Unit Corporation's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Unit Corporation (UNT)

Q1 2012 Earnings Call

May 1, 2012 11:00 am ET

Executives

Larry Pinkston - President, CEO & COO

Brad Guidry - SVP, Exploration - Unit Petroleum Company

Bob Parks - Manager & President, Superior Pipeline Company

John Cromling - SVP, Drilling Operations

David Merrill - CFO & Treasurer

Analysts

Marshall Adkins - Raymond James

Brad Evans - Heartland Funds

Presentation

Operator

Welcome to the Unit Corporation first quarter 2012 earnings conference call. My name is John and I will be your operator for today’s call. At this time all participants are in a listen-only-mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

This conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act. All statements other than statements of historical facts included in this call that address activities, events, or developments that the company expects or anticipates will occur or may occur in the future are forward-looking statements.

A number of risks and uncertainties could cause actual results to differ materially from these statements, including the impact that any decline in wells being drilled will have on production and drilling rig utilization; the productive capabilities of the company's wells, including the ability of recently completed wells to maintain their initial rate of production or their projected rate of production; future demand for oil and natural gas, future drilling rig utilization and day rates; projected or anticipated growth of the company's oil and natural gas production; oil and gas reserve information, as well as the ability to meet future reserve replacement goals; anticipated gas gathering and processing rates, and throughput volumes; the prospective capabilities of the reserves associated with the company's inventory of future drilling sites; anticipated oil and natural gas prices; the number of wells to be drilled by the company's exploration segments; development, operational, implementation and opportunity risks; possible delays caused by limited availability of third-party services needed in the course of its operations; possibility of future growth opportunities and other factors described from time to time in the company's publicly available SEC reports. The company assumes no obligation to update publicly such forward-looking statements whether as a result of new information, future events or otherwise.

I will now turn the call over to Mr. Larry Pinkston, President and CEO. Mr. Pinkston, you may begin.

Larry Pinkston

Thank you, John. Good morning everyone. I want to thank you for joining us this morning. With me today are David Merrill, Brad Guidry, John Cromling and Bob Parks. Each of these gentlemen will be providing you with updates concerning their segments in a few minutes. We will take questions after their comments.

We released our first quarter results this morning. We reported net income of $52.4 million and earnings per share of $1.09. This represents a 28% increase in net income and a 27% increase in earnings per share as compared to the first quarter of 2011. Net income in the first quarter was basically flat with the fourth quarter, which was quite an achievement considering natural gas spot prices were down 26% and natural gas liquids spot prices were down 15% in the first quarter.

Our Contract Drilling segment had a very good quarter especially considering all the movement of rigs out of the dry gas producing formations. Rig utilization was basically flat with the fourth quarter averaging 81.5 rigs for the first quarter. During the first quarter, we sold one of our smaller mechanical rigs and added a new 1500 horsepower rig into our Wyoming operation at Pineville.

We have one additional new rig that will be added to our Balkan operation later in the second quarter. The movement of rigs out of the dry gas formation continues, we currently only have three rigs operating in dry gas areas. The demand for smaller rigs and the 800 to 1000 horsepower range continues to increase. These rigs are being utilized to drill the shallow or the horizontal liquid-rich wells.

The increase cannot be described as a dramatic year, but has been very steadily increasing. Most of the increased demand we have seen has been in the Mississippian play and Northern Oklahoma and Kansas. We believe this demand would continue to increase for the next several months. Our mid-stream segments achieved a good quarter with first quarter operating margin at 26% over the fourth quarter. The increase is due to higher liquids volumes and better processing margins.

We continue to see good opportunities for mid-stream growth primarily in natural gas processing. The Mississippian play continues to grow as the industry drills wells. This play will need hundreds of millions of dollars to build out the natural gas processing infrastructure and we hope to be a significant participant in that buildout.

Our Oil and Natural Gas segment had a good quarter. On our average daily oil and natural gas production was up 2% sequentially and up 18% over the first quarter of 2011. Our liquids volumes continue to increase, [book] per day liquids, up 2% sequentially and up 32% over the first quarter of 2011.

Liquids production was 42% of our total production in the first quarter of 2012 as compared to 39% for the year 2011. In 2012 virtually all of our CapEx budget has been directed towards liquid-rich prospects. Since 2009, when our focus changed primarily from natural gas to liquids, our liquids production has increased 87% and is now 42% of our total production as compared to 27% in 2009.

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