[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
[Commission File Number 1-9260]
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation)
(I.R.S. Employer Identification No.)
8200 South Unit Drive, Tulsa, Oklahoma
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
(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 by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ x ] Accelerated filer [ ] Non-accelerated filer [ ]
Smaller reporting company [ ] Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
As of April 19, 2019, 55,467,987 shares of the issuer's common stock were outstanding.
Securities registered pursuant to Section 12(b) of the Act:
This report contains “forward-looking statements” – meaning, statements related to future events within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included or incorporated by reference in this document that addresses activities, events or developments we expect or anticipate will or may occur, are forward-looking statements. The words “believes,” “intends,” “expects,” “anticipates,” “projects,” “estimates,” “predicts,” and similar expressions are used to identify forward-looking statements. This report modifies and supersedes documents filed by us before this report. In addition, certain information we file with the SEC will automatically update and supersede information in this report.
These forward-looking statements include, among others, things as:
•the amount and nature of our future capital expenditures and how we expect to fund our capital expenditures;
•prices for oil, natural gas liquids (NGLs), and natural gas;
•demand for oil, NGLs, and natural gas;
•our exploration and drilling prospects;
•the estimates of our proved oil, NGLs, and natural gas reserves;
•oil, NGLs, and natural gas reserve potential;
•development and infill drilling potential;
•expansion and other development trends of the oil and natural gas industry;
•our business strategy;
•our plans to maintain or increase production of oil, NGLs, and natural gas;
•the number of gathering systems and processing plants we plan to construct or acquire;
•volumes and prices for natural gas gathered and processed;
•expansion and growth of our business and operations;
•demand for our drilling rigs and drilling rig rates;
•our belief that the final outcome of legal proceedings involving us will not materially affect our financial results;
•our ability to timely secure third-party services used in completing our wells;
•our ability to transport or convey our oil or natural gas production to established pipeline systems;
•impact of federal and state legislative and regulatory actions affecting our costs and increasing operating restrictions or delays and other adverse impacts on our business;
•our projected production guidelines for the year;
•our anticipated capital budgets;
•our financial condition and liquidity;
•the number of wells our oil and natural gas segment plans to drill or rework during the year;and
•our estimates of the amounts of any ceiling test write-downs or other potential asset impairments we may have to record in future periods.
These statements are based on assumptions and analyses made by us based on our experience and our perception of historical trends, current conditions, and expected future developments, and other factors we believe are appropriate in the circumstances. Whether actual results and developments will conform to our expectations and predictions is subject to several risks and uncertainties, any one or combination of which could cause our actual results to differ materially from our expectations and predictions, including:
•the risk factors discussed in this document and in the documents (if any) we incorporate by reference;
•general economic, market, or business conditions;
•the availability of and nature of (or lack of) business opportunities we pursue;
•demand for our land drilling services;
•changes in laws or regulations;
•changes in the current geopolitical situation;
•risks relating to financing, including restrictions in our debt agreements and availability and cost of credit;
•risks associated with future weather conditions;
•decreases or increases in commodity prices;
•putative class action lawsuits that may cause substantial expenditures and divert management's attention; and
•other factors, most of which are beyond our control.
You should not place undue reliance on these forward-looking statements. Except as required by law, we disclaim any intention to update forward-looking information and to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after this document to reflect unanticipated events.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - CONTINUED
March 31, 2019
December 31, 2018
(In thousands except share amounts)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accrued liabilities (Note 5)
Current operating lease liability (Note 12)
Current portion of other long-term liabilities (Note 6)
Total current liabilities
Long-term debt less debt issuance costs (Note 6)
Non-current derivative liability (Note 10)
Operating lease liability (Note 12)
Other long-term liabilities (Note 6)
Deferred income taxes
Commitments and contingencies (Note 13)
Preferred stock, $1.00 par value, 5,000,000 shares authorized, none issued
Common stock, $.20 par value, 175,000,000 shares authorized, 55,467,987 and 54,055,600 shares issued as of March 31, 2019 and December 31, 2018, respectively
Capital in excess of par value
Accumulated other comprehensive loss (Note 15)
Total shareholders’ equity attributable to Unit Corporation
Non-controlling interests in consolidated subsidiaries
Total shareholders' equity
Total liabilities(1) and shareholders’ equity
(1)Unit Corporation's consolidated total assets as of March 31, 2019 include total current and long-term assets of its variable interest entity (VIE) (Superior Pipeline Company, L.L.C.) of $28.9 million and $428.1 million, respectively, which can only be used to settle obligations of the VIE. Unit Corporation's consolidated total liabilities as of March 31, 2019 include total current and long-term liabilities of the VIE of $36.0 million and $14.0 million, respectively, for which the creditors of the VIE have no recourse to Unit Corporation. Unit Corporation's consolidated total assets as of December 31, 2018 include total current and long-term assets of the VIE of $40.1 million and $423.3 million, respectively, which can only be used to settle obligations of the VIE. Unit Corporation's consolidated total liabilities as of December 31, 2018 include total current and long-term liabilities of the VIE of $42.8 million and $14.7 million, respectively, for which the creditors of the VIE have no recourse to Unit Corporation. See Note 14 – Variable Interest Entity Arrangements.
The accompanying notes are an integral part of these
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PREPARATION AND PRESENTATION
The unaudited condensed consolidated financial statements in this report include the accounts of Unit Corporation and all its subsidiaries and affiliates and have been prepared under the rules and regulations of the SEC. The terms “company,” “Unit,” “we,” “our,” “us,” or like terms refer to Unit Corporation, a Delaware corporation, and one or more of its subsidiaries and affiliates, except as otherwise indicated or as the context otherwise requires. We consolidate the activities of Superior Pipeline Company, L.L.C. (Superior), a 50/50 joint venture between Unit Corporation and SP Investor Holdings, LLC, which qualifies as a Variable Interest Entity (VIE) under generally accepted accounting principles in the United States (GAAP). We have concluded that we are the primary beneficiary of the VIE, as defined in the accounting standards, since we have the power, through our 50% ownership, to direct those activities that most significantly affect the economic performance of Superior as further described in Note 14 – Variable Interest Entity Arrangements.
The condensed consolidated financial statements are unaudited and do not include all the notes in our annual financial statements. This report should be read with the audited consolidated financial statements and notes in our Form 10-K, filed February 26, 2019, for the year ended December 31, 2018.
In the opinion of our management, the unaudited condensed consolidated financial statements contain all normal recurring adjustments (including the elimination of all intercompany transactions) necessary to fairly state:
•Balance Sheets at March 31, 2019 and December 31, 2018;
•Statements of Operations for the three months ended March 31, 2019 and 2018;
•Statements of Comprehensive Income (Loss) for the three months ended March 31, 2019 and 2018;
•Statements of Changes in Shareholders' Equity for the three months ended March 31, 2019 and 2018; and
•Statements of Cash Flows for the three months ended March 31, 2019 and 2018.
Our financial statements are prepared in conformity with GAAP, which requires us to make certain estimates and assumptions that may affect the amounts reported in our unaudited condensed consolidated financial statements and notes. Actual results may differ from those estimates. Results for the three months ended March 31, 2019 and 2018 are not necessarily indicative of the results we may realize for the full year of 2019, or that we realized for the full year of 2018.
Certain amounts in this report for prior periods have been reclassified to conform to current year presentation. There was no impact to consolidated net income (loss) or shareholders' equity.
As of January 1, 2019, we adopted Leases - Topic 842(ASC 842) using the modified retrospective method and the optional transition method to record the adoption impact through a cumulative adjustment to equity. Results for reporting periods beginning after January 1, 2019, are presented under Topic 842, while prior periods are not adjusted and continue to be reported under the accounting standards in effect for those periods. This new lease standard is explained further in Note 8 – New Accounting Pronouncements.
The additional disclosures required by ASC 842 have been included in Note 12 – Leases.
NOTE 2 – REVENUE FROM CONTRACTS WITH CUSTOMERS
Our revenue streams are reported under three segments: oil and natural gas, contract drilling, and mid-stream. This is our disaggregation of revenue and how our segment revenue is reported (as reflected in Note 16 – Industry Segment Information). Revenue from the oil and natural gas segment is from sales of our oil and natural gas production. Revenue from the contract drilling segment is derived by contracting with upstream companies to drill an agreed-on number of wells or provide drilling rigs and services over an agreed-on time period. Revenue from the mid-stream segment is derived from gathering, transporting, and processing natural gas production and selling those commodities. We sell the hydrocarbons (from the oil and natural gas and mid-stream segments) to mid-stream and downstream oil and gas companies.
Certain costs—as either a deduction from revenue or as an expense—is determined based on when control of the commodity is transferred to our customer, which would affect our total revenue recognized, but will not affect gross profit. For example, gathering, processing and transportation costs included as part of the contract price with the customer on transfer of control of the commodity are included in the transaction price, while costs incurred while we are in control of the commodity represent operating costs.
Contract Drilling Revenues
We evaluated the mobilization and de-mobilization charges due on our outstanding drilling contracts. The impact of those charges to the financial statements was immaterial. As of March 31, 2019, we had 32 contract drilling contracts with terms ranging fromtwo months to almost three years.
Most of our drilling contracts have an original term of less than one year; however, the remaining performance obligations under the contracts that have a longer duration are not material.
Mid-stream Contracts Revenues
Revenues are generated from the fees earned for gas gathering and processing services provided to a customer. The typical revenue contracts used by this segment are gas gathering and processing agreements.The following tables show the changes in our mid-stream contract asset and contract liability balances during the three months ended March 31, 2019:
Balance at December 31, 2018 (1)
Amounts invoiced in excess of revenue recognized
Balance at March 31, 2019 (1)
1.At December 31, 2018, the total contract assets are included in prepaid expenses and other and other assets of $0.3 million and $12.9 million, respectively, in our Condensed Consolidated Balance Sheet. At March 31, 2019, the total contract assets included prepaid expenses and other and other assets of $1.8 million and $11.4 million, respectively, in our Condensed Consolidated Balance Sheet.
Balance at December 31, 2018
Revenue recognized included in beginning balance
Balance at March 31, 2019
1.At December 31, 2018, the total contract liabilities are included in current portion of other long-term liabilities and other long-term liabilities of $2.9 million and $7.0 million, respectively, in our Condensed Consolidated Balance Sheet. At March 31, 2019, the total contract liabilities included current portion of other long-term liabilities and other long-term liabilities of $2.9 million and $6.3 million, respectively, in our Condensed Consolidated Balance Sheet.
Included below is the additional fixed revenue we will earn over the remaining term of the contracts and excludes all variable consideration to be earned with the associated contract.
We sold non-core oil and natural gas assets, net of related expenses, for $0.6 million during the first three months of 2019, compared to $21.7 million during the first three months of 2018. Proceeds from those sales reduced the net book value of our full cost pool with no gain or loss recognized.
In December 2018, we removed 41 drilling rigs and other equipment from service. We estimated the fair value of the 41 drilling rigs based on the estimated market value from third-party assessments (Level 3 fair value measurement) less cost to sell. Based on these estimates, we recorded a non-cash write-down of approximately $147.9 million, pre-tax. During the first quarter of 2019, we sold three of these drilling rigs and some of the other equipment to unaffiliated third parties. The proceeds of those sales, less costs to sell, was less than the applicable $2.8 million net book value resulting in a loss of $0.6 million. The remaining drilling rigs and equipment not sold will be marketed for sale throughout 2019 and remain classified as assets held for sale. The net book value of those assets is $19.7 million.
NOTE 4 – EARNINGS (LOSS) PER SHARE
Information related to the calculation of earnings (loss) per share attributable to Unit Corporation follows:
Earnings (Loss) (Numerator)
Weighted Shares (Denominator)
(In thousands except per share amounts)
For the three months ended March 31, 2019
Basic loss attributable to Unit Corporation per common share
Effect of dilutive stock options and restricted stock
Diluted loss attributable to Unit Corporation per common share
For the three months ended March 31, 2018
Basic earnings attributable to Unit Corporation per common share
Effect of dilutive stock options and restricted stock
Diluted earnings attributable to Unit Corporation per common share
Due to the net loss for the three months ended March 31, 2019, approximately 279,000 weighted average shares related to stock options and restricted stock were antidilutive and were excluded from the earnings per share calculation above.
The following table shows the number of stock options (and their average exercise price) excluded because their option exercise prices were greater than the average market price of our common stock:
NOTE 6 – LONG-TERM DEBT AND OTHER LONG-TERM LIABILITIES
As of the date indicated, our long-term debt consisted of the following:
March 31, 2019
December 31, 2018
Unit credit agreement with an average interest rate of 4.0% at March 31, 2019
Superior credit agreement
6.625% senior subordinated notes due 2021
Total principal amount
Less: unamortized discount
Less: debt issuance costs, net
Total long-term debt
Unit Credit Agreement. On October 18, 2018, we amended our Senior Credit Agreement (Unit credit agreement) which is scheduled to mature on October 18, 2023. Under that agreement, the amount we can borrow is the lesser of the amount we elect as the commitment amount or the value of the borrowing base as determined by the lenders, but in either event not to exceed the maximum credit agreement amount of $1.0 billion. Our elected commitment amount is $425.0 million. Our borrowing base is $425.0 million. We are currently charged a commitment fee of 0.375% on the amount available but not borrowed. That fee varies based on the amount borrowed as a percentage of the total borrowing base. Total amendment fees of $3.3 million in origination, agency, syndication, and other related fees are being amortized over the life of the agreement. Under the agreement, we have pledged as collateral 80% of the proved developed producing (discounted as present worth at 8%) total value of our oil and gas properties.
On May 2, 2018, we entered into a Pledge Agreement with BOKF, NA (dba Bank of Oklahoma), as administrative agent to benefit the secured parties, under which we granted a security interest in the limited liability membership interests and other equity interests we own in Superior (which as of this report is 50% of the aggregate outstanding equity interests of Superior) as additional collateral for our obligations under the Unit credit agreement.
The borrowing base amount–which is subject to redetermination by the lenders on April 1st and October 1st of each year–is based on a percentage of the discounted future value of our oil and natural gas reserves. We or the lenders may request a onetime special redetermination of the borrowing base between each scheduled redetermination. In addition, we may request a redetermination following the completion of an acquisition that meets the requirements in the Unit credit agreement.
At our election, any part of the outstanding debt under the Unit credit agreement can be fixed at a London Interbank Offered Rate (LIBOR). LIBOR interest is computed as the LIBOR base for the term plus 1.50% to 2.50% depending on the level of debt as a percentage of the borrowing base and is payable at the end of each term, or every 90 days, whichever is less. Borrowings not under LIBOR bear interest at the prime rate specified in the Unit credit agreement but in no event less than
LIBOR plus 1.00% plus a margin. The credit agreement provides that if ICE Benchmark Administration no longer reports the LIBOR or Administrative Agent determines in good faith that the rate so reported no longer accurately reflects the rate available to Lender in the London Interbank Market or if such index no longer exists or accurately reflects the rate available to Administrative Agent in the London Interbank Market, Administrative Agent may select a replacement index. Interest is payable at the end of each month and the principal may be repaid in whole or in part at any time, without a premium or penalty. At March 31, 2019, we had $40.0 million outstanding borrowings under the Unit credit agreement.
We can use borrowings to finance general working capital requirements for (a) exploration, development, production, and acquisition of oil and gas properties, (b) acquisitions and operation of mid-stream assets up to certain limits, (c) issuance of standby letters of credit, (d) contract drilling services and acquisition of contract drilling equipment, and (e) general corporate purposes.
The Unit credit agreement prohibits, among other things:
•the payment of dividends (other than stock dividends) during any fiscal year over 30% of our consolidated net income for the preceding fiscal year;
•the incurrence of additional debt with certain limited exceptions;
•the creation or existence of mortgages or liens, other than those in the ordinary course of business and with certain limited exceptions, on any of our properties, except in favor of our lenders; and
•investments in Unrestricted Subsidiaries (as defined in the Unit credit agreement) over $200.0 million.
The Unit credit agreement also requires that we have at the end of each quarter:
•a current ratio (as defined in the credit agreement) of not less than 1 to 1.
•a leverage ratio of funded debt to consolidated EBITDA (as defined in the Unit credit agreement) for the most recently ended rolling four fiscal quarters of no greater than 4 to 1.
As of March 31, 2019, we were in compliance with these covenants.
Superior Credit Agreement. On May 10, 2018, Superior signed a five-year, $200.0 million senior secured revolving credit facility with an option to increase the credit amount up to $250.0 million, subject to certain conditions (Superior credit agreement). The amounts borrowed under the Superior credit agreement bear annual interest at a rate, at Superior’s option, equal to (a) LIBOR plus the applicable margin of 2.00% to 3.25% or (b) the alternate base rate (greater of (i) the federal funds rate plus 0.5%, (ii) the prime rate, and (iii) third day LIBOR plus 1.00%) plus the applicable margin of 1.00% to 2.25%. The obligations under the Superior credit agreement are secured by, among other things, mortgage liens on certain of Superior’s processing plants and gathering systems. The credit agreement provides that if ICE Benchmark Administration no longer reports the LIBOR or Administrative Agent determines in good faith that the rate so reported no longer accurately reflects the rate available to Lender in the London Interbank Market or if such index no longer exists or accurately reflects the rate available to Administrative Agent in the London Interbank Market, Administrative Agent may select a replacement index.
Superior is currently charged a commitment fee of 0.375% on the amount available but not borrowed which varies based on the amount borrowed as a percentage of the total borrowing base. Superior paid $1.7 million in origination, agency, syndication, and other related fees. These fees are being amortized over the life of the Superior credit agreement.
The Superior credit agreement requires that Superior maintain a Consolidated EBITDA to interest expense ratio for the most-recently ended rolling four quarters of at least 2.50 to 1.00, and a funded debt to Consolidated EBITDA ratio of not greater than 4.00 to 1.00. The agreement also contains several customary covenants that restrict (subject to certain exceptions) Superior’s ability to incur additional indebtedness, create additional liens on its assets, make investments, pay distributions, sign sale and leaseback transactions, engage in certain transactions with affiliates, engage in mergers or consolidations, sign hedging arrangements, and acquire or dispose of assets. As of March 31, 2019, Superior was in compliance with these covenants.
The borrowings under the Superior credit agreement will fund capital expenditures and acquisitions, provide general working capital, and for letters of credit for Superior. As of March 31, 2019, we had no outstanding borrowings under the Superior credit agreement.
Superior's credit agreement is not guaranteed by Unit.
6.625% Senior Subordinated Notes. We have an aggregate principal amount of $650.0 million, 6.625% senior subordinated notes (the Notes) outstanding. Interest on the Notes is payable semi-annually (in arrears) on May 15 and November 15 of each year. The Notes mature on May 15, 2021. In issuing the Notes, we incurred fees of $14.7 million that are being amortized as debt issuance cost over the life of the Notes.
The Notes are subject to an Indenture dated as of May 18, 2011, between us and Wilmington Trust, National Association (successor to Wilmington Trust FSB), as Trustee (the Trustee), as supplemented by the First Supplemental Indenture dated as of May 18, 2011, between us, the Guarantors, and the Trustee, and as further supplemented by the Second Supplemental Indenture dated as of January 7, 2013, between us, the Guarantors, and the Trustee (as supplemented, the 2011 Indenture), establishing the terms of and providing for issuing the Notes. The Guarantors are most of our direct and indirect subsidiaries. The discussion of the Notes in this report is qualified by and subject to the actual terms of the 2011 Indenture.
Unit, as the parent company, has no significant independent assets or operations. The guarantees by the Guarantors of the Notes (registered under registration statements) are full and unconditional, joint and several, subject to certain automatic customary releases, are subject to certain restrictions on the sale, disposition, or transfer of the capital stock or substantially all of the assets of a subsidiary guarantor, and other conditions and terms set out in the 2011 Indenture. Effective April 3, 2018, Superior is no longer a Guarantor of the Notes. Excluding Superior, any of our other subsidiaries that are not Guarantors are minor. There are no significant restrictions on our ability to receive funds from any of our subsidiaries through dividends, loans, advances, or otherwise.
We may redeem all or, occasionally, a part of the Notes at certain redemption prices, plus accrued and unpaid interest. If a “change of control” occurs, subject to certain conditions, we must offer to repurchase from each holder all or any part of that holder’s Notes at a purchase price in cash equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the date of purchase. The 2011 Indenture contains customary events of default. The 2011 Indenture also contains covenants including those that limit our ability and the ability of certain of our subsidiaries to incur or guarantee additional indebtedness; pay dividends on our capital stock or redeem capital stock or subordinated indebtedness; transfer or sell assets; make investments; incur liens; enter into transactions with our affiliates; and merge or consolidate with other companies. We were in compliance with all covenants of the Notes as of March 31, 2019.
We may from time to time seek to retire or purchase our outstanding Note debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Other Long-Term Liabilities
Other long-term liabilities consisted of the following:
March 31, 2019
December 31, 2018
Asset retirement obligation (ARO) liability
Finance lease obligations
Separation benefit plans
Deferred compensation plan
Gas balancing liability
Less current portion
Total other long-term liabilities
Estimated annual principal payments under the terms of our long-term debt and other long-term liabilities during the five successive twelve-month periods beginning April 1, 2019 (and through 2024) are $14.3 million, $47.8 million, $656.9 million, $3.6 million, and $42.3 million, respectively.
We are required to record the estimated fair value of the liabilities relating to the future retirement of our long-lived assets. Our oil and natural gas wells are plugged and abandoned when the oil and natural gas reserves in those wells are depleted or the wells are no longer able to produce. The plugging and abandonment liability for a well is recorded in the period in which the obligation is incurred (at the time the well is drilled or acquired). None of our assets are restricted for purposes of settling these AROs. All our AROs relate to the plugging costs associated with our oil and gas wells.
The following table shows certain information about our estimated AROs for the periods indicated:
Three Months Ended
ARO liability, January 1:
Accretion of discount
Revision of estimates (1)
ARO liability, March 31:
Less current portion
Total long-term ARO
1.Plugging liability estimates were revised in both 2019 and 2018 for updates in the cost of services used to plug wells over the preceding year. We had various upward and downward adjustments.