2023-11-29 04:27:32 ET
Summary
- Unit Corporation has seen a drop in revenues due to lower commodity prices, but its stock price has been steadily climbing.
- The company operates in the energy sector, focusing on oil and natural gas exploration, drilling, and production.
- Unit Corporation has a strong dividend yield and a low valuation, making it an attractive investment option.
Investment Rundown
With commodity prices like oil and natural gas down since this same period last year, the results for Unit Corporation ( UNTC ) have not been spectacular perhaps. The revenues have dropped from $80 million last year to $35 million the last quarter. One of the main appeals of the business comes from the high dividend yield it offers, currently over 9%. The company doesn't have a significant history of paying out a high dividend. In the first quarter of 2023, the company announced a special dividend of $10 per share which is significantly higher than the $2.5 quarterly it has had before and currently still has. This was the result of strong commodity prices last year which enabled the management to reward shareholders handsomely. Even with a quarterly dividend of $2.5 which is $24.5 million per quarter or $98 million annually, UNTC has the net income to cover this I think going forward and a strong cash position of over $200 million to help fund as well. I like the risk/reward here and with UNTC trading at a p/e under 3 I will be rating it a buy, the p/e is significantly under the sector average of 9.5 leaving a lot of upside potential.
Company Segments
UNTC is involved in the energy sector, focusing on the exploration, acquisition, development, and production of oil and natural gas properties across the United States. The company's journey, which commenced in 1963 as an oil and natural gas contract drilling entity, has evolved significantly. Today, UNTC operates through three key segments: Oil and Natural Gas, Contract Drilling, and Mid-Stream.
In the Oil and Natural Gas segment, UNTC undertakes various tasks and projects, including exploration, acquisition, development, and production of oil and natural gas properties. This diverse approach positions the company strategically in the dynamic energy landscape.
Texas Footprint (Investor Presentation)
Originally rooted in contract drilling, the company has expanded its reach into oil and natural gas exploration and production. Additionally, a noteworthy 50% stake in a midstream pipeline company reflects its commitment to a vertically integrated approach within the energy sector. This has been previously been positive for the business as the revenues and bottom line grew impressively.
Company Production (Investor Presentation)
Until April 2023, UNTC maintained a 50% investment in Superior Pipeline Company L.L.C. This subsidiary played a pivotal role in buying, selling, gathering, processing, and treating natural gas and natural gas liquids. The company did however announce the sale of its stake in Superior Pipeline Company from their March presentation which values it at $20 million. This additional capital I think will lend UNTC better capable of expanding their asset base further in the coming years. I think that the sale has enabled UNTC to access more capital that it can use to further its asset expansion, which ultimately means I look quite positively at the sale and not as a sign of desperation.
Markets They Are In
The Anadarko Basin in Texas is a prolific oil and gas-producing region, known for its vast hydrocarbon reserves. Situated in the western part of the state, the basin spans multiple counties and has been a focal point for energy exploration and production. Operators in the Anadarko Basin tap into various geological formations, including the Granite Wash and Woodford Shale, to extract oil and natural gas.
Market Footprint (Investor Presentation)
The Permian Basin, located in West Texas and Southeastern New Mexico, is one of the most prolific oil-producing regions globally. It has become a cornerstone of the U.S. oil industry. The basin's geology includes multiple stacked layers of oil-rich formations, such as the Spraberry Trend, Wolfcamp, and Bone Spring, making it highly attractive for oil extraction. UNTC has established itself here quite well, with 10 active rigs in the area as of their March presentation.
Earnings Highlights
Looking at the last report from the company it was clear that poor commodity prices have taken a toll on the top line of the business. The revenues dropped from $80 million to just $35 million.
Commodity Prices (Investor Presentation)
The company noted that commodity prices have struggled since the end of 2022 and the better part of 2023 as well as economic uncertainty is lowering demand for some. I do think that this is to be expected with a lot of commodity companies and it's better to look at the bigger picture and that to me right now says that oil and gas will be sticking around for a very long time.
Dividend (Earnings Report)
One of the key positives of the company right now is the strong dividend yield it has and the low valuation as well. The dividend has been set at $2.5 per share every quarter it seems. Which on a FWD basis puts the yield at nearly 20% as the share price is around the $50 mark. I think that this is a very worthwhile stock to get into as the dividend is well supported in my view. I mentioned in the first segment of the article that the quarterly dividend payout amounts to $24.5 million and with the last report producing a net income of close to $29 million I think that even in a market environment with poor commodity prices UNTC is capable of supporting the current dividend yield. The company has also been strong with maintaining their rigs up and running and with contract drilling growing in revenues YoY to over $44 million I think UNTC will have more predictable revenues and results going into the next few quarters. In their March presentation for example they noted all 14 of their BOSS rigs were up and running. But again, what is most important for me is that they can sustain the dividend and provide investors with a fantastic yield.
Operating Activities (Earnings Report)
On a nine-month basis, UNTC has seen a net income of $191 million, up over 100% YoY, and underscores the sustainable dividend. Some of the key reasons for this boost has been the lower depreciation on assets for the business going from $20 million nine months in 2022 to $12 million nine months this year. In 2022 the company had expenses of $66 million from gas gathering and processing which was not on the income statement in 2023. In 2022 UNTC also had a $73 million loss on derivatives, something which has completely changed in 2023 as it has instead gained $11 million from derivatives. All in all, I think that the last quarter's results were strong for the company and it has proved it can efficiently improve margins despite a tough market climate. I think that the coming years will be positive for the business and investors. What I think is important to watch out for though is whether depreciation begins to increase. I have mentioned in the risks segment that climate change and weather disasters can take a toll on the company's infrastructure and this could drag down earnings further.
P/E (Seeking Alpha)
In comparison to the sector, UNTC trades roughly 77% below it on an earnings basis. I think this leaves significant room for the upside still. I think if UNTC can provide consistent net income growth and asset expansion then a p/e closer to 6 - 7 might be justified. It's not a very well-covered stock and I think this could be a reason for the lower multiple it is receiving too. Nonetheless, most of the appeal for me comes from the dividend and we have seen that it is right now quite manageable and this results in a buy rating from me for UNTC.
Risks
The impact of adverse climate effects on UNTC extends beyond mere market dynamics, intertwining with operational challenges and strategic considerations. In the United States, uncharacteristic weather patterns have the potential to influence the demand for oil and natural gas, creating a dual challenge for UNTC.
Natural Disasters (Met Office)
While unusual weather conditions might spur an increase in demand for energy resources, they also pose logistical hurdles that could impede UNTC's ability to deliver its products and services to customers. Major climatic events, such as large hurricanes, can shut down offshore oil rigs, disrupting operations and contributing to spikes in oil prices.
Moreover, UNTC navigates a market characterized by the inherent volatility of commodity prices . The fluctuations in these prices pose the potential for periodic variations in quarterly results, occasionally leading to less favorable performance in a sequential analysis. However, in the broader context, these short-term undulations may not present risks substantial enough to justify a sell rating. A significantly larger company in the sector like Imperial Oil Limited ( IMO ) has seen similar declines YoY in revenues, decreasing about 6.8% YoY. Perhaps not as much as UNTC but still a noticeable amount on something that has been caused by lower prices for oil.
One of the reasons I continue to be bullish on the business and for commodity prices not to further harm the earnings is the simple fact over the long term these types of volatilities are common. I don't base an entire thesis on a couple of quarters of poor commodity prices for oil and gas. The fact of the matter is that these sources of energy are some of the most reliable and experts predict we will still be using oil in 2050 and together with gas will make up around 47% of the energy supplied worldwide.
Final Words
UNTC has been on a steady climb the last 12 months in terms of its stock price, but also the bottom line. With strong margins, the company has been able to generate net incomes of over $190 million in the last 9 months alone even as commodity prices have fallen from their recent highs last year. This is well enough to support an annual dividend of $10 per share and result in a yield close to 20%. With a low earnings multiple I think that UTNC can be a real winner for investors and I will be rating it a buy as a result.
For further details see:
Unit Corporation: Dividend Seems Supported With Positive Risk/Reward Case