drilling $ 10,549 $ 13,487 $ 32,919 $ 43,870
Oil and natural gas 12,018 10,100 28,454 29,859
Other 46 40 416 201
---------- ---------- ---------- ----------
Total revenues 22,613 23,627 61,789 73,930
---------- ---------- ---------- ----------
Expenses:
Contract drilling:
Operating costs 9,666 10,711 29,918 35,251
Depreciation
and amortization 1,483 1,553 4,294 4,427
Oil and natural gas:
Operating costs 3,654 3,513 10,249 10,789
Depreciation, depletion
and amortization 4,035 4,273 11,978 11,804
General and administrative 1,180 1,204 3,654 3,711
Interest 1,369 1,237 3,801 3,596
---------- ---------- ---------- ----------
Total expenses 21,387 22,491 63,894 69,578
---------- ---------- ---------- ----------
Income (Loss) Before Income Taxes 1,226 1,136 (2,105) 4,352
---------- ---------- ---------- ----------
Income Tax Expense (Benefit):
Current 6 90 (11) 147
Deferred 530 392 (636) 1,591
---------- ---------- ---------- ----------
Total income taxes 536 482 (647) 1,738
---------- ---------- ---------- ----------
Net Income (Loss) $ 690 $ 654 $ (1,458) $ 2,614
========== ========== ========== ==========
Net Income (Loss) Per Common Share:
Basic $ .03 $ .03 $ (.06) $ .10
========== ========== ========== ==========
Diluted $ .03 $ .03 $ (.06) $ .10
========== ========== ========== ==========
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)
Nine Months Ended
September 30,
1999 1998
---------- ----------
(In thousands)
Cash Flows From Operating Activities:
Net Income (Loss) $ (1,458) $ 2,614
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Depreciation, depletion and amortization 16,507 16,496
Deferred income tax expense (636) 1,591
Other-net 35 211
Changes in operating assets and liabilities
increasing (decreasing) cash:
Accounts receivable 824 5,404
Accounts payable 1,562 4,071
Other-net 1,352 (571)
---------- ----------
Net cash provided by
operating activities 18,186 29,816
---------- ----------
Cash Flows From (Used In) Investing Activities:
Capital expenditures (57,356) (45,730)
Proceeds from disposition of assets 1,146 629
Other-net (146) (105)
---------- ----------
Net cash used in investing activities (56,356) (45,206)
---------- ----------
Cash Flows From (Used In) Financing Activities:
Net borrowings (payments) under line of credit (10,800) 17,100
Net payments of notes payable
and long-term debt (115) (353)
Proceeds from stock 50,502 59
Other-net - (131)
---------- ----------
Net cash provided by (used in)
financing activities 39,587 16,675
---------- ----------
Net Increase in Cash and Cash Equivalents 1,417 1,285
Cash and Cash Equivalents, Beginning of Year 446 458
---------- ----------
Cash and Cash Equivalents, End of Period $ 1,863 $ 1,743
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the nine months ended
September 30, for:
Interest $ 3,522 $ 3,133
Income taxes $ - $ 482
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 September 30, 1999
and the results of their operations for the three and nine month periods ended
September 30, 1999 and 1998 and cash flows for the nine months ended September
30, 1999 and 1998. Results for the three and nine months ended September 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 - ACQUISITION OF DRILLING RIGS
- --------------------------------------
On September 30, 1999, the Company completed the acquisition of 13 land
contract drilling rigs and related equipment (the "Parker Acquisition")from
Parker Drilling Company and Parker Drilling Company North America, Inc. (the
"Sellers"). Under the terms of the Parker Acquisition, the Sellers received
1,000,000 shares of the Company's common stock valued at $8,138,000 and
$40,000,000 in cash. The cash portion of the consideration paid was funded
through an offering of 7,000,000 shares of the Company's common stock which
closed on September 29, 1999. The net proceeds received by the Company from the
offering were $50,435,000. The Company will file the pro-forma information
related to this acquisition on Form 8-K to be filed on or before December 14,
1999.
5
NOTE 3 - EARNINGS PER SHARE
- ---------------------------
The following data shows the amounts used in computing earnings (loss) per
share for the Company.
For the Three Months Ended September 30, 1999
----------------------------------------------
INCOME WEIGHTED SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ --------------- ----------
Basic earnings per
common share $ 690,000 25,964,000 $ 0.03
==========
Effect of dilutive
stock options - 333,000
------------ ------------
Diluted earnings per
common share $ 690,000 26,297,000 $ 0.03
============ ============ ==========
For the Three Months Ended September 30, 1998
----------------------------------------------
INCOME WEIGHTED SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ --------------- ----------
Basic earnings per
common share $ 654,000 25,545,000 $ 0.03
==========
Effect of dilutive
stock options - 212,000
------------ ------------
Diluted earnings per
common share $ 654,000 25,757,000 $ 0.03
============ ============ ==========
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
September 30, 1999 and 1998 due to the options exercise prices being greater
than the average market price of common shares:
1999 1998
---------- ----------
Options 154,000 191,000
========== ==========
Average exercise price $ 8.84 $ 8.60
========== ==========
6
For the Nine Months Ended September 30, 1999
---------------------------------------------
INCOME WEIGHTED SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ --------------- ----------
Basic loss per
common share $(1,458,000) 25,790,000 $ (0.06)
==========
Effect of dilutive
stock options - -
------------ ------------
Diluted loss per
common share $(1,458,000) 25,790,000 $ (0.06)
============ ============ ==========
For the Nine Months Ended September 30, 1998
---------------------------------------------
INCOME WEIGHTED SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ --------------- ----------
Basic earnings per
common share $ 2,614,000 25,546,000 $ 0.10
==========
Effect of dilutive
stock options - 264,000
------------ ------------
Diluted earnings per
common share $ 2,614,000 25,810,000 $ 0.10
============ ============ ==========
The following options to purchase shares of common stock have been excluded
from the computation of diluted earnings per share for the nine months ended
September 30, 1999 due to the net loss and for the nine months ended September
30, 1998 due to the options exercise prices being greater than the average
market price of common shares:
1999 1998
---------- ----------
Options 735,100 178,500
========== ==========
Average exercise price $ 4.56 $ 8.72
========== ==========
NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS
- --------------------------------------
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133). 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
7
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.
NOTE 5 - INDUSTRY SEGMENT INFORMATION
- --------------------------------------
The Company has two business segments: Contract Drilling and Oil and
Natural Gas, representing its two strategic business units offering different
products and services. The Contract Drilling segment provides land contract
drilling of oil and natural gas wells and the Oil and Natural Gas segment is
engaged in the development, acquisition and production of oil and natural gas
properties. The Company evaluates the performance of its operating segments
based on operating income, which is defined as operating revenues less operating
expenses and depreciation, depletion and amortization. The Company has natural
gas production in Canada which is not significant. Information regarding the
Company's operations by industry segment for the three and nine months ended
September 30, 1999 and 1998 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------- --------- --------- ---------
(In thousands)
Revenues:
Contract drilling $ 10,549 $ 13,487 $ 32,919 $ 43,870
Oil and natural gas 12,018 10,100 28,454 29,859
Other 46 40 416 201
--------- --------- --------- ---------
Total revenues $ 22,613 $ 23,627 $ 61,789 $ 73,930
========= ========= ========= =========
Operating Income (Loss)(1):
Contract drilling $ (600) $ 1,223 $ (1,293) $ 4,192
Oil and natural gas 4,329 2,314 6,227 7,266
--------- --------- --------- ---------
Total operating
income 3,729 3,537 4,934 11,458
General and
administrative expense (1,180) (1,204) (3,654) (3,711)
Interest expense (1,369) (1,237) (3,801) (3,596)
Other income - net 46 40 416 201
--------- --------- --------- ---------
Income (loss) before
income taxes $ 1,226 $ 1,136 $ (2,105) $ 4,352
========= ========= ========= =========
(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 September 30, 1999, and the related consoli-
dated condensed statements of operations for the three and nine month periods
ended September 30, 1999 and 1998 and cash flows for the nine month periods
ended September 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
October 26, 1999
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
- -------------------
Our 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 our oil and natural
gas reserves, as determined by the banks, plus the greater of (i) 50 percent of
the appraised value of our contract drilling rigs or (ii) two times the previous
12 months cash flow from 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 our election, any portion of the debt outstanding may be fixed at the
Libor Rate for 30, 60, 90 or 180 days. During any Libor Rate funding period we
may not pay, in part or in whole, the outstanding principal balance of the note
to which such Libor Rate option applies. Borrowings under the Prime Rate option
may be paid anytime, in part or in whole, without premium or penalty. Effective
May 1, 1999, borrowings under the revolving credit facility bear interest at the
Chase Manhattan Bank, N.A. prime rate ("Prime Rate") or the London Interbank
Offered Rates ("Libor Rate") plus 1.00 to 1.50 percent depending on the level of
debt as a percentage of the total borrowing base. Subsequent to May 1, 2002,
borrowings under the Loan Agreement bear interest at the Prime Rate or the
Libor rate plus 1.25 to 1.75 percent depending on the level of debt as a
percentage of the total borrowing base.
At September 30, 1999 borrowings under the Credit Agreement totaled $59.1
million. The average bank debt interest rate in the third quarter of 1999 was
7.2 percent compared to the average interest rate of 6.9 percent in the third
quarter of 1998. A facility fee of .375 of 1 percent is charged for any unused
portion of the Loan Value.
Our shareholders' equity at September 30, 1999 was $169.1 million resulting
in a ratio of long-term debt-to-equity of .38 to 1. At September 30, 1999 and
December 31, 1998, we had working capital of $1.1 million and $1.6 million,
respectively. Net cash provided by operating activities for the first nine
months of 1999 was $18.2 million as compared to $29.8 million for the first nine
months of 1998. During the first nine months of 1998 net cash provided by
operations contained a $5.4 million dollar reduction in accounts receivable and
a $4.1 million increase in accounts payable while the 1999 net cash provided by
operations was negatively effected by lower net income due to lower natural gas
prices, oil and natural gas production, contract drilling utilization and
dayrates.
On September 30, 1999, we completed the acquisition of 13 land contract
drilling rigs and related equipment (the "Parker Acquisition") from Parker
Drilling Company and Parker Drilling Company North America, Inc. (the
"Sellers"). Under the terms of the Parker Acquisition, the Sellers received
1,000,000 shares of our common stock valued at $8,138,000 and $40,000,000 in
cash. The consideration paid was determined through arms-length negotiations
between the parties. The cash portion of the consideration paid was funded
through an offering of 7,000,000 shares of our common stock which closed on
September 29, 1999 (the "Equity Offering"). The net proceeds received by us
from the offering were $50,435,000.
10
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 currently under contract with various
operators and are located in Utah and Wyoming. Three of the remaining rigs are
located in South Louisiana and three are located in South Texas. The Parker
Acquisition opens a new market area for our contract drilling segment in the
Rocky Mountains and increases our contract drilling rig fleet to 47 rigs. In
addition, one of our wholly owned subsidiaries, has employed approximately 160
people previously employed by the Sellers to operate the rigs.
Our primary source of liquidity and capital resources in the near- and long-
term will consist of cash flow from operating activities, available borrowings
under our Credit Agreement and the remaining proceeds from the Equity Offering.
During the first nine months of 1999, we had capital additions of $63.8 million
consisting of $11.2 million for oil and natural gas exploration and development
drilling, $48.1 million for the Parker Acquisition discussed above and the
remaining $4.5 million for other capital expenditures in our contract drilling
operations. Due to lower natural gas prices, we slowed our development drilling
during the first six months of 1999. As commodity prices increased in the third
quarter, we increased our development drilling program. Depending, in part, on
the continued strengthening of commodity prices, we anticipate we will spend
approximately $20 million on our oil and natural gas capital expenditures
program in 1999 and approximately $5.0 million on our contract drilling fleet
exclusive of the Parker Acquisition. These expenditures are anticipated to be
within the constraints of available cash to be provided by our operating
activities, Credit Agreement and remaining proceeds from the Equity Offering.
Since a large portion of our capital expenditures are discretionary and directed
toward increasing reserves and future growth, current operations are not
dependent on our ability to obtain funds outside of our Credit Agreement.
On November 20, 1997, we acquired Hickman Drilling Company, pursuant to an
Agreement and Plan of Merger ("the Merger Agreement") entered into between the
company, Hickman Drilling Company and all of the shareholders of Hickman
Drilling Company (the "Selling Stockholders"). As part of this acquisition, the
Selling Stockholders hold, as of September 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 and 8.25 percent, respectively.
Due to a settlement agreement which terminated at December 31, 1997, we have
a liability of $1.3 million at September 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.
In order to reduce our exposure to short-term fluctuations in the price of
oil and natural gas, we sometimes enter into hedging arrangements. Our hedging
arrangements apply to only a portion of our production and provides only partial
price protection against declines in oil and natural gas prices. These hedging
arrangements also expose us to risk of financial loss and limit the benefit to
us of increases in prices. Included in the first nine months of 1999 is a
reduction to oil and natural gas sales of $524,000 resulting from our hedging
activity during the period.
The natural gas price received by us during the first nine months of 1999
was $1.88 per Mcf, $.02 per Mcf less than during the same period in 1998. The
11
average oil price received by us during the first nine months of 1999 was $15.74
per barrel, $2.47 per barrel more 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 our
reserves, large drops in spot market natural gas prices have a significant
adverse effect on the value of our reserves and material price declines could
also cause us to reduce the carrying value of our oil and natural gas
properties. Such decreases, if sustained, would also adversely effect our
future cash flow due to reduced oil and natural gas revenues and if continued
over an extended period would adversely impact the demand for our contract
drilling rigs. Declines in natural gas and oil prices could also adversely
effect the semi-annual determination of the loan value under the Credit
Agreement since this determination is calculated on the value of our oil and
natural gas reserves and our drilling rigs. Any such reduction would reduce the
amount available to us under the Credit Agreement which, in turn, would
impact our ability to carry out its capital projects.
Our ability to utilize our 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 our ability to supply the type of equipment required. We expect that these
factors will continue to influence our rig utilization throughout the remainder
of 1999 and into 2000.
In the third quarter of 1994, our Board of Directors authorized us to
purchase up to 1,000,000 shares of our outstanding common stock on the open
market. Since that time, 160,100 shares have been repurchased at prices ranging
from $2.50 to $9.69 per share. In the first quarter of 1999 and 1998, 25,000
and 19,863 of the purchased shares, respectively, were used as the matching
contribution to the 401(K) Employee Thrift Plan. At December 31, 1998, 25,000
treasury shares were held by the company and at September 30, 1999 no such
shares were held.
YEAR 2000 STATEMENT
- -------------------
We have initiated a comprehensive assessment of our 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 us but also for our customers and suppliers, so we
have also initiated an assessment of our customers' and suppliers' efforts to
become year 2000 compliant.
Evaluation of our IT systems began in house during 1997. Our IT systems
consist mainly of office computers, related computer programs and mangement
financial information software. We believe nearly all of our hardware is Year
2000 compliant and during the first week in April 1999, we converted our related
computer programs, software and data base on the AS400 computer system making it
Year 2000 compliant. We spent approximately $130,000 bringing our systems
compliant by the end of the second quarter of 1999. No additional expenditures
were made in the third quarter.
12
Our non-IT systems consist of office equipment and other systems associated
with our oil and natural gas properties and our drilling rigs. We began
assessing these non-IT systems and the associated cost during the fourth quarter
of 1998. Currently, we anticipate 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, we issued questionnaires to our key
suppliers and customers to assess their preparation for Year 2000 compliance.
We received responses from 41 percent of these entities. During the first
quarter of 1999, we 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 October 31, 1999, we had received responses from 68 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, we currently believe that nearly all of our internal corporate
systems and equipment was Year 2000 compliant at the end of the second quarter
of 1999 and the associated costs have not had a material adverse effect on
results of our operations and financial condition. However, the failure to
properly assess or timely remediate a material Year 2000 problem could result in
a disruption in our normal business activities or operations. Such failures,
depending on the extent and nature, could materially and adversely effect our
operations and financial condition. As a result, we will continue to evaluate
our Year 2000 exposure, both internally and externally. Since a portion of our
overall evaluation of our Year 2000 readiness will, of necessity, be based on
the information to be supplied by and the readiness of our key suppliers and
customers, we cannot currently determine the impact, if any, such third parties
will have on our Year 2000 exposure. As noted, we intend to evaluate this
information as, if and when it is made available. The failure by key third
parties to correct their Year 2000 problems could adversely affect us. We intend
to develop contingency plans as appropriate to minimize disruption in our normal
business activities or operations if it is determined there is a significant
Year 2000 risk. These plans might include the use of alternative service
providers or product suppliers. Currently, we do not have any contingency plans
in place based on the Year 2000 assessments completed to date.
Our assessment of Year 2000 issues involve many assumptions. Our
assumptions might prove to be inaccurate, and actual results could differ
significantly from the assumptions. In addition, third party representations or
certifications as to Year 2000 compliance might prove to be inaccurate. We have
not retained any experts or advisors to independently verify our Year 2000
compliance or the Year 2000 compliance of key customers and suppliers.
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 our operations (financial and otherwise)
to differ materially from those discussed in this report. Generally, forward
looking statements relate to projections involving our anticipated revenues from
our oil and natural gas production, sources of capital, the utilization rate of
our drilling rigs, rates to be received under our drilling contracts, growth of
our oil and natural gas reserves, oil and natural gas well production or reserve
13
amounts and our anticipated debt. In addition, much of our 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 our operations are subject to a number of influences
outside our control, any one of which, or a combination of which, could
materially affect the results of our operations. A more thorough discussion of
some of these factors and their possible impact on us is provided in our Annual
Report on Form 10-K for the year ended December 31, 1998 as filed with the
Securities and Exchange Commission.
RESULTS OF OPERATIONS
- ---------------------
Third Quarter 1999 versus Third Quarter 1998
- --------------------------------------------
We reported net income of $690,000 in the third quarter of 1999 as compared
to net income of $654,000 for the third quarter of 1998. Substantial increases
in prices received for both oil and natural gas offset decreases in oil and
natural gas production volumes, contract drilling dayrates and rig utilization
between the comparative quarters.
Oil and natural gas revenues increased 19 percent in the third quarter
of 1999 as compared to the third quarter of 1998. While natural gas production
decreased 10 percent and oil production decreased 11 percent between the two
quarters, average natural gas and oil prices received by us offset the
production decline, increasing 28 and 63 percent, respectively. Natural gas
production was lower due to reduced natural gas reserve replacement as we
reduced our development drilling program during the first six months of 1999, in
response to declining natural gas prices, while oil production has declined due
to our focus on replacing natural gas reserves as opposed to oil reserves over
the past several years.
Oil and natural gas operating margins (revenues less operating costs)
increased to 70 percent in the third quarter of 1999 as compared to 65 percent
in the third quarter of 1998. Margins increased due to the rise in commodity
prices. Total operating costs for oil and natural gas production increased 4
percent. Depreciation, depletion and amortization ("DD&A") decreased 6 percent
due to the decrease in production. The decrease was partially offset by an
increase in our average DD&A rate per equivalent barrel to $5.24 for the third
quarter of 1999 as compared with $4.94 in the third quarter of 1998.
Contract drilling revenues decreased 22 percent for the comparative quarters
due to decreases in both the number of rigs utilized and dayrates. As the price
for natural gas dropped in the first six months of 1999, the demand for contract
drilling rigs declined and we experienced downward pressure on dayrates. These
previous price declines continued to influence rig demand while commodity prices
started to rise in the third quarter. Rig utilization averaged 19.1 rigs in the
third quarter of 1999 as compared to 23.9 rigs in the third quarter of 1998.
Contract drilling operating margins (revenues less operating costs) were 8
percent in the third quarter of 1999 and 21 percent in the third quarter of
1998.
14
General and administrative expense decreased 2 percent in the third quarter
of 1999 when compared with the third quarter of 1998. Interest expense
increased 11 percent as the average long-term debt outstanding increased 7
percent between the comparative quarters and the average interest rate incurred
by us increased from 7.0 percent to 7.3 percent.
Nine Months 1999 versus Nine Months 1998
- -------------------------------------------------
We had a net loss for the first nine months of 1999 of $1,458,000 as
compared to net income of $2,614,000 for the first nine months of 1998. Declines
in 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.
Oil and natural gas revenues decreased 5 percent in the first nine
months of 1999 as compared to the first nine months of 1998. Natural gas and
oil production decreased 5 and 17 percent, respectively between the comparative
periods and the average natural gas prices received by us decreased 1 percent.
Average oil prices increased 18 percent. Natural gas production was lower due
to reduced natural gas reserve replacement as we reduced our development
drilling program in response to declining natural gas prices while oil
production has declined due to our focus on replacing natural gas reserves as
opposed to oil reserves over the past several years.
In the first nine months of 1999 and 1998 the oil and natural gas operating
margins (revenues less operating costs) were 64 percent. Depreciation,
depletion and amortization ("DD&A") increased 1 percent between the comparative
periods due to an increase in our average DD&A rate per equivalent barrel from
$4.90 in the first nine months of 1998 to $5.31 for the first nine months of
1999.
Contract drilling revenues decreased 25 percent for the comparative nine
month periods as rig utilization decreased from an average of 24.8 rigs
operating in the first nine months of 1998 to 19.3 rigs in the first nine months
of 1999, due primarily to lower commodity prices, and dayrates on daywork
contracts dropped 10 percent. Contract drilling operating margins (revenue less
operating costs) dropped from 20 percent to 9 percent between the comparative
periods.
General and administrative expense decreased 2 percent during the
comparative nine month periods. Interest expense increased 6 percent due to a
17 percent increase in the average long-term debt outstanding in the first nine
months of 1999 compared to the first nine months of 1998. The average interest
rate incurred by the Company decreased from 7.3 percent to 6.8 percent.
On May 3, 1999, our contract drilling offices in Moore, Oklahoma were struck
by a tornado destroying two buildings and damaging various vehicles and drilling
equipment. In May 1999, we received $500,000 of insurance proceeds related to
the destruction of the buildings and as a 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 we will receive are not determinable under
the additional claims, but we do not expect any financial loss to be incurred
from these claims.
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
- ------------------------------------------------------------
Not applicable
Item 5. Other Information
- --------------------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K
- --------------------------------------------
(a) Exhibits:
10.1.24 First Amendment to the Loan Agreement effective as
of May 1, 1999 between and among Unit Corporation,
Bank of Oklahoma, N.A., BankBoston, N.A., Bank of
America, N.A. and Local Oklahoma Bank, N.A.
15 Letter re: Unaudited Interim Financial
Information.
27 Financial Data Schedule
(b) On September 27, 1999, we filed a report on Form 8-K under Item
5 reporting the filing of a prospectus supplement relating to
the issuance and sale in an underwritten public offering of up
to 8,050,000 shares of our common stock.
On October 12, 1999, we filed a report on Form 8-K under Item 2
reporting the acquisition of 13 land contract drilling rigs from
Parker Drilling Company and Parker Drilling Company North America,
Inc.
16
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: November 10, 1999 By: /s/ John G. Nikkel
--------------------------- ------------------------
JOHN G. NIKKEL
President, Chief Operating
Officer and Director
Date: November 10, 1999 By: /s/ Larry D. Pinkston
--------------------------- ------------------------
LARRY D. PINKSTON
Vice President, Chief
Financial Officer
and Treasurer
17