<PAGE>
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 1-9260
UNIT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 73-1283193
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Kensington Tower I, 7130 South Lewis, Tulsa, Oklahoma 74136
(Address of principal executive offices)
(Zip Code)
(918) 493-7700
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No _______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.20 par value 25,538,165
Class Outstanding at October 26, 1998
<PAGE>
UNIT CORPORATION
INDEX
Page
PART I. Financial Information: Number
Item 1 - Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets
September 30, 1998 and December 31, 1997 2
Consolidated Condensed Statements of Operations
Three and Nine Months
Ended September 30, 1998 and 1997 3
Consolidated Condensed Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 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
1
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31,
1998 1997
ASSETS ---------- ----------
- ------ (Unaudited)
Current Assets: (In thousands)
Cash and cash equivalents $ 1,743 $ 458
Accounts receivable 14,409 19,813
Other 6,744 5,741
---------- ----------
Total current assets 22,896 26,012
---------- ----------
Property and Equipment:
Total cost 403,635 362,587
Less accumulated depreciation, depletion,
amortization and impairment 207,916 192,613
---------- ----------
Net property and equipment 195,719 169,974
---------- ----------
Other Assets 6,434 6,511
---------- ----------
Total Assets $ 225,049 $ 202,497
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current portion of long-term debt $ 1,286 $ 286
Accounts payable 12,033 11,112
Accrued liabilities 8,187 7,854
Gas Purchaser Prepayments 440 441
---------- ----------
Total current liabilities 21,946 19,693
---------- ----------
Natural Gas Purchaser Prepayments (Note 2) 1,319 1,765
---------- ----------
Long-Term Debt 71,197 54,614
---------- ----------
Deferred Income Taxes 18,861 17,560
---------- ----------
Shareholders' Equity:
Preferred stock, $1.00 par value, 5,000,000
shares authorized, none issued - -
Common stock $.20 par value, 40,000,000
shares authorized, 25,563,165 and
25,514,836 shares issued, respectively 5,113 5,103
Capital in excess of par value 82,255 82,043
Retained earnings 24,489 21,875
Treasury stock, at cost, 25,000 and
19,863 shares, respectively (131) (156)
---------- ----------
Total shareholders' equity 111,726 108,865
---------- ----------
Total Liabilities and Shareholders' Equity $ 225,049 $ 202,497
========== ==========
The accompanying notes are an integral part of the
consolidated condensed financial statements.
2
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UNIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
(In thousands except per share amounts)
Revenues:
Contract drilling $ 13,487 $ 11,936 $ 43,870 $ 33,250
Oil and natural gas 10,100 9,647 29,859 32,452
Other 40 2 201 11
---------- ---------- ---------- ----------
Total revenues 23,627 21,585 73,930 65,713
---------- ---------- ---------- ----------
Expenses:
Contract drilling:
Operating costs 10,711 8,854 35,251 26,161
Depreciation
and amortization 1,553 1,122 4,427 3,037
Oil and natural gas:
Operating costs 3,513 3,295 10,789 9,998
Depreciation, depletion
and amortization 4,273 3,085 11,804 9,148
General and administrative 1,204 1,100 3,711 3,418
Interest 1,237 720 3,596 2,024
---------- ---------- ---------- ----------
Total expenses 22,491 18,176 69,578 53,786
---------- ---------- ---------- ----------
Income Before Income Taxes 1,136 3,409 4,352 11,927
---------- ---------- ---------- ----------
Income Tax Expense:
Current 90 30 147 89
Deferred 392 1,258 1,591 4,411
---------- ---------- ---------- ----------
Total income taxes 482 1,288 1,738 4,500
---------- ---------- ---------- ----------
Net Income $ 654 $ 2,121 $ 2,614 $ 7,427
========== ========== ========== ==========
Net Income Per Common Share:
Basic $ .03 $ .09 $ .10 $ .31
========== ========== ========== ==========
Diluted $ .03 $ .09 $ .10 $ .30
========== ========== ========== ==========
The accompanying notes are an integral part of the
consolidated condensed financial statements.
3
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UNIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
1998 1997
---------- ----------
(In thousands)
Cash Flows From Operating Activities:
Net Income $ 2,614 $ 7,427
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation, depletion and amortization 16,496 12,436
Deferred income tax expense 1,591 4,548
Other-net 211 212
Changes in operating assets and liabilities
increasing (decreasing) cash:
Accounts receivable 5,404 1,047
Accounts payable 4,071 3,506
Natural gas purchaser prepayments (Note 2) (447) (417)
Other-net (124) (1,474)
---------- ----------
Net cash provided by
operating activities 29,816 27,285
---------- ----------
Cash Flows From (Used In) Investing Activities:
Capital expenditures (45,730) (29,223)
Proceeds from disposition of assets 629 591
Other-net (105) (237)
---------- ----------
Net cash used in investing activities (45,206) (28,869)
---------- ----------
Cash Flows From (Used In) Financing Activities:
Net borrowings (payments) under line of credit 17,100 1,900
Net payments of notes payable
and long-term debt (353) -
Proceeds from the exercise of stock options 59 172
Other-net (131) (41)
---------- ----------
Net cash provided by (used in)
financing activities 16,675 2,031
---------- ----------
Net Increase in Cash and Cash Equivalents 1,285 447
Cash and Cash Equivalents, Beginning of Year 458 547
---------- ----------
Cash and Cash Equivalents, End of Period $ 1,743 $ 994
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the nine months ended September 30, for:
Interest $ 3,133 $ 2,066
Income taxes $ 482 $ 102
The accompanying notes are an integral part of the
consolidated condensed financial statements.
4
<PAGE>
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, 1998
and the results of their operations for the three and nine month periods ended
September 30, 1998 and 1997 and cash flows for the nine months ended September
30, 1998 and 1997. Results for the three and nine months ended September 30,
1998 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, 1997.
NOTE 2 - NATURAL GAS PURCHASER PREPAYMENTS
- -------------------------------------------
Due to a settlement agreement ("Settlement Agreement") which terminated at
December 31, 1997, the Company has a prepayment balance of $1.8 million at
September 30, 1998 representing proceeds received from a natural gas purchaser
as prepayment for natural gas. This amount is net of natural gas recouped and
net of certain amounts disbursed to other owners (such owners, collectively with
the Company are referred to as the "Committed Interest") for their proportionate
share of the prepayments. The unrecouped prepayment balance remaining at
December 31, 1997 is payable in equal annual payments over a five year period.
The first payment of $441,000 was made on June 1, 1998.
5
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NOTE 3 - EARNINGS PER SHARE
- ---------------------------
The following data shows the amounts used in computing earnings per share
for the Company.
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
============ =========== ==========
For the Three Months Ended September 30, 1997
---------------------------------------------
INCOME WEIGHTED SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ----------
Basic earnings per common
share $ 2,121,000 24,180,000 $ 0.09
==========
Effect of dilutive
stock options - 421,000
------------ -----------
Diluted earnings per common
share $ 2,121,000 24,601,000 $ 0.09
============ =========== ==========
The following options and their average exercise prices were not included
in the computation of diluted earnings per share because the option exercise
prices were greater than the average market price of common shares for the three
months ended September 30,:
1998 1997
---------- ---------
Options 191,000 0
========== =========
Average exercise price $ 8.60 $ 0.00
========== =========
6
<PAGE>
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
============ =========== ==========
For the Nine Months Ended September 30, 1997
--------------------------------------------
INCOME WEIGHTED SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ----------
Basic earnings per common
share $ 7,427,000 24,176,000 $ 0.31
==========
Effect of dilutive
stock options - 385,000
------------ -----------
Diluted earnings per common
share $ 7,427,000 24,561,000 $ 0.30
============ =========== ==========
The following options and their average exercise prices were not included
in the computation of diluted earnings per share because the option exercise
prices were greater than the average market price of common shares for the nine
months ended September 30,:
1998 1997
---------- ---------
Options 178,500 2,500
========== =========
Average exercise price $ 8.72 $ 11.31
========== =========
Due to the effect of price changes of the Company's stock, diluted earnings
per share for the year's first three quarters, which includes the effect of
potential dilutive common shares calculated during each quarter, does not equal
the first nine months diluted earnings per share, which includes the effect of
such potential dilutive common shares calculated for the first nine months.
7
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NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS
- --------------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("FAS 131"). FAS 131 amends standards
regarding the disclosure of information about business segments in annual
financial statements and also requires selected financial information about
segments for interim financial statements. FAS 131 information will be
reflected in the Company's 1998 annual financial statements. The Company does
not anticipate that FAS 131 will significantly impact the disclosure of its
segment information.
8
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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, 1998, and the related consoli-
dated condensed statements of operations for the three and nine month periods
ended September 30, 1998 and 1997 and cash flows for the nine month periods
ended September 30, 1998 and 1997. 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, 1997, 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 17, 1998 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, 1997, 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 27, 1998
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -------------------------------------------------------------------------
FINANCIAL CONDITION
- -------------------
The Company's bank loan agreement (the "Credit Agreement") provides for a
total loan facility of $100 million with a current available borrowing value
(the "Loan Value") of $85 million. The Loan Value under the revolving credit
facility is subject to a semi-annual redetermination calculated as the sum of a
percentage of the discounted future value of the Company's oil and natural gas
reserves, as determined by the banks, plus the greater of (i) 50 percent of the
appraised value of the Company's contract drilling rigs or (ii) two times the
previous 12 months cash flow from the contract drilling rigs, limited in either
case to $20 million. The revolving credit facility covers four years with a
three year term loan thereafter. At September 30, 1998 borrowings under the
Credit Agreement totaled $66.2 million. The average bank debt interest rate in
the third quarter of 1998 was 6.9 percent compared to the average interest rate
of 7.0 percent in the third quarter of 1997. A facility fee of .375 of 1 percent
is charged for any unused portion of the Loan Value.
The Company's shareholders' equity at September 30, 1998 was $111.7 million
resulting in a ratio of long-term debt-to-equity of .65 to 1. The Company's
primary source of liquidity and capital resources in the near- and long-term
will consist of cash flow from operating activities and available borrowings
under the Company's Credit Agreement. At September 30, 1998 and December 31,
1997, the Company had working capital of $950,000 and $6.3 million,
respectively. Net cash provided by operating activities for the first nine
months of 1998 was $29.8 million as compared to $27.3 million for the first nine
months of 1997. The increase in 1998, as compared to 1997, was primarily due to
decreases in accounts receivable and increases in accounts payable partially
offset by lower net income as a result of lower spot market natural gas and oil
prices.
During the first nine months of 1998, the Company had capital additions of
$42.6 million. Approximately 78 percent of the expenditures were for producing
property acquisitions and oil and natural gas exploration and development
drilling while the remainder was for the Company's contract drilling operations.
The Company purchased an interest in approximately 300 producing properties in
the first quarter of 1998 for $4.8 million along with continuing its development
drilling projects through the first nine months of 1998. The Company plans to
continue its focus on development drilling during the remainder of 1998 and into
1999. Depending, in part, on commodity pricing, the Company anticipates it will
spend approximately $40 million on its oil and natural gas capital expenditures
program in 1998 and approximately $10.0 million on domestic contract drilling
capital expenditures. These expenditures are anticipated to be within the
constraints of available cash to be provided by operating activities and the
Company's existing Credit Agreement. Since a large portion of the Company's
capital expenditures are discretionary and directed toward increasing reserves
and future growth, current operations are not dependent on the Company's ability
to obtain funds outside of the Company's current Credit Agreement.
10
<PAGE>
The Company continues to explore opportunities to expand its contract
drilling operations outside the continental United States, specifically into
areas of Central and South America. To date, the Company has not concluded any
such arrangements and there is no assurance that it will. The Company has not
previously conducted international contract drilling operations, but anticipates
that any such operations would involve a number of additional political,
economic, currency, tax and other risks and costs not generally encountered in
its domestic operations.
On November 20, 1997, the Company acquired Hickman Drilling Company,
pursuant to an Agreement and Plan of Merger ("the Merger Agreement") entered
into by and between the Company, Hickman Drilling Company and all of the holders
of the outstanding capital stock of Hickman Drilling Company (the "Selling
Stockholders"). As part of this acquisition, the Selling Stockholders received
promissory notes in the aggregate principal amount of $5,000,000. These notes
are to be paid in five equal annual installments commencing January 2, 1999. The
notes bear interest at the Chase Prime Rate which at December 31, 1997 and
September 30, 1998 was 8.5 and 8.25 percent, respectively.
Due to a settlement agreement ("Settlement Agreement") which terminated at
December 31, 1997, the Company has a prepayment balance of $1.8 million at
September 30, 1998 representing proceeds received from a natural gas purchaser
as prepayment for natural gas. This amount is net of natural gas recouped and
net of certain amounts disbursed to other owners (such owners, collectively with
the Company are referred to as the "Committed Interest") for their proportionate
share of the prepayments. The remaining prepayment balance unrecouped at
December 31, 1997 is payable in equal annual payments over a five year period.
The first payment of $441,000 was made on June 1, 1998. The price per Mcf under
the Settlement Agreement was substantially higher than current spot market
prices. The impact of the higher price received under the Settlement Agreement
increased pre-tax income approximately $414,000 in the first nine months of
1997.
Both average oil and spot market natural gas prices received during the
first nine months of 1998 were substantially lower than during the same period
in 1997. The average oil price received by the Company during the first nine
months of 1998 was $13.27 per barrel which was a $6.18 per barrel decrease.
Average spot market natural gas prices decreased to $1.90 per Mcf, a $.36 per
Mcf decrease. Oil prices within the industry remain largely dependent upon
world market developments for crude oil. Prices for natural gas are influenced
by weather conditions and supply imbalances, particularly in the domestic
market, and by world wide oil price levels. Since natural gas comprises
approximately 88 percent of the Company's reserves, the large drop in spot
market natural gas prices had a significant adverse effect on the value of the
Company's reserves at the end of the quarter and further price declines could
cause the Company to reduce the carrying value of its oil and natural gas
properties. Such decreases, if sustained, will also adversely effect the
Company's cash flow in future quarters and possibly beyond due to reduced oil
and natural gas revenues and if continued over an extended period will adversely
impact demand for the Company's contract drilling rigs. Declines in natural gas
and oil prices could also adversely effect the semi-annual determination of the
loan value under the Company's Credit Agreement since this determination is
calculated on the value of the Company's oil and natural gas reserves and its
drilling rigs. Any such reduction would reduce the amount available to the
Company under the Credit Agreement, which in turn, would impact the Company's
ability to carry out its capital projects.
11
<PAGE>
The Company's ability to utilize its full complement of drilling rigs is
restricted due to the lack of qualified labor and certain supporting equipment
not only within the Company but in the industry as a whole. The Company's
ability to utilize its drilling rigs at any given time is dependent on a number
of factors, including but not limited to, the price of both oil and natural gas,
the availability of labor and the Company's ability to supply the type of
equipment required. The Company's management expects that these factors will
continue to influence the Company's rig utilization throughout 1998 and into
1999.
In the third quarter of 1994, the Company's Board of Directors authorized
the Company to purchase up to 1,000,000 shares of the Company's outstanding
common stock on the open market. Since that time, 160,100 shares have been
repurchased at prices ranging from $2.50 to $9.69 per share. In the first
quarter of 1998 and 1997, 19,863 and 23,892 of the purchased shares,
respectively, were used as the Company's matching contribution to its 401(K)
Employee Thrift Plan. At September 30, 1998 and 1997, 25,000 and 9,863 treasury
shares, respectively, were held by the Company.
YEAR 2000 STATEMENT
- -------------------
The Company has initiated a comprehensive assessment of its information
technology ("IT") and non-information technology ("non-IT") systems to ensure
that such systems will be Year 2000 compliant. The Year 2000 problem exists
because many existing computer programs use only the last two digits to define
the year. Therefore, these computer programs do not recognize years that begin
with a "20" and assume that all years begin with a "19". If not corrected many
computer applications could fail or create erroneous results which could cause
disruption of operations not only for the Company but also for its customers and
suppliers, so the Company has also initiated an assessment of its customers' and
suppliers' efforts to become year 2000 compliant.
Evaluation of the Company's IT systems began in house during 1997. The
Company's IT systems consist mainly of office computers, related computer
programs and management financial information software. Nearly all of the
Company's hardware is Year 2000 compliant and approximately 20 percent of its
related computer programs and software are Year 2000 compliant. The Company has
expended approximately $60,000 and estimates it will expend an additional
$70,000 to bring the remaining systems compliant by the end of the second
quarter of 1999.
The Company's non-IT systems consist of office equipment and other systems
associated with its oil and natural gas properties and its drilling rigs. The
Company is assessing these non-IT systems and the associated cost during the
fourth quarter of 1998. The assessment and replacement of equipment, if any,
should be completed by the end of the second quarter of 1999. The Company
anticipates that the cost associated with non-IT systems will be minimal.
During the third quarter of 1998, the Company issued questionnaires to its
key suppliers and customers to assess their preparation for Year 2000
compliance. Upon the return of the questionnaires from these non-affiliated
entities, the Company will review their responses and begin the process of
assessing the preparedness of these entities.
12
<PAGE>
As noted, the Company currently anticipates that all of its internal
systems and equipment will be Year 2000 compliant by the end of the second
quarter of 1999 and that the associated costs will not have a material adverse
effect on the Company's results of operations and financial condition. However,
the failure to properly assess or timely implement a material Year 2000 problem
could result in a disruption in the Company's normal business activities or
operations. Such failures, depending on the extent and nature, could materially
and adversely effect the Company's operations and financial condition. As a
result, the Company will continue to evaluate its Year 2000 exposure, both
internally and externally. Since the Company's overall evaluation of its Year
2000 compliance will, of necessity, be based on the information to be supplied
by and the readiness of the Company's key suppliers and customers, the Company
cannot currently determine the impact, if any, such third parties will have on
the Company's Year 2000 exposure. As noted, the Company intends to evaluate
this information as, if and when it is made available to it. To date, the
Company has not developed a contingency plan.
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
and actual results could differ materially from those discussed. Generally,
these statements relate to projections involving the anticipated revenues to be
received from the Company's oil and natural gas production, sources of capital,
the utilization rate of its drilling rigs, growth of its oil and natural gas
reserves and well performance and the Company's anticipated debt. In addition ,
much of the Company's Year 2000 disclosure regarding the estimated costs (both
internal costs as well as the cost associated with any business disruption
caused by third parties non-compliant)are forward looking statements. As with
any forward looking statement, these statements are subject to a number of
factors that may tend to influence the accuracy of the statements and the
projections upon which the statements are based. All phases of the Company's
operations are subject to a number of influences outside the control of the
Company, any one of which, or a combination of which, could materially affect
the results of the Company's operations. A more thorough discussion of some of
these factors and their possible impact on the Company is provided in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 filed
with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
- ---------------------
Third Quarter 1998 versus Third Quarter 1997
- ----------------------------------------------
The Company reported net income of $654,000 in the third quarter of 1998
as compared to net income of $2,121,000 for the third quarter of 1997.
Decreases in prices received for natural gas and oil and reduced production of
oil between the comparative quarters along with lower dayrates in contract
drilling all contributed to the decrease in net income.
Oil and natural gas revenues increased 5 percent in the third quarter
of 1998 as compared to the third quarter of 1997. Natural gas production
increased 35 percent and oil production decreased 6 percent between the two
13
<PAGE>
quarters while average natural gas prices and oil prices received by the Company
decreased 14 and 30 percent, respectively. Wells added through the Company's
development drilling program and acquisitions were primarily responsible for the
increase in natural gas production while oil production declined due to the
Company's focus on replacing natural gas reserves as opposed to oil reserves.
Oil and natural gas operating margins (revenues less operating costs)
were 65 percent in the third quarter of 1998 as compared to 66 percent in the
third quarter of 1997. Margins were adversely affected by the declines in
average natural gas and oil prices. Total operating costs increased 7 percent as
the Company continues to add wells through its development drilling and
acquisition programs. Depreciation, depletion and amortization ("DD&A")
increased 39 percent due to higher natural gas production between the
comparative periods and from an increase in the Company's average DD&A rate per
equivalent barrel from $4.63 in the third quarter of 1997 to $4.94 in the third
quarter of 1998.
Dayrates received by the Company's contract drilling operations decreased
9 percent between the comparative quarters as contract drilling revenues
increased 13 percent due to increases in the number of rigs utilized. Due in
part to the Hickman Drilling Company acquisition, rig utilization averaged 23.9
rigs in the third quarter of 1998 as compared to 20.1 rigs in the third quarter
of 1997. With the decrease in dayrates, contract drilling operating margins
(revenues less operating costs) declined to 21 percent in the third quarter of
1998 as compared to 26 percent in the third quarter of 1997.
General and administrative expense increased 9 percent in the third
quarter of 1998 when compared with the third quarter of 1997 as certain employee
costs increased. Interest expense increased 72 percent as the average long-term
debt outstanding increased 75 percent between the comparative quarters due to
the debt associated with the acquisition of 9 drilling rigs in the fourth
quarter of 1997 and continued expenditures for the Company's development
drilling and acquisition programs. The average interest rate incurred by the
Company was 7.0 percent for the third quarter of 1998 compared to 7.2 for the
third quarter of 1997.
Nine Months 1998 versus Nine Months 1997
- -------------------------------------------------
Net income for the first nine months of 1998 was $2,614,000 as compared to
$7,427,000 for the first nine months of 1997. As the contract drilling segment
experienced an increase in the number of rigs utilized and average dayrates
remained unchanged, decreases experienced by the exploration and production
segment in both oil and natural gas prices and oil production more than offset
contract drilling's improved performance.
Oil and natural gas revenues decreased 8 percent in the first nine
months of 1998 as compared to the first nine months of 1997. Natural gas
production increased 22 percent while oil production decreased 11 percent
between the comparative periods. Average natural gas and oil prices received by
the Company decreased 17 and 32 percent, respectively, during the first nine
months of 1998. Average natural gas prices were down due to a decrease of 16
percent in spot market natural gas prices received between the comparative
quarters along with the return to spot market pricing for production from wells
covered by the Settlement Agreement, which terminated at December 31, 1997 and
14
<PAGE>
provided for prices higher than current spot market prices, as discussed above.
The impact of the higher price received under the Settlement Agreement increased
pre-tax income by approximately $414,000 during the first nine months of 1997.
Oil and natural gas operating margins (revenues less operating costs)
declined from 69 percent in the first nine months of 1997 to 64 percent in the
first nine months of 1998 due to lower natural gas and oil prices and lower oil
production in 1998. Total operating costs increased 8 percent due to additional
costs associated with the addition of wells through development drilling and
acquisitions. Depreciation, depletion and amortization ("DD&A") increased 29
percent due to higher natural gas production between the comparative periods and
from an increase in the Company's average DD&A rate per equivalent barrel from
$4.44 in the first nine months of 1997 to $4.90 for the first nine months of
1998.
Contract drilling revenues increased 32 percent for the comparative nine
month periods as rig utilization increased from an average of 19.6 rigs
operating in the first nine months of 1997 to 24.8 rigs in the first nine months
of 1998. Contract drilling operating margins (revenue less operating costs)
were 20 percent in the first nine months of 1998 and 21 percent in the first
nine months of 1997.
General and administrative expense increased 9 percent during the
comparative nine month periods as certain employee costs increased. Interest
expense increased 78 percent due to a 70 percent increase in the average long-
term debt outstanding in the first nine months of 1998 compared to the first
nine months of 1997. The average interest rate incurred by the Company also
increased from 7.2 to 7.3 percent.
15
<PAGE>
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
- -----------------------------
As set forth in the Company's Proxy Statement for the 1998 Annual
Meeting of Stockholders, stockholder proposals submitted pursuant to
Rule 14a-8 for inclusion in the Company's proxy materials for the 1999
Annual Meeting of Stockholders must be received by the Company no later
than Novemer 25, 1998.
Any stockholder who intends to present a proposal at the 1999 Annual
Meeting and has not sought inclusion of the proposal in the Company's
proxy materials pursuant to Rule 14a-8, must provide the Company with
notice of such proposal no later than February 8, 1999.
Item 6. Exhibits and Reports on Form 8-K
- --------------------------------------------
(a) Exhibits:
15 Letter re: Unaudited Interim Financial Information.
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
16
<PAGE>
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: October 29, 1998 By: /s/ John G. Nikkel
--------------------------- ------------------------
JOHN G. NIKKEL
President, Chief Operating
Officer and Director
Date: October 29, 1998 By: /s/ Larry D. Pinkston
--------------------------- ------------------------
LARRY D. PINKSTON
Vice President, Chief
Financial Officer
and Treasurer
17
<PAGE>
Exhibit 15
----------
October 29, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Unit Corporation
Registration on Form S-8 and S-3
We are aware that our report dated October 27, 1998 on our review of interim
financial information of Unit Corporation for the three and nine month periods
ended September 30, 1998 and 1997 and included in the Company's quarterly report
on Form 10-Q for the quarter ended September 30, 1998 is incorporated by
reference in the Company's registration statements on Form S-8 (File No.'s 33-
19652, 33-44103, 33-49724, 33-64323 and 33-53542)and Form S-3 (File No.333-
42341). Pursuant to Rule 436(c) under the Securities Act of 1933, this report
should not be considered a part of the registration statement prepared or
certified by us within the meaning of Sections 7 and 11 of that Act.
PricewaterhouseCoopers L L P
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Condensed Financial Statements of Unit Corporation and Subsidiaries
under cover of Form 10-Q for the nine months ended September 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000798949
<NAME> UNIT CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,743
<SECURITIES> 0
<RECEIVABLES> 14,409<F1>
<ALLOWANCES> 0
<INVENTORY> 0<F2>
<CURRENT-ASSETS> 22,896
<PP&E> 403,635
<DEPRECIATION> 207,916
<TOTAL-ASSETS> 225,049
<CURRENT-LIABILITIES> 21,946
<BONDS> 0
0
0
<COMMON> 5,113
<OTHER-SE> 106,613
<TOTAL-LIABILITY-AND-EQUITY> 225,049
<SALES> 0
<TOTAL-REVENUES> 73,930
<CGS> 0
<TOTAL-COSTS> 62,271
<OTHER-EXPENSES> 3,711
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,596
<INCOME-PRETAX> 4,352
<INCOME-TAX> 1,738
<INCOME-CONTINUING> 2,614
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,614
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
<FN>
<F1>Accounts Receivable is presented net in the Consolidated Condensed Balance
Sheet.
<F2>Inventory is presented as a portion of Other Current Assets in the
Consolidated Condensed Balance Sheet.
</FN>
</TABLE>
