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Unit Corporation (OTCQX:UNTC) paid out $22.50 per share in dividends in December 2023. As a result, it has significantly lower cash on hand now, which I estimate to be around $75 million at the end of 2023.
Unit currently has a $2.50 per share quarterly dividend, but I project its 2024 free cash flow to be around 0.7x to 0.75x its projected dividends if that remains unchanged. This is with a below maintenance capex development budget as well.
Unit can potentially maintain its dividend for now, but its longer-term ability to keep a $2.50 per share quarterly dividend seems uncertain.
I’ve mainly looked at Unit through my Investing Group reports, and have often been bullish on the company. However, I now believe the company is roughly fairly valued and estimate its value at approximately $45 per share.
Dividend Payments
Unit paid out $22.50 per share in dividends near the end of 2023. This included its quarterly $2.50 per share dividend, a $15 per share special dividend, and a $5 per share dividend that was contingent on its Texas Panhandle sale closing in time.
Unit announced on December 13 that it completed its Texas Panhandle sale for net proceeds of $50 million, resulting in the $5 per share dividend being paid.
I have modeled Unit’s year-end 2023 cash balance at $75 million, although that is subject to a bit of variance depending on the changes to Unit’s other working capital items.
Texas Panhandle Sale
Unit’s Texas Panhandle divestiture involved 51,000 net acres, which is around 73% of the total acreage that it had in the Texas Panhandle. Unit mentioned that it was retaining its core Granite Wash assets in the area. Unit’s Granite Wash production was over 50,000 MMCFE per day back in 2019, but that production will have declined a very large amount since then due to the lack of development spending.
Unit’s divested Texas Panhandle assets may have generated close to $2 million per month in recent free cash flow, given the $5 million purchase price adjustment in the deal with the effective date of the transaction occurring 2.5 months before deal close.
Revised 2024 Outlook
I’ve attempted to model Unit’s potential 2024 results after its Texas Panhandle divestiture. This also assumes that Unit has a modest amount of development capex, consistent with what it said in its March 2023 Investor Presentation.
Unit’s Development Activity (unitcorp.com (March 2023 Presentation))
At current strip prices for 2024 (including $76 to $77 WTI oil and $2.15 NYMEX gas), I estimate that Unit can generate $77 million in oil and gas revenues. At last report Unit had no hedges after 2023.
I am also modeling around $60 million in 2024 contract drilling revenue (net of operating costs). This allows for a 5% decrease in day rates compared to Unit’s Q3 2023 results.
With the large amount of dividend payouts in December 2023 reducing its cash on hand, Unit may end up with only $3 million in 2024 interest income.
| Type | Barrels/Mcf | Per Barrel/Mcf | $ Million |
| Oil | 520,000 | $74.50 | $39 |
| NGLs | 961,250 | $19.00 | $18 |
| Natural Gas | 13,400,000 | $1.50 | $20 |
| Net Contract Drilling | $60 | ||
| Interest Income | $3 | ||
| Total | $140 |
This results in a projection of $72 million in free cash flow for Unit in 2024 at current strip prices, and also assuming no additional divestitures.
| $ Million | |
| Oil and Gas Operating Costs | $39 |
| Cash G&A | $15 |
| Capital Expenditures | $14 |
| Total | $68 |
Unit is paying out $97 million per year in dividends with a $2.50 per share quarterly dividend, so it would be projected to finish 2024 with $59 million in cash on hand if it maintains that dividend. This includes roughly $9 million in deferred proceeds (mainly from its midstream divestiture) that it is scheduled to receive in 2024.
Notes On Valuation
I estimate Unit’s current valuation to be around $45 per share. This translates into a value of approximately $450 million. Unit has approximately 10 million outstanding shares (assuming that the RSUs vest and more of the outstanding employee stock options become exercisable).
As mentioned earlier, Unit is projected to end 2023 with around $75 million in cash and it also expects to receive $9 million in deferred proceeds during 2024.
Unit’s upstream division is probably worth closer to $140 million now after its most recent divestiture. Unit’s upstream assets have relatively high operating costs compared to the value of its production, partly due to its production being only around 14% oil. A valuation of $140 million would be 3.7x Unit’s projected 2024 oil and gas operating margins (not including G&A), albeit based on low natural gas prices. That leaves approximately $225 million in value for Unit’s drilling division.
Thus I am generally neutral on Unit at its current share price. Unit may be able to keep its current $10 per share annualized dividend for now, but it is uncertain how sustainable that is. I’m currently projecting Unit’s 2024 free cash flow to be around 0.7x to 0.75x its current dividend, with a below maintenance capex development budget.
Conclusion
Unit Corporation has looked undervalued for much of the last few years, but I now think its share price (adjusted for dividends) has increased to the point where it is roughly fairly valued. I now estimate Unit’s value at around $45 per share, and believe that it can generate $7 to $7.50 per share in free cash flow in 2024 with a below maintenance capex budget.
Unit’s current $2.50 quarterly dividend adds up to $10 per share annualized, and it is uncertain how long it will maintain its dividend for. Unit does still have some cash on hand, so it could pay higher dividends than its free cash flow generation for a while, but longer-term I don’t see a $2.50 quarterly dividend as being sustainable.
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