Unit Corporation: A Post-Bankruptcy Energy Company With Hidden Asset Value
A microcap oil and gas producer with a huge cash balance and a history of special dividends
I don’t often look at oil and gas companies, but Unit Corp caught my eye because of their large cash balance and history of special dividends. The stock is trading around $35 and has a market capitalization of $335M. Unit Corp today looks very different from the business that filed for bankruptcy in 2020. After several asset sales, Unit is a simpler business with no debt. Unit Corp doesn’t scream cheap, its stock price hasn’t cratered and is trading at a P/B of 1.2x. However I think the market is not got the memo that Unit Corp’s balance sheet is better than the figures in their last earnings release.
Unit entered Chapter 11 during the 2020 after carrying roughly $700 million of debt into a period when oil and natural gas prices fell sharply. The company’s assets themselves were not necessarily the problem; rather, the leverage became unsustainable when commodity markets deteriorated. The restructuring eliminated most of the debt and allowed the company to emerge with a much cleaner balance sheet.
Historically, Unit consisted of three major business segments: upstream oil and natural gas production, a 50% ownership stake in a midstream joint venture, and a contract drilling operation. Since emerging from bankruptcy, management has systematically simplified the business by divesting the non-core segments. The midstream stake was sold in 2023 for approximately $20 million, while the contract drilling business was sold last October for about $120 million. These transactions leave Unit primarily as an upstream producer focused on the Anadarko Basin in Oklahoma and Texas.
Because the sale of contract drilling business was announced right after their Q3 earnings, and the company has not released Q4 earnings yet (should be any day now), the impact of the sale has not fully been digested. The Q3 financials did adjust the income statement to classify the drilling business as discontinued operations. However the balance sheet does not include the sales proceeds.
The balance sheet is what makes Unit Corp potentially attractive. Unit appears to be debt free and is likely holding around $175 million in cash. With a market capitalization of around $330 million, more than half of the company’s value is represented by cash alone. The remaining operating assets consist of oil and natural gas properties in the Anadarko Basin. According to the company’s filings, the SEC standardized value of proved reserves is approximately $175.2 million. In effect, the market seems to be valuing the company at roughly the sum of its cash and reserve value.
The financial history since bankruptcy has been volatile, largely because of commodity prices and the mix of operating segments. Revenue peaked in 2021 at $639 million, while gross profit reached a high of $260 million in 2022, the same year operating income peaked at $236 million. Over the trailing twelve months, however, the figures are lower: about $315 million in revenue, $104 million in gross profit, and $82 million in operating income. Part of the difficulty in interpreting these numbers is that Unit may effectively be a company in managed decline, and the asset sales make historical comparisons challenging. Looking forward, the key metric becomes the cash flow generated by the remaining upstream operations.
For the last nine months, Unit generated about $39 million in operating cash flow when factoring in discontinued operations, or roughly $13 million per quarter. Supposedly the contract drilling business required the most capex, so now spending should be less. Just spitballing, but assuming capex around $3 million per quarter, that leaves approximately $10 million in quarterly free cash flow. Lately Unit has been paying a $12M quarterly dividend. It looks like they usually pay out 90% of their FCF as dividends. Based on just these operating figures, Unit would have to reduce their dividend a bit. If the upstream operations generate around $10 million per quarter, a more sustainable dividend might be closer to $8 million per quarter, which would equate to roughly $0.94 per share rather than the current $1.25.
The company also has a history of paying large special dividends, particularly following the sale of the midstream business and during the strong commodity environment of 2023. Based on this history, it seems quite possible that much of the $120M sales proceeds from the contract drilling business is paid out as dividends.
In summary, Unit Corp is a debt-free energy company trading near the combined value of its cash and reserves. Based on their pro-forma cash flows, the company should be able to maintain a 10% dividend yield. Then there is the possibility of a large capital return since their cash balance corresponds to half their stock price. I am not an expert in energy companies, but it seems like there is enough safety in Unit Corp to make it interesting to me.