Unit Corporation (UNTC)

Nov 28, 2022

Good starting points to research the company:

As we can see, this name is well covered on the Internet and it feels like I am just creating digital waste by writing these few sentences. But I promised myself to make a written statement for every position I take and promises need to be kept. Luckily, most of the work had been done already by others and the thesis is very simple.

UNTC has three divisions: E&P, midstream and contract drilling. I treat midstream division as a bonus.

Contract drilling. Company has 14 high spec BOSS rigs and 3 lower spec SCR rigs in operation. Drilling rigs market is getting tighter day by day thus pushing rates higher and higher. Last quarter (Q3 2022) contract drilling segment generated $40 million in revenue and $15 million of income at an average $24,000/day rate for BOSS rigs. I think this past quarter will be the worst of the next four. There is a decent probability for UNTC to have generated $160 million in revenue and $60 million in cash from drilling segment alone by the next Thanksgiving Day. If we apply an undemanding 4x multiple to FCF we get $240 million worth of value. We can also look at this segment from a different angle. New BOSS rig costs about $30 million. If the company was to sell all of their rigs at half price today it would get between $200 and $250 million.

After combining cash with contract drilling segment, we arrive at $380-430 million figure. This leaves us with $170 million valuation for E&P division on a more conservative side. I don’t know how much this segment is worth but after having generated $25 million of cash with hedges that are hurting badly in one quarter, it should be worth much more than $170 million.

I think the highest risk at this point is a very poor capital allocation decision i.e., dumb acquisition. Majority of new CEO’s compensation was paid in the form of RSUs so far and he is highly incentivized for the share price to go up (even though he’s already done well given the SP behavior past year). Continuous share buybacks are very pleasing to see. Let’s hope UNTC keeps reducing the share count for as long as they can.  

This situation reminds me of Pabrai’s IPSCO story a little bit: I’ll buy and see what happens in a year.