Annual Report - Unit Corporation

DEEP ROOTS FOR SUSTAINED GROW TH
U N I T C O R P O R AT I O N
Annual Report 2008
U N I T
C O R P O R A T I O N
BOARD OF DIRECTORS
John G. Nikkel
Chairman of the Board
J. Michael Adcock
Chairman of the Board of Arvest Bank
Trustee, Don Bodard Trust
Shawnee, Oklahoma
OFFICERS
John G. Nikkel
Chairman of the Board
Larry D. Pinkston
President and Chief Executive Officer
Mark E. Schell
Senior Vice President, General Counsel
and Secretary
David T. Merrill
Chief Financial Officer and Treasurer
AUDIT COMMITTEE
Gary R. Christopher
Investments
Tulsa, Oklahoma
Steven B. Hildebrand
Investments
Tulsa, Oklahoma
Steven B. Hildebrand
Chairman
Gary R. Christopher
William B. Morgan
J. Michael Adcock
King P. Kirchner
Co-founder, Unit Corporation
Tulsa, Oklahoma
William B. Morgan
Attorney and Investments
Chandler, Arizona
Larry D. Pinkston
President and Chief Executive Officer
N O M I N AT I N G &
GOVERNANCE
COMMITTEE
Robert J. Sullivan, Jr.
Manager of Sullivan and Company LLC
Tulsa, Oklahoma
C O M P E N S AT I O N
COMMITTEE
William B. Morgan
Chairman
John H. Williams
Investments
Tulsa, Oklahoma
J. Michael Adcock
Chairman
J. Michael Adcock
William B. Morgan
John H. Williams
Robert J. Sullivan, Jr.
John H. Williams
A nnual S hareholders M eeting
As we highlight the people who make us strong, we also thank our shareholders whom we are honored to serve.
Our annual meeting of stockholders will be held at 11:00 a.m. Central Time on May 6, 2009, in the Tulsa
Room, in the Bank of Oklahoma Tower, 9th floor, in Tulsa, Oklahoma.
A N N U A L
R E P O R T
2 0 0 8
THE FACES BEHIND OUR SUCCESS
MIKE FANK HOUSER, 20 YE AR S
JACKI DILLMAN, 13 YE ARS
KEITH ROWEK AMP, 11 YE AR S
Diverse Skills for a
D iversifie D
E n e r g y C o m p a n y.
From our large drilling fleet and extensive exploration and production operations, to our
growing mid-stream presence, we cover the petroleum energy spectrum. Our people, with
their diverse skills and specializations, are as multifaceted as our company.
But there’s one thing that unifies us all under the Unit name: experience.
Experience to plan. Experience to persevere. Experience to prevail.
We’re the people of Unit Corporation. And we’re proud to be a diversified energy company.
Where our roots, like our drill bits, run deep.
3
U N I T
LYLE L ANDSBERGER, 3 3 YE AR S
C O R P O R A T I O N
L AVITA HILL, 23 YE ARS
4
MIKE E ARNEST, 19 YE AR S
A N N U A L
R E P O R T
2 0 0 8
ROOTED IN EXPERIENCE
A Letter to Our
SHAREHOLDERS
For us, 2008 was a year of changes. It started slowly, then became fast-paced with commodity
prices rising significantly, and then ended in a free fall as part of the much larger collapse of the
world economies. For the year, the results exceeded most everyone’s expectations, including our
own, and made for some impressive highlights despite the fourth quarter downturn.
•Our revenues reached an all-time record of $1.4 billion, a 17% increase over 2007.
•Net income for the year was $143.6 million, or $3.06 per diluted share. Excluding the effect of the ceiling test impairment write-down of $175.5 million net of income tax, net income for 2008 would have been $319.1 million, or $6.80 per diluted share.
•We ended the year with working capital of $90.2 million, long-term debt of $199.5 million, and a debt to capitalization ratio of 11%.
When the economy and liquidity meltdown hit, we moved into action. What our folks could control,
they did – and did a good job of it. Most notably, we put three main protective strategies into action.
1. Minimized capital expenditures to preserve cash.
Example: We cut our drilling program by 8% during the fourth quarter of 2008. We originally planned 300+ wells and ended with 278. Compared to 2008, excluding acquisitions, we reduced our 2009 operating segment capital expenditure budget by 60% to $290 million.
2. Greatly increased levels of hedging.
Example: For 2009, we moved our hedged position from approximately 30% hedged to approximately 70% hedged on natural gas and oil production.
3. Greatly increased borrowing capacity.
Example: We increased our borrowing capacity by $50 million for a total of $325 million –
with the intention of using it for potential acquisition opportunities, not day-to-day operations.
A fourth protective measure I’d like to highlight isn’t new at all. It’s the cornerstone of our company –
diversification. It enables us to channel cash across our three segments as needed. Case in point?
Over the last three years of growth, we’ve utilized about $470 million out of drilling operations for
our midstream and E&P segments, before income taxes. Now the reverse is true, with growth in our
E&P segment buffering the economy’s impact on our drilling segment. This balance is what drives
our distinct ability to not just ride out the downturns, but to instead capitalize on them.
Ours is a cyclical business. In 45 years, we’ve seen numerous highs and lows. We don’t get carried
away in the good times. And, in fact, we’ve typically experienced our biggest growth opportunities
during the tough times.
As another cycle runs its course, we anticipate 2009 to be a challenging year. To stay flexible and
well-positioned, you’ve got to have capital and you’ve got to have people. The right people. We’ve
got both. Our officers have a cumulative 130 years experience. And many of the smart, dedicated
people you’ll see throughout this report have grown with us for more than one, two and even three
decades. Bottom line: our people have experienced our industry’s challenging cycles. And they
have the know-how to take advantage of the opportunities they bring.
Sincerely,
Larry D. Pinkston
President and Chief Executive Officer
F e b r u a r y 24, 2 0 0 9
5
U N I T
C O R P O R A T I O N
THE FACES BEHIND THE PROGRESS
PHIL LIVING STON, 18 YE AR S
K ATHY HATFIELD, 23 YE ARS
DEE MORRIS, 35 YE AR S
Our Contract Drilling Operations.
For 45 years, the hard-working individuals in our contract drilling operations have built a strong
reputation for putting customers first and meeting their unique needs with responsive, outstanding
service. Our can-do culture has kept our company on a steady track, growing from our initial 3
drilling rigs to a record 132 drilling rigs in 2008. As our rig count has expanded, so has our reach.
With operations in 10 states, 68 of our drilling rigs are located in the Anadarko Basin, 15 are in the
Arkoma Basin, 23 are located within our Gulf Coast operations, and 26 are in the Rocky Mountain
region. Our drilling field offices include Oklahoma City, Oklahoma; Humble, Texas; Borger, Texas;
and Casper, Wyoming.
Our capabilities meet today’s demands. Our drilling fleet ranges in depth capacities from 5,000 to
40,000 feet, averaging approximately 16,208 feet, and can provide vertical and horizontal services
using both air and mud as drilling mediums.
Our average drilling rig utilization for the year was 103.1 drilling rigs, a 4% increase over 2007. The
year’s softening in the drilling rig market and the economy downturn in the fourth quarter, however,
6
A N N U A L
R E P O R T
2 0 0 8
THE FACES BEHIND THE PROGRESS
impacted our operating results. Drilling revenues for the year decreased 1% to $622.7 million, while
average dayrates for the year decreased 1% to $18,458 per day. Contract drilling operating margins
decreased to 50% for the year, compared to 51% for 2007.
Due to the significant drop in commodity prices and decline in demand for our drilling rigs, we
stored a 1,500 horsepower diesel-electric drilling rig in our Oklahoma City yard that was scheduled
to be placed into service in North Dakota during the first quarter of 2009. The mobilization of this rig
has been delayed pending final negotiation with our customer. In addition, after discussions with our
customers, we determined to postpone the construction of five drilling rigs and have cancelled three
additional drilling rigs we had anticipated building and, instead, substituted under the contracts
drilling rigs we already owned. As a result of existing contractual obligations, we expect to take
delivery of a new drilling rig during the fourth quarter of 2009. Looking forward, our current capital
expenditure budget for 2009 is $77 million.
BRENT KE YS, 11 YE AR S
THERESA TURNER, 22 YE ARS
7
SCOT T GORDON, 29 YE AR S
U N I T
C O R P O R A T I O N
T H E FAC E S B E H I N D T H E I N N OVAT I O N
MIKE SELLER S, 19 yeaR S
JULIE BE HLING, 20 years
JIM K AHLDEN, 14 year S
KE VIN TENNISON, 17 years
Our Oil and Natural Gas Operations.
Despite the tumultuous economic environment, our seasoned geological, land and engineering
staff helped make 2008 a year of records and milestones. We marked our 25th consecutive year
of replacing at least 150% of the year’s production with new oil and natural gas reserves, replacing
186% of our 2008 production.
At the year’s end, our total reserves hit a record 569.4 Bcfe, consisting of 9.7 million barrels of
oil, 10.2 million barrels of natural gas liquids and 450.1 Bcf of natural gas – an 11% equivalent
Bcf increase. The results include negative revisions of about 23 Bcfe resulting from significantly
lower commodity prices at year-end 2008. Total equivalent production increased 16% to 63.4 Bcfe,
another company record. Of the total, we produced 47.5 Bcf of natural gas, a 9% increase; 1.3
million barrels of oil, a 16% increase; and 1.4 million barrels of NGLs, a 77% increase over 2007.
Although commodity prices decreased dramatically with the economic turndown in the fourth
quarter, prior months saw strong prices and results. Our oil and natural gas revenues increased
8
A N N U A L
R E P O R T
2 0 0 8
T H E FAC E S B E H I N D T H E I N N OVAT I O N
42% to $554.0 million in 2008. The price we received for our natural gas averaged $7.62 per Mcf, a
21% increase over 2007, while our average oil price increased 33% to $93.87 per barrel. Our NGL
price averaged $47.42 per barrel, up 5% from 2007.
Following our strategy of combining our solid acquisition program with a successful development
drilling program, we commenced drilling operations on 276 new wells in 2008, 257 of which were
completed by year end. An additional 21 wells originally started in 2007 were also finished for a total
of 278 wells in 2008. Of these, 245 were completed as producing for a success rate of 88%.
Our current capital expenditure budget for 2009 is $200 million, with $164 million planned for
exploration and development drilling. The three areas we plan to spend the majority of our capital
in 2009 is the Granite-Wash play in the Texas Panhandle, the Segno prospect in Southeast Texas,
and the Haynesville Shale prospect in East Texas. Both the Granite Wash and the Segno prospects
have favorable economics due to the expertise we have developed in these areas along with the
high BTU gas that nets a better overall price. The Haynesville Shale is a new area for us and we
initially plan to drill primarily vertical wells to hold our leasehold and then drill one to two horizontal
wells in the second half of this year.
DENNIS MOORE, 36 yeaR S
LESLIE NAUGHTON, 18 years
DANA EDDY, 30 year S
9
BERNARD BOECKMAN, 33 years
U N I T
C O R P O R A T I O N
THE FACES BEHIND THE GROWTH
KEN BLONDE AU, 14 YE AR S
LINDA SMITH, 20 YE ARS
ED PHELPS, 36 YE AR S
Our Mid-Stream Operations.
Rounding out our diverse operations is our mid-stream segment. Our dedicated people have grown
these operations through grass roots construction projects and acquisitions of equipment and plants
into a sustaining presence in the Mid-Continent region and a growing presence in the North East.
Serving a strong customer base of mostly independent producers, our mid-stream operations
are located in Oklahoma, Texas, Louisiana, Kansas and, most recently, Pennsylvania. In July, we
opened a new Pittsburgh business development office to provide pipeline infrastructure for natural
gas supplies being produced from the Marcellus shale formations within the Appalachian Basin.
Careful planning brought several expansions in 2008. We added two new gathering systems and
connected an additional 99 wells to our gathering systems. We also added 94 miles of pipeline – an
approximate 14% increase in total pipeline miles. In addition in 2008, we completed the installation
of a new natural gas processing plant, increasing processing capacity by approximately 20 MMcf
10
A N N U A L
R E P O R T
2 0 0 8
THE FACES BEHIND THE GROWTH
per day. This brings our current asset base to three natural gas treatment plants, nine operated
natural gas processing plants, 37 gathering systems and approximately 770 miles of pipeline.
Revenues for our mid-stream operations also increased 31% in 2008 to $181.7 million, up from
$138.6 million in 2007. During the year, our natural gas liquids sold increased 51% over 2007 to
195,837 gallons per day, while our natural gas volumes processed increased 35% to 67,796 MMBtu
per day. Our natural gas volumes gathered decreased 10% from 2007 to 197,367 MMBtu per day.
For 2009, we have budgeted capital expenditures of $13 million.
DON HAYES, 24 YE AR S
BILLIE LENHART, 18 YE ARS
11
JOHN FE AM STER, 17 YE AR S
U N I T
C O R P O R A T I O N
Year Ended December 31, 2008 (Dollars and shares in thousands except per share and average price amounts)
2007 2006 2005 2004 Statement of Income Data:
Revenues:
Contract drilling Oil and natural gas Gas gathering and processing Other revenues $ 622,727
553,998
181,730
(362)
$ 627,642
391,480
138,595
1,037
$ 699,396 $ 357,599 101,863 3,527 462,141 318,208 100,464 4,795 $ 298,204
185,017 29,717
6,265 Total revenues $ 1,358,093
$ 1,158,754
$ 1,162,385 $ 885,608 $ 519,203 Net income $
143,625
$ 266,258
$
312,177 $ 212,442
$ 90,275 Net income per common share:
Basic Diluted $
$
3.08
3.06
$
$
$
$
6.75 $
6.72 $ 4.62 4.60 Shares outstanding:
Basic Diluted Balance Sheet Data:
Total assets Other long-term liabilities Long-term debt Total debt-to-book capital ratio Shareholders’ equity Statement of Cash Flows Data:
Net cash provided by operating activities Capital expenditures, including
acquisitions (cash basis) 46,586
46,909
5.74
5.71
46,366
46,653
46,228 46,451 45,940 46,189 $
$
1.97
1.97 45,717
45,934 $ 2,581,866 $
75,807
$ 199,500
11%
$ 1,633,099
$ 2,199,819
$
59,115
$ 120,600
8%
$ 1,434,817
$ 1,874,096 $ 1,456,195 $
55,741 $ 41,981 $ 174,300 $ 145,000 13% 15% $ 1,158,036 $ 836,962 $ 1,023,136 $ 37,725 $ 95,500 14% $ 608,269 $
689,913
$
577,571
$
317,771 $ 203,210 $
808,161
$
517,450
$ 546,343 $ 390,863 $ 314,026
Comparison of Cumulative Five Year Total Return
12
506,702 $ A N N U A L
Year Ended December 31, R E P O R T
2008 2007 132
1,028
11,734
103.1
79%
129
996
10,453 99.4
80%
117 1,033 11,461 109.0 96% $
892,559
$ 1,481,604
$
984,123 $ 1,312,962 $ 787,067
$
624,471
$ 990,331 $ 684,895 $ 863,683 $ 521,612
450,135
9,699
10,171
569,353
419,616
9,676
6,149
514,569
406,400 9,357
2,226
475,899 352,841 8,052 1,819
412,066 295,406
7,487
1,074
346,775
47,473
1,261
1,388
63,368
43,464
1,091
785
54,720
44,169 1,012 441
52,889 34,058 847 237
40,565 (Dollars in thousands except per share and average price amounts)
Contract Drilling Operations Data:
Number of rigs at year end Wells drilled Total footage drilled (feet in 1,000’s) Average number of rigs utilized Average utilization Oil and Natural Gas Operations Data:
Proved oil and natural gas reserves
discounted at 10% (before income taxes)
Proved oil and natural gas reserves
discounted at 10% (after income taxes) Total estimated proved reserves:
Natural gas (MMcf) Oil (MBbl) Natural Gas Liquids (MBbl)
Equivalent (MMcfe) Production:
Natural gas (MMcf) Oil (MBbl) Natural Gas Liquids (MBbl)
Equivalent (MMcfe) Average price:
Natural gas (per Mcf) Oil (per Bbl) Natural Gas Liquids (per Bbl)
Equivalent (Mcfe) Gross operated wells Wells drilled Wells completed Success rate Oil and natural gas wells producing
or capable of producing at end of year:
Natural gas Oil Total Mid-Stream Operations Data:
Natural gas gathered (MMBtu/day) Natural gas processed (MMBtu/day) Liquids sold (gallons/day)
2 0 0 8
$
$
$
$
7.62
93.87
47.42
8.62
1,523
278
245
88%
2008
$
$
$
$
6.30
70.61
45.03
7.06 1,409 253
220
87%
2007
2006 $
$
$
$
6.17 63.39 36.08
6.66 1,369 244 216 89% 2006
2005 2004
$
$
$
$
112 980 10,815 102.1
97% 7.64 54.47
34.69
7.75 1,208 192 179 93% 2005
$
$
$
$
100
832 9,261 88.1
95% 27,149 829
219
33,438 5.42 35.45 24.67
5.44 1,019
168 144 86%
2004
Gross Net Gross Net Gross Net Gross Net Gross Net
5,015 1,151.84 4,8551077.38 4,659 1,007.8 3,719 830.0 3,169 672.6 2,665 418.27
2,612 392.99 2,784 492.9 2,746 428.9 2,716 418.6 7,680 1,570.11
197,367
67,796
195,837
7,4671,470.37
219,635
50,350
129,421
7,443 1,500.7 6,465 1,258.9 5,885 1,091.2 247,537 31,833 66,902
142,444 30,613 61,665
33,147 13,412
22,626
Certifications
The Chief Executive Officer and Chief Financial Officer have certified in writing to the Securities Exchange Commission
(SEC) as to the integrity of the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 as filed
with the SEC, and the effectiveness of the company’s disclosure controls and procedures and internal control over financial
reporting. The certifications are filed as Exhibits to the Form 10-K. On May 15, 2008 the Chief Executive Officer also certified
to the New York Stock Exchange the company’s corporate governance listing standards.
13
U N I T
C O R P O R A T I O N
T he E xperience
t o Tu r n C h a l l e n g i n g Y e a r s I n t o
OPPORTUNITIES
for Growth.
U nit C orporation re m e m b er s w it h g ratitude
D on C ook
Passed away October 18, 2008
Served as a director and Audit Committee
Chairman since the company’s inception in 1963.
14
P hilip K eeley
Passed away December 7, 2008
Joined Unit Corporation in 1983 and retired in 2004
as Senior Vice President of Exploration & Production.
A N N U A L
R E P O R T
2 0 0 8
TRANSFER AGENT & REGISTRAR
Communications concerning the transfer of shares, lost certificates
and changes of address should be directed to:
American Stock Transfer & Trust Co.
59 Maiden Lane, Plaza Level
New York, NY 10038
800.710.0929
amstock.com
STOCK LISTING
Our common stock trades on the New York Stock Exchange under the symbol: “UNT.”
During 2008, Unit’s average daily trading volume on the NYSE was 441,677 shares.
Approximately 47.3 million shares were outstanding at the end of 2008.
SHAREHOLDER PROFILE
We had 1,231 shareholders of record at year-end 2008.
I N V E S TO R R E L AT I O N S
The Form 10-Q reports are available in May, August and November. The Form 10-K and
Form 10-Q are available for viewing on our web site at www.unitcorp.com. Copies of
the Forms 10-K, 10-Q and Annual Report, filed with the Securities and Exchange
Commission, are available without charge on written request to:
Linda Baugher
Investor Relations Department
7130 South Lewis Avenue, Suite 1000
Tulsa, Oklahoma 74136
918.493.7700
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
Tulsa, Oklahoma
INDEPENDENT PETROLEUM ENGINEERS
Ryder Scott Company, L.P.
Houston, Texas
U N I T C O R P O R AT I O N
Cor p orate He ad quar te r s
7130 South Lewis Avenue, Suite 1000 | Tulsa, Oklahoma 74136 |
www.unitcorp.com
918.493.7700