Are you an investor who can't decide whether or not to play the exploration and production companies or contract drillers when an eventual rebound in the energy sector occurs? Then take a look at Unit Corp (NYSE:UNT), an interesting hybrid energy company comprised of an exploration and production division, a contract drilling operation and a small pipeline system. (For more on how to take advantage of this market without having to open a futures account, read A Guide to Investing in Oil Markets.)

Unit Petroleum
Unit had 515 Bcfe (billion cubic feet equivalent) of proved reserves at the end of 2007. The reserves are split amongst several high profile areas in North America, including the Permian Basin in Texas and New Mexico, the Arkoma Basin in Arkansas and the Anadarko Basin in Oklahoma. The company also has other properties in North Louisiana and on the Gulf Coast.

Unit was a slow growth company with relatively flat production growth until 2003. Since 2004, the company has increased production from its reserve base every year. While some of this growth was due to the acquisition of PetroCorp in early 2004, Unit should be given credit for kick starting its business into a growth phase.

The company has replaced its reserves at an average rate of 204% since 1995. In 2007, the company replaced 171% of its reserves. Unit spent $438 million in 2008 to explore and develop its properties. Its largest inventory of wells for drilling was in the Anadarko Basin.

The company is setting up for future growth by accumulating acreage in unconventional shale plays across North America. These include the Marcellus Shale in Pennsylvania, the Haynesville Shale in Louisiana and the Bakken Shale in North Dakota. The combined net acreage in these three plays totals 75,000.

Unit Drilling Company
The company's contract drilling fleet consisted of 25 rigs in 1997. Seven acquisitions brought Unit's drilling fleet to the present total of 131 rigs. Rig utilization reached into the mid-90% range in 2006, but has since slipped to 76% as of September 30, 2008. The company expects even lower rig utilization numbers for the end of 2008, as the downturn in energy continued to work its way through the business. (To learn more about how to evaluate energy companies, read Oil and Gas Industry Primer.)

Questar (NYSE:STR) is the company's largest customer and represented 13% of total revenues for the drilling division in 2007.

Superior Pipeline
The company's smallest division, Superior Pipeline consists of 755 miles of pipeline, eight natural gas processing plants and three natural gas treatment plants.

Financials & Features
Unit Corp. is in fairly solid financial shape, with long-term debt of $148 million and an undrawn credit line of $127 million. Its debt-to-total capitalization ratio was 8% at September 30, 2008.

Unit Corp. stands out from similar companies because it is fairly unusual for an exploration and production company to own its own drilling fleet. Chesapeake (NYSE:CHK) owns a fleet of rigs, but usually will sell the rig after it is built and lease it back. Likewise, it is also unusual for a contract driller to own its own exploration properties. Nabors (NYSE:NBR), for exampled, entered into a joint venture with a private equity firm in 2006 to begin oil and gas exploration.

Bottom Line
Unit Petroleum is an interesting hybrid energy company operating in three different energy subsectors. Investors could use Unit as a vehicle to play an eventual rebound in the sector.

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Investing Basics

    Understanding the Spot Market

    A spot market is a market where a commodity or security is bought or sold and then delivered immediately.
  3. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  8. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  9. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Derivative

    A security with a price that is dependent upon or derived from ...
  3. Inverse Transaction

    A transaction that can cancel out a forward contract that has ...
  4. Best To Deliver

    The security that is delivered by the short position holder in ...
  5. Exchange Traded Derivative

    A financial instrument whose value is based on the value of another ...
  6. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!