<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 March 31, 1999
OR
[ ] 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
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 25,736,660
Class Outstanding at April 27, 1999
<PAGE>
UNIT CORPORATION
INDEX
Page
PART I. Financial Information: Number
Item 1 - Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets
March 31, 1999 and December 31, 1998 2
Consolidated Condensed Statements of Operations
Three Months Ended March 31, 1999 and 1998 3
Consolidated Condensed Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998 4
Notes to Consolidated Condensed Financial Statements 5
Report of Review by Independent Accountants 8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. Other Information:
Item 1 - Legal Proceedings 14
Item 2 - Changes in Securities and Use of Proceeds 14
Item 3 - Defaults Upon Senior Securities 14
Item 4 - Submission of Matters to a Vote of
Security Holders 14
Item 5 - Other Information 14
Item 6 - Exhibits and Reports on Form 8-K 14
Signatures 15
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, December 31,
1999 1998
ASSETS ---------- ----------
- ------ (Unaudited)
Current Assets: (In thousands)
Cash and cash equivalents $ 423 $ 446
Accounts receivable 12,675 13,149
Other 5,749 5,948
---------- ----------
Total current assets 18,847 19,543
---------- ----------
Property and Equipment:
Total cost 409,450 405,043
Less accumulated depreciation, depletion,
amortization and impairment 213,425 207,883
---------- ----------
Net property and equipment 196,025 197,160
---------- ----------
Other Assets 6,301 6,361
---------- ----------
Total Assets $ 221,173 $ 223,064
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current portion of long-term
liabilities and debt $ 1,785 $ 1,801
Accounts payable 9,459 8,517
Accrued liabilities 6,740 7,672
---------- ----------
Total current liabilities 17,984 17,990
---------- ----------
Long-Term Debt 72,100 72,900
---------- ----------
Other Long-Term Liabilities 2,377 2,301
---------- ----------
Deferred Income Taxes 17,891 18,583
---------- ----------
Shareholders' Equity:
Preferred stock, $1.00 par value, 5,000,000
shares authorized, none issued - -
Common stock $.20 par value, 40,000,000
shares authorized, 25,734,160 and
25,563,165 shares issued, respectively 5,147 5,113
Capital in excess of par value 82,827 82,187
Retained earnings 22,847 24,121
Treasury stock, at cost, 0 and
25,000 shares, respectively - (131)
---------- ----------
Total shareholders' equity 110,821 111,290
---------- ----------
Total Liabilities and Shareholders' Equity $ 221,173 $ 223,064
========== ==========
The accompanying notes are an intergral part of the
consolidated condensed financial statements
2
<PAGE>
UNIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
March 31,
1999 1998
---------- ----------
(In thousands except per
share amounts)
Revenues:
Contract drilling $ 11,831 $ 14,888
Oil and natural gas 7,835 9,351
Other 31 10
---------- ----------
Total revenues 19,697 24,249
---------- ----------
Expenses:
Contract drilling:
Operating costs 10,414 12,487
Depreciation
and amortization 1,362 1,395
Oil and natural gas:
Operating costs 3,231 3,376
Depreciation, depletion
and amortization 4,203 3,510
General and administrative 1,252 1,235
Interest 1,211 1,083
---------- ----------
Total expenses 21,673 23,086
---------- ----------
Income (Loss) Before Income Taxes (1,976) 1,163
---------- ----------
Income Tax Expense (Benefit):
Current (10) 47
Deferred (692) 391
---------- ----------
Total income taxes (702) 438
---------- ----------
Net Income (Loss) $ (1,274) $ 725
========== ==========
Net Income (Loss) Per Common Share:
Basic $ (.05) $ .03
========== ==========
Diluted $ (.05) $ .03
========== ==========
The accompanying notes are an intergral part of the
consolidated condensed financial statements
3
<PAGE>
UNIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31,
1999 1998
---------- ----------
(In thousands)
Cash Flows From Operating Activities:
Net Income (Loss) $ (1,274) $ 725
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Depreciation, depletion and amortization 5,644 4,985
Deferred income tax expense (692) 391
Other-net 395 327
Changes in operating assets and liabilities
increasing (decreasing) cash:
Accounts receivable 474 4,294
Accounts payable 3,174 4,731
Other-net (249) (1,512)
---------- ----------
Net cash provided by
operating activities 7,472 13,941
---------- ----------
Cash Flows From (Used In) Investing Activities:
Capital expenditures (6,710) (22,928)
Proceeds from disposition of assets 72 83
Other-net (1) (99)
---------- ----------
Net cash used in investing activities (6,639) (22,944)
---------- ----------
Cash Flows From (Used In) Financing Activities:
Net borrowings (payments) under line of credit (800) 10,500
Net payments of notes payable
and other long-term debt (61) (11)
Other-net 5 20
---------- ----------
Net cash provided by (used in)
financing activities (856) 10,509
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents (23) 1,506
Cash and Cash Equivalents, Beginning of Year 446 458
---------- ----------
Cash and Cash Equivalents, End of Period $ 423 $ 1,964
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the three months ended March 31, for:
Interest $ 1,569 $ 896
Income taxes $ 2 $ 20
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 March 31, 1999 and
the results of their operations for the three month periods ended March 31, 1999
and 1998 and cash flows for the three months ended March 31, 1999 and 1998.
Results for the three months ended March 31, 1999 are not necessarily indicative
of the results to be realized during the full year. The year end consolidated
condensed balance sheet data was derived from audited financial statements but
does not include all disclosures required by generally accepted accounting
principles. The condensed financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
1998.
NOTE 2 - EARNINGS PER SHARE
- ---------------------------
The following data shows the amounts used in computing earnings (loss) per
share for the Company.
For the Three Months Ended March 31, 1999
---------------------------------------------
LOSS WEIGHTED SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ --------------- ---------
Basic loss per common
share $(1,274,000) 25,664,000 $ (0.05)
=========
Effect of dilutive
stock options - -
------------ ------------
Diluted loss per common
share $(1,274,000) 25,664,000 $ (0.05)
============ ============ =========
For the Three Months Ended March 31, 1998
---------------------------------------------
INCOME WEIGHTED SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ --------------- ---------
Basic earnings per common
share $ 725,000 25,547,000 $ 0.03
=========
Effect of dilutive
stock options - 292,000
------------ ------------
Diluted earnings per
common share $ 725,000 25,839,000 $ 0.03
============ ============ =========
5
<PAGE>
The following options and their average exercise prices were not included
in the computation of diluted earnings per share for the three months ended
March 31, 1998 because the option exercise prices were greater than the average
market price of common shares and for the three months ended March 31, 1999 all
options are not dilutive due to the net loss:
1999 1998
--------- ---------
Options 836,060 156,000
========= =========
Average exercise price $ 4.31 $ 8.79
========= =========
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS
- --------------------------------------
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133). FAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999 (January 1, 2000
for the Company). FAS 133 requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Management of the
Company anticipates that, due to its limited use of derivative instruments, the
adoption of FAS 133 will not have a significant effect on the Company's results
of operations or its financial position.
NOTE 4 - OIL AND NATURAL GAS PROPERTIES
- ---------------------------------------
In early 1999, the oil and natural gas industry experienced a downturn in
natural gas prices. Utilizing oil and natural gas prices in effect at March
31, 1999, the Company's calculation of its ceiling with respect to costs
capitalized associated with its oil and natural gas properties indicated that
a write-down of $18 million before taxes was warranted. Subsequent to March
31, 1999, both oil and natural gas prices have increased to levels which
indicate no such impairment, and accordingly, no write-down of the Company's
oil and natural gas properties has been reflected in the accompanying
statement of operations. Future declines in oil and natural gas prices
experienced by the Company could cause the Company in the near term to reduce
the carrying value of its oil and natural gas properties.
6
<PAGE>
NOTE 5 - INDUSTRY SEGMENT INFORMATION
- --------------------------------------
The Company has two business segments: Contract Drilling and Oil and
Natural Gas, representing its two strategic business units offering different
products and services. The Contract Drilling segment provides land contract
drilling of oil and natural gas wells and the Oil and Natural Gas segment is
engaged in the development, acquisition and production of oil and natural gas
properties. The Company evaluates the performance of its operating segments
based on operating income, which is defined as operating revenues less operating
expenses and depreciation, depletion and amortization. The Company has natural
gas production in Canada which is not significant. Information regarding the
Company's operations by industry segment for the three months ended March 31,
1999 and 1998 is as follows:
Three Months Ended
March 31,
1999 1998
--------- ---------
(In thousands)
Revenues:
Contract drilling $ 11,831 $ 14,888
Oil and natural gas 7,835 9,351
Other 31 10
--------- ---------
Total revenues $ 19,697 $ 24,249
========= =========
Operating Income (1):
Contract drilling $ 55 $ 1,006
Oil and natural gas 401 2,465
--------- ---------
Total operating income 456 3,471
General and administrative
Expense (1,252) (1,235)
Interest expense (1,211) (1,083)
Other income (expense)- net 31 10
--------- ---------
(Loss) income before
income taxes $ (1,976) $ 1,163
========= =========
(1) Operating income is total operating revenues less operating expenses,
depreciation, depletion and amortization and does not include non-operating
revenues, general corporate expenses, interest expense or income taxes.
7
<PAGE>
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 March 31, 1999, and the related consolidated
condensed statements of operations and cash flows for the three month periods
ended March 31, 1999 and 1998. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Unit Corporation and subsidiaries
at December 31, 1998, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows for the year then ended (not
presented herein); and our report dated February 23, 1999 expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated condensed balance
sheet at December 31, 1998, is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
PricewaterhouseCoopers L L P
Tulsa, Oklahoma
April 28, 1999
8
<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 continues through May 1,
2002 with a three year term loan thereafter. At March 31, 1999 borrowings under
the Credit Agreement totaled $69.1 million. The average bank debt interest rate
in the first quarter of 1999 was 6.5 percent compared to the average interest
rate of 7.8 percent in the first quarter of 1998. A facility fee of .375 of 1
percent is charged for any unused portion of the Loan Value.
The Company's shareholders' equity at March 31, 1999 was $110.8 million
resulting in a ratio of long-term debt-to-equity of .67 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 March 31, 1999 and December 31, 1998,
the Company had working capital of $863,000 and $1.6 million, respectively. Net
cash provided by operating activities for the first quarter of 1999 was $7.5
million as compared to $13.9 million for the first quarter of 1998. In the
first quarter of 1998, the Company had a significant reduction in its accounts
receivable which contributed to 1998's higher net cash provided by operations,
while in 1999, lower revenues as a result of lower spot market natural gas and
oil prices reduced cash flow.
During the first three months of 1999, the Company had capital additions of
$4.5 million. Approximately 71 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.
Due to lower oil and natural gas prices, the Company slowed its development
drilling during the first quarter of 1999. Depending, in part, on commodity
pricing, the Company anticipates it will spend approximately $20 million on its
oil and natural gas capital expenditures program in 1999 and approximately $2.5
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.
9
<PAGE>
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, at March 31, 1999, the Selling
Stockholders hold promissory notes in the remaining aggregate principal amount
of $4,000,000 . These notes are payable in equal annual installments on January
2, 2000 through January 2, 2003. The notes bear interest at the Chase Prime Rate
which at both December 31, 1998 and March 31, 1999 was 7.75 percent.
Due to a settlement agreement which terminated at December 31, 1997, the
Company has a prepayment balance of $1.8 million at March 31, 1999 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 for their proportionate share of the prepayments. The March 31,
1999 prepayment balance of $1.8 million is payable in equal annual payments from
June 1, 1999 to June 1, 2002.
Both average oil and spot market natural gas prices received during the
first three months of 1999 were substantially lower than during the same period
in 1998. The average oil price received by the Company during the first three
months of 1999 was $11.43 per barrel which was a $3.23 per barrel decrease.
Average spot market natural gas prices decreased to $1.53 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 89 percent of the Company's reserves, the large drop in spot
market natural gas prices in the first quarter of 1999 had a significant adverse
effect on the value of the Company's reserves and would have caused the Company
to reduce the carrying value of its oil and natural gas properties had there not
been a significant increase in prices subsequent to the end of the first
quarter. Decreases in natural gas prices, if sustained, would 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 would
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.
The Company's ability to work its drilling rigs as well as demand for its
services 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
qualified labor, availability of supporting equipment and the Company's ability
to supply the type of equipment required. The drop in oil and natural gas
prices received in the first quarter of 1999 was the primary reason for the 19
percent decline in rigs utilized as compared to the first quarter of 1998 and
for the 10 percent reduction in daywork dayrates received between the
comparative quarters.
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
10
<PAGE>
quarter of 1999 and 1998, 25,000 and 19,863 of the purchased shares,
respectively, were used as part of the Company's matching contribution to its
401(K) Employee Thrift Plan. No treasury shares were held by the Company at
March 31, 1999 and 1998.
YEAR 2000 STATEMENT
- -------------------
The Company has initiated a comprehensive assessment of its information
technology ("IT") and non-information technology ("non-IT") systems to try and
ensure that such systems will be Year 2000 compliant. The Year 2000 problem
exists because many existing computer programs use only the last two digits to
define the year. Therefore, these computer programs do not recognize years that
begin with a "20" and assume that all years begin with a "19". If not corrected
many computer applications could fail or create erroneous results which could
cause disruption of operations not only for 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 mangement financial information software. The Company believes
nearly all of the Company's hardware is Year 2000 compliant and during the first
week in April 1999 converted its related computer programs, software and data
base on the AS400 computer system making it Year 2000 compliant. The Company
has expended approximately $110,000 and estimates it will expend an additional
$20,000 to bring any 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 began assessing these non-IT systems and the associated cost during the
fourth quarter of 1998 and the assessment should be complete by the end of the
second quarter of 1999. The cost and replacement of equipment, if any, should
be minimal and completed by the end of the second quarter of 1999.
During the third quarter of 1998, the Company issued questionnaires to its
key suppliers and customers to assess their preparation for Year 2000
compliance. The Company received responses from 41 percent of these entities.
Approximately 90 percent of the responses indicated that these entities are
aware of and are in the process of resolving their Year 2000 issues. During the
first quarter of 1999, the Company issued second request questionnaires to those
key suppliers and customers who did not respond to the questionnaires issued
during the third quarter of 1998. Upon the return of the second request
questionnaires from these non-affiliated entities, the Company will review their
responses and will begin the process of assessing the preparedness of these
entities.
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
11
<PAGE>
result, the Company will continue to evaluate its Year 2000 exposure, both
internally and externally. Since a portion of the Company's overall evaluation
of its Year 2000 readiness 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
which could canse the actual results of the Company's operations (financial and
otherwise) to differ materially from those discussed in this report. Generally,
forward looking 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, rates to be
received under its drilling contracts, growth of its oil and natural gas
reserves, oil and natural gas well production or reserve amounts 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-
compliance) are forward looking statements. As with any forward looking
statement, these statements are subject to a number of factors that may tend to
influence the accuracy of the statements and the projections upon which the
statements are based. All phases of 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, 1998 filed with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS
- ---------------------
The Company reported a net loss of $1,274,000 in the first quarter of 1999
as compared to net income of $725,000 for the first quarter of 1998. Decreases
in prices received for natural gas and oil, reduced production of oil between
the comparative quarters and lower contract drilling dayrates and rig
utilization all contributed to the decrease in net income.
Oil and natural gas revenues decreased 16 percent in the first quarter
of 1999 as compared to the first quarter of 1998. Natural gas production
increased 8 percent and oil production decreased 19 percent between the two
quarters while average natural gas prices and oil prices received by the Company
decreased 19 and 22 percent, respectively. Wells added through the Company's
development drilling program and acquisitions in 1998 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
over the past several years.
12
<PAGE>
Oil and natural gas operating margins (revenues less operating costs)
were 59 percent in the first quarter of 1999 as compared to 64 percent in the
first quarter of 1998. Margins were adversely affected by the declines in
average natural gas and oil prices. Total operating costs decreased 4 percent.
Depreciation, depletion and amortization ("DD&A") increased 20 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 $4.77 in
the first quarter of 1998 to $5.43 in the first quarter of 1999.
Contract drilling revenues decreased 21 percent due to decreases in the
number of rigs utilized and contract dayrates received between the comparative
quarters. Rig utilization averaged 20.0 rigs in the first quarter of 1999 as
compared to 24.8 rigs in the first quarter of 1998. With a 10 percent decrease
in dayrates, contract drilling operating margins (revenues less operating costs)
declined to 12 percent in the first three months of 1999 as compared to 16
percent in the first three months of 1998.
General and administrative expense increased 1 percent in the first quarter
of 1999 when compared with the first quarter of 1998. Interest expense
increased 12 percent as the average long-term debt outstanding increased 33
percent between the comparative quarters due to development drilling and
acquisitions made during 1998. The average interest rate incurred by the Company
was 6.5 percent for the first quarter of 1999 compared to 7.9 percent for the
first quarter of 1998.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133). FAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999 (January 1, 2000
for the Company). FAS 133 requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Management of the
Company anticipates that, due to its limited use of derivative instruments, the
adoption of FAS 133 will not have a significant effect on the Company's results
of operations or its financial position.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
Not applicable
Item 2. Changes in Securities and Use of Proceeds
- -------------------------------------------------
Not applicable
Item 3. Defaults Upon Senior Securities
- ---------------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Not applicable
Item 5. Other Information
- -------------------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits:
15 Letter re: Unaudited Interim Financial Information.
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended March
31, 1999.
14
<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: April 29, 1999 By: /s/ John G. Nikkel
--------------------------- ------------------------
JOHN G. NIKKEL
President, Chief Operating
Officer and Director
Date: April 29, 1999 By: /s/ Larry D. Pinkston
--------------------------- ------------------------
LARRY D. PINKSTON
Vice President, Chief
Financial Officer
and Treasurer
15
<PAGE>
Exhibit 15
----------
April 28, 1999
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 April 28, 1999 on our review of interim
financial information of Unit Corporation for the three month periods ended
March 31, 1999 and 1998 and included in the Company's quarterly report on Form
10-Q for the quarter ended March 31, 1999 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).
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 the cover of Form 10-Q for the three months ended March 31, 1999 and is
qualidied in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000798949
<NAME> UNIT CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 423
<SECURITIES> 0
<RECEIVABLES> 12,675<F1>
<ALLOWANCES> 0
<INVENTORY> 0<F2>
<CURRENT-ASSETS> 18,847
<PP&E> 409,450
<DEPRECIATION> 213,425
<TOTAL-ASSETS> 221,173
<CURRENT-LIABILITIES> 17,984
<BONDS> 0
0
0
<COMMON> 5,147
<OTHER-SE> 105,674
<TOTAL-LIABILITY-AND-EQUITY> 221,173
<SALES> 0
<TOTAL-REVENUES> 19,697
<CGS> 0
<TOTAL-COSTS> 19,210
<OTHER-EXPENSES> 1,252
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,211
<INCOME-PRETAX> (1,976)
<INCOME-TAX> (702)
<INCOME-CONTINUING> (1,274)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,274)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
<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>
