2023-04-21 05:13:13 ET
Summary
- Unit Corporation implements a dividend policy and has paid a sizeable special dividend, but oil and gas prices are driving the stock price.
- Unit Corporation is an integrated US oil and gas company. Its robust operating cash flow made the dividend possible, while a solid balance sheet supports future payouts and buyback programs.
- Analysts are forecasting higher oil and gas prices and with its strong correlation to changes in fossil fuel prices, Unit Corporation's stock price is well positioned for a strong recovery.
- Unit Corporation's stock price is looking cheap and has the potential for a sharp rise as recession risk gradually fades in favor of a much less dramatic scenario for the economy.
Unit Corporation Introduces the Dividend, but It's Not What Determines the Share Price
The introduction of a quarterly dividend payment policy with an initial payout of $2.5 per share to shareholders of Tulsa, Oklahoma-based integrated oil and gas company Unit Corporation ( UNTC ) did not have the desired effect on the stock's share price.
On January 5, 2023, Unit Corporation announced board approval for its quarterly cash dividend policy, with the first payment scheduled sometime in the second quarter of 2023, but the stock price has significantly declined since then. The stock price has plummeted, falling from $64.50 per unit to $43.50 per share at the time of writing.
But on the other hand, the following aspect is also true and actually more interesting. Shares are trading at interesting levels today, which coupled with a possible rosy outlook for Oil & Gas and the company's strong finances and operations, imply a good chance for a potentially strong comeback in the share price.
Investors may want to consider this stock for a Buy rating.
About Unit Corporation
Headquartered in Tulsa, Oklahoma, Unit Corporation operates through three segments: Oil & Natural Gas Segment, Contract Drilling Segment and Mid-Stream Segment.
The first segment explores, develops, acquires and produces oil and natural gas resources for the company's benefit.
The second segment carries out onshore oil and natural gas drilling for the benefit of the company and third parties.
Through the third segment, the company is engaged in the purchase, collection, processing and distribution of natural gas for third parties and for its own account.
The Dividend Has Robust Fundamentals
In addition, the company had promised to pay a special dividend of $10 per share, which was cashed by shareholders on January 31, 2023.
Like the regular remuneration of the shareholders, the special dividend results from a drastically reduced use of funds for financing purposes and a resilient cash inflow from ongoing business activities, as shown in the screenshot below of the cash flow activity table from Unit Corporation's 2022 Annual Report .
Robust operating cash flow was possible despite lower oil and gas production and thanks to higher fossil fuel prices. Financing cash outflow was driven by lower financial obligations and lower share buyback expenses. On the other hand, the situation was different for the inflows from investment activities, which fell somewhat compared to the previous year.
Setting up a dividend policy undoubtedly leads to a qualitative leap for a company as it is generally synonymous with managerial profitability generating more than enough cash to reward venture capitalists.
The basis for the decision to start paying dividends is likely to be attributed to a significant improvement in the net increase in cash and cash equivalents for 2022 compared to 2021, which was up 191% year over year.
Good Growth Prospects Require Higher Fossil Fuel Prices
The dividend isn't an indicator of the company's good growth prospects. The latter as well as the company's ability to pay dividends and repurchase common stock depend on the prices it receives for fossil fuel production, the quantities of raw materials produced, and the profitable settlement of commodity derivative contracts.
Pricing for the use of third-party rigs and midstream services also impacts cash flow generation, but commodity prices remain the context in which the more or less expensive use of an asset or infrastructure is determined.
Therefore, despite the start of dividend payments, Unit Corporation shares continue to follow the price of the commodity and the two charts from Seeking Alpha below can be used to understand this relationship.
Unit Corporation stock and Crude Oil WTI Futures - June 23 (CLM2023) are positively correlated and the relationship is strong as the index shows 0.87, suggesting very similar stock price movements for the two securities.
Unit Corporation stock and Natural Gas Futures - May 23 (NGK 2023) relationship is also characterized by a very high and positive correlation value of 0.68.
How Analyst Forecasts Could Affect UNTC Stock Price
Following the same trend in commodities (oil down 9.97% and natural gas down 50.89%) over the past year, UNTC fell 21.49%, underperforming the Energy Select Sector SPDR Fund (XLE), or benchmark for energy stocks, by a wide margin.
As UNTC shares have moved faster than the fall in crude oil prices, so should the stock if the commodity turns bullish.
Estimates of the future oil price could serve as a guide to predicting the possible direction of the UNTC stock price going forward.
UNTC's share price is less volatile compared to Natural Gas but estimates of Natural Gas's price target to be reached in the coming months are still helpful in providing an idea of how UNTC's stock might perform going forward.
According to Trading Economics analysts , the barrel of crude oil should rise from the current price per barrel of $77.52 to $88.47 in ? a year, a growth of 14.1%.
In terms of natural gas, analysts expected the metric million British thermal unit [MMBtu] to rise 46% in a year, rising to $3.19 per MMBtu from the current $2.181.
Unit Corporation Cash Flow, Operations and Balance Sheet
Net cash flow from operations decreased 9% year over year to $159.42 million in 2022, primarily due to lower fossil fuel production (oil production fell 21% to 1.281 million barrels; NGL production fell 18% to 2.148 million barrels; natural gas production fell 17% to 24.211 million barrels). The company's segment also suffered from higher derivatives settlement payments. The oil and natural gas segment accounted for 58.5% of Unit Corporation's total revenue in 2022.
But the following aspect is important to mention. Operating cash flow also reflects the reporting of the only first two months of consolidated midstream results, attributable to the deconsolidation of Superior and its subsidiaries - the operator of the midstream segment - from the Unit Corporation balance sheet effective from March 1, 2022.
Before deconsolidation, Unit Corporation's 50% investments in Superior's midstream operator generated ? 45-50% of the Unit's total revenues in 2021.
Net cash used in financing activities decreased 76% year-on-year to $38.5 million in 2022 and this trend was determined as follows.
With respect to the common stock repurchases, Unit Corporation repurchased 522,429 common shares at an average price of $52.49 per share and spent a total of $27.421 million in 2022. This was a decrease of 47.2% from 2021, when 1,949,963 shares of common stock were repurchased at $26.62 per share, resulting in $51.917 million.
The company has $31.1 million of its common stock remaining to be retired as part of its repurchase program and will use a portion of its cash balance of ? $214 million plus future cash flows for the purpose and payment of dividends. The balance sheet shows neither short-term nor long-term debt.
Despite lower capital expenditures for fossil fuel development and drilling rig fleet maintenance, the investing activities resulted in a lower inflow of ?$29 million in 2022, down 20% year-over-year. This was due to the deconsolidation of Superior and lower proceeds from the sale of non-core assets.
The Stock Valuation
Shares of Unit Corporation were trading at $43.15 per unit as of this writing for a market cap of ? $419.121 million.
With favorable growth prospects, the Unit Corporation stock price is well positioned to trade significantly higher going forward and the current stock price levels which appear to offer interesting entry points could greatly assist the trader in potentially making a significant profit.
The company has a solid balance sheet to continue to fund the dividend and purchases of its own stock while fossil fuels are expected to trade at significantly higher levels than today.
Shares are below the longer trend of the 200-day simple moving average of $54.13, the 100-day simple moving average of $51.39, and the 50-day simple moving average of $45.15.
Also, the 14-day relative strength indicator of 47.80 suggests there is still plenty of room for shares to reach significantly higher levels than they are today.
Whether Unit Corporation stock is trading low or high can also be judged by comparing the Enterprise Value/EBITDA of the stock with those of its peers.
The ratio is one of the most useful indicators for such analysis as the company operates in a capital-intensive industry. So, Unit Corporation has a TTM EV/EBITDA of 1.07x, while the peer group is composed of the following stocks:
- YPF Sociedad Anónima ( YPF ) has a TTM EV/EBITDA of 4.08x.
- OMV Aktiengesellschaft ( OMVKY ) has a TTM EV/EBITDA of 1.62x.
- Repsol, S.A. ( REPYY ) has a TTM EV/EBITDA of 2.29x.
- Ecopetrol S.A. ( EC ) has a TTM EV/EBITDA of 3.35x.
- Imperial Oil Limited ( IMO ) has a TTM EV/EBITDA of 3.87x.
Buying shares in Unit Corporation carries a risk presented by the recession that markets are now fearing because of the US Federal Reserve raising interest rates to combat elevated inflation.
A recession would dampen demand for fossil fuels, putting downward pressure on the commodity prices as economic activities require less energy to function in such a scenario.
At the other end of the spectrum, however, is OPEC+ with its crude oil supply cuts which, combined with the strong recovery in the Chinese economy, could sustain higher per barrel prices. There is no definitive data for 2022 yet, so as of 2021, China is the world's second-largest oil consumer with 15.4 million barrels per day, behind the United States, which consumed 18.7 million barrels per day, according to Statista.com In addition, Europe's need for liquefied natural gas from US exports to increase independence from Russian products is driving demand for this US product.
It's hard to tell which side of the scale it's trending towards, likely recession risk, but as time goes on a soft landing for the economy is becoming increasingly likely. This is a manageable slowdown in economic activity as higher borrowing costs continue to dampen inflation, apart from weighing somewhat on consumption and investment, but non-farm payrolls remain resilient.
Given the possibility of the Federal Reserve lowering inflation without crashing the economy, which would boost demand for fossil fuels for power generation, investors should consider Unit Corporation to take advantage of the subsequent positive sentiment on gas and oil.
Shares of Unit Corporation appear cheap in the light of such prospects, while based on past performance they could grow faster than fossil fuels.
Conclusion
Unit Corporation introduces the dividend, but Oil & Gas price developments are the key influencers of the share price.
The share price of the integrated oil and gas company could benefit enormously from positive sentiment towards fossil fuels, which cannot be ruled out despite the risk of a recession as a scenario.
The economy could slump significantly, hurting demand for fossil fuels for power generation, but as activity appears to have merely paused and non-farm payrolls continue to withstand higher rates, a soft-landing scenario is beginning to take shape.
As Unit Corporation shares appear to offer interesting entry points and may even outperform the commodity in a bull market, investors should consider buying this stock with its robust business and solid financials.
For further details see:
Before Oil And Gas Turns Potentially Bullish, Consider Unit Corporation