David from Kingdom Capital on UNTC

Episode Summary

Executive Summary: The episode analyzes Unit Corp (UNTC), an illiquid pink-sheet oil and gas company with upstream, midstream, and drilling assets. The guests argue the market is underestimating asset value, cash generation, hedging benefits, and capital returns. Despite aborting a sale process, the company may be worth far more than its market cap when cash, rigs, and upstream assets are considered.

Main Topics: Unit Corp overview and business mix: UNTC is presented as a diversified energy company with upstream production, midstream processing/pipelines, and contract drilling operations, giving it multiple value streams beyond a pure-play E&P. Failed sale process and re-rating thesis: The discussion centers on the terminated upstream sales process, why bids likely came in too low versus asset value, and how higher oil/gas prices since the process began may have increased intrinsic value. Hedging and near-term cash flow protection: The company restarted hedging after ending the sale process, locking in high oil and gas prices and reducing downside risk while supporting predictable cash generation. Rig segment as a hidden value driver: UNTC’s owned drilling rigs are seen as a major source of cash flow and potential asset value, especially as day rates rise sharply in a tight drilling market. Midstream asset uncertainty and Partners Group control: The midstream business is viewed more cautiously; a private equity partner may force a sale, but its value could be limited relative to earlier expectations. Capital allocation, buybacks, dividends, and warrants: The company’s share repurchases, likely dividend/return-of-capital strategy, NOL considerations, and the impact on warrants are discussed as important drivers of per-share value.

Key Arguments: UNTC’s market value appears too low relative to the sum of its parts: cash, upstream assets, and rig fleet alone may justify most or all of the current enterprise value. The upstream sale process failed not because the assets are bad, but because buyers and sellers were far apart on price amid volatile energy markets. Higher strip prices for oil and gas versus the January sale process materially improve the value of the upstream assets. Hedging at elevated commodity prices reduces downside risk and makes UNTC a safer energy investment than many unhedged peers. The rig segment could generate substantial incremental cash flow as day rates rise toward current market levels. Midstream likely has limited upside unless it sells at a strong multiple; the author’s working assumption is close to zero value until proven otherwise. Prescott’s concentrated ownership means the company is incentivized to preserve value, avoid harming NOLs, and likely support a shareholder-friendly capital return strategy. Buybacks may be constrained by ownership thresholds and tax/NOL issues, making dividends or special distributions more likely. Warrants add another layer of complexity and may benefit less if returns are paid as dividends instead of repurchases.

Data Points: Market capitalization: ~$500 million - Approximate market value of Unit Corp discussed at the start. Enterprise value: ~$300 million - Derived from market cap less roughly $200 million cash after the Gulf Coast asset sale. Cash balance (Q2): $115 million - Quarter-end cash disclosed in the discussion before proceeds from the Gulf Coast sale. Gulf Coast asset sale price: $56 million - Headline consideration received for the non-core Gulf Coast assets. Effective sale date: April 1 - Used to explain that cash flow between April 1 and July 1 went to the buyer, lowering effective proceeds to seller. Cash from Gulf sale (adjusted discussion figure): ~$44 million - One speaker’s working figure for the amount added to balance sheet after adjustments. Prescott ownership: Over one-third; possibly ~40% post-buybacks - Legacy bankruptcy holder with a very large concentrated stake. Daily volume: 1,000-2,000 shares/day - Illustrates illiquidity and difficulty of building or exiting positions. Upstream PV10 estimate at sale launch: ~$760 million - Company’s estimate in the original sales deck/discussion of upstream value at a 10% discount rate. January upstream sales target: ~$1 billion - Reuters report and company discussions on desired proceeds from selling upstream assets. Oil strip at sale launch: $63/barrel (2023-2030 average) - Used to highlight that current pricing is much higher than when sale process began. Gas strip at sale launch: $3.30/MMBtu - January strip assumption cited as materially below current market levels. Current oil price reference: ~$75/barrel - Used to argue upstream asset value has increased since the process began. Current gas price reference: ~$5/MMBtu - Used to argue upstream asset value has increased since the process began. Hedge prices: ~$104 and $95/barrel oil; ~$9/MMBtu gas - Prices at which the company re-hedged production after restarting its hedging program. Hedge-related revenue: ~$70 million - Estimated revenue contribution from hedges over the next 9-12 months. Production cost reference: ~$6 per barrel of energy - Used to underscore very high margins with hedged production at elevated prices. Rig fleet value / replacement cost: ~$30 million per high-spec rig; >$400 million total for 17 rigs - Illustrates how expensive it would be to replicate the rig fleet from scratch. Rig count: 17 BOSS rigs plus ~7-8 older rigs - Describes the owned drilling fleet and its mix of newer and legacy equipment. Rig segment LTM EBITDA: $14 million - Trailing EBITDA cited for the drilling segment (stale as of Q1). Rig day rates (current vs. market): $21,300/day current; ~$30,000/day expected - Shows potential upside in contract drilling revenue as rates normalize to market. Rig segment quarterly revenue: ~$33 million in Q2 - Base period for projecting higher revenue as day rates improve. Rig segment quarterly expense: ~$26 million in Q2 - Used to estimate profitability and leverage to higher rates. Potential annual rig cash flow: $50 million+ - Rough estimate of annual cash flow as day rates rise and activation costs roll off. Midstream partner ownership: 50% - Partners Group owns a preferred 50% interest in the Superior pipeline operating segment. Partners Group investment: $300 million (2018) - Preferred interest investment from 2018 that accrues a 7% return. Preferred return hurdle: 7% - Partners Group’s return hurdle on the midstream investment. Midstream preferred return today: ~$350 million - Approximate value of the preferred interest after accruing returns. Midstream cash flow (Q2): ~$15 million - Superior segment cash flow mentioned in the discussion. Shares outstanding: ~10 million - Used throughout the sum-of-the-parts valuation. Shares repurchased since bankruptcy: ~1.5 million shares - Repurchased over roughly 15 months post-bankruptcy. Repurchases as % of shares: ~3% - Share count reduction discussed around the June/July period. Warrants outstanding: ~1.8 million - Bankruptcy-related warrants remaining outstanding. Warrant strike price: ~$63.70 - Approximate exercise price referenced in the discussion. Value estimate for upstream: ~$1 billion - One speaker’s working estimate for upstream asset value in the current environment. Value estimate for rigs: ~$250 million - Working estimate for the rig segment’s value in sum-of-the-parts math. Value estimate for cash: ~$160 million - Estimated total cash after the Gulf sale adjustment in sum-of-the-parts math. Value estimate for midstream: ~$0 - Conservative working assumption for the midstream business in the speaker’s valuation.

Pivotal Quotes: "if you even go back to, all right, well, if prices do go back to 50 a barrel and $3 gas, you're still looking at... a $750 or so million dollar asset at a 10% discount rate." — Andrew Walker / discussion: Explaining how much higher UNTC’s upstream assets still look even under more conservative commodity assumptions. "they want to maximize the value by not doing anything." — David Bastion: Describing the logic behind preserving NOLs and avoiding actions that could destroy tax value or trigger change-of-control issues. "I think you get the best of both worlds here" — Andrew Walker: Summarizing the appeal of UNTC as a cash-rich, hedged, debt-light energy company with upside from multiple assets.

Implications: Listeners should view UNTC as a high-optional value-and-cash-flow story with multiple catalysts: hedged production, rig rate inflation, capital returns, and potential asset monetization. The main risks are illiquidity, concentrated ownership, and uncertain midstream value.