Energy Prospectus

missed on revs--q/q production down. y/y production of ~5% not impressive. a lot of selling early on. down >5% so far.

They beat my forecast.

Larry Pinkston, Unit’s Chief Executive Officer and President, stated, “For the quarter, Unit reported net income of $56.9 million, or $1.17 per diluted share, and adjusted net income of $62.8 million, or $1.29 per diluted share (see Non-GAAP Financial Measures below). We continue to make progress on our key initiatives within each business segment.

I will have an updated forecast model posted within an hour.

Selloffs because of weather related delays are usually (90% of the time) buying opportunities. Higher natural gas and NGL prices more than make up for Unit's 2% drop in production guidance. - Dan

During the quarter, Unit experienced two factors that contributed to the estimated production loss of approximately 2.2 Bcfe. The first was weather. Well freeze offs and operational delays caused by inclement weather, primarily in the company’s Mid-Continent plays, resulted in a reduction in production from the impacted wells. Second, Unit incurred mechanical issues on nine separate wells primarily within its Granite Wash play. These problems involved either liner issues in the horizontal component of the wells or casing leaks just above the liner top packer. As a result, the wells required remediation work before they could be completed. To date, six of the nine wells have been repaired. Work is continuing on the remaining three wells. Although the company believes it will successfully repair all nine wells, the flow rate from five of the nine wells may experience reduced rates as a result of these problems. On average, first production from these nine wells has been delayed approximately three months as compared to their initial forecasted production date. Going forward, Unit has modified its casing and liner program which should eliminate any further problems. In response to these production delays, Unit plans to accelerate its drilling program in both the Granite Wash and its new emerging play (SOHOT, discussed below) in an effort to make up part of the incurred production losses; however, the company forecasts that its first production resulting from these increased drilling efforts will not occur until mid-to-late third quarter primarily due to the production timing of pad drilling. As a result, Unit is reducing its current 2014 production guidance to 13% - 15%. The capital required for the increased drilling in the Granite Wash and SOHOT will be reallocated from its Mississippian play (as discussed below).

Unit’s newest core play, SOHOT, is an emerging play located in southwest Grady County. The Hoxbar is a Pennsylvanian sand/shale sequence that is approximately 2,000’ thick that contains four to six potentially productive stacked sand benches. Unit recently completed horizontal wells in two of the Hoxbar sand benches, indicating the discovery of an oil zone (Marchand) and a natural gas zone (Medrano) at true vertical depths of approximately 11,000’ and 9,800’ respectively. The completed well cost for the Marchand with a 4,300’ lateral is approximately $7.0 million. The estimated ultimate reserves (EUR) are projected at 300 MBoe to 500 MBoe for this well, consisting of approximately 85% to 90% oil. The Medrano completed well cost with a 4,200’ lateral is approximately $4.2 million with an EUR of 3.0 to 4.5 Bcfe, consisting of an average of approximately 30% liquids. In its current focus area in southwest Grady County, Unit has 50,560 gross acres and 12,810 net acres. The company has one rig drilling in the play and plans to add two additional rigs in June for a total of three rigs running during the second half of 2014. The 2014 capital drilling budget in this area has been increased approximately 49% to $82 million.

In the Granite Wash (GW) play, all nine wells in the initial horizontal program in the Buffalo Wallow field have been successfully completed. Unit will move one drilling rig back into the Buffalo Wallow field in late May. Unit will add an additional rig in the GW play in July. After adding these two drilling rigs, there will be a total of six drilling rigs running in the GW with expectations to maintain that pace through the rest of the year.

The Wilcox play, located in southeast Texas, achieved its fifth consecutive quarter of production growth with production up 32% for the first quarter 2014 compared to the first quarter 2013. The Gilly field continues to be a first class Basal Wilcox field discovery with excellent results obtained from four recent well recompletions. For 2014, the company plans to run two rigs supplemented by a strategic recompletion program throughout the Wilcox play area.

In the Marmaton horizontal oil play, three horizontally stacked lateral wells have recently been drilled targeting both the Upper and Lower Marmaton benches in the same wellbore. The production from these wells will be evaluated to determine the feasibility of drilling a greater portion of our Marmaton well program with this design. Currently, Unit anticipates maintaining the two drilling rig program in the play.

In the Mississippian play, located in south central Kansas, the current drilling program is being modified to reduce from two drilling rigs to one drilling rig while Unit evaluates the well production results and explores the potential of shooting a 3-D seismic survey over a portion of its leasehold. Unit’s revised budgeted capital for this play is approximately $89 million, which is a reduction of approximately $48 million. The $48 million will be reallocated to the company’s GW and SOHOT plays.

Unit Corp. (UNT): An updated Net Income & Cash Flow Forecast model has been posted under the Sweet 16 Tab.

My Fair Value Estimate is now $92.55

This is my Top Pick for natural gas. If gas stays over $4.50/mcf, UNT is going to look very attractive by year-end. All three of their divisions will benefit from higher gas prices.