Unit Corporation: High FCF, Strong Balance Sheet, Multiple Catalysts

Michael Melby of Gate City Capital Management presented his investment thesis on Unit Corporation (US: UNTC) at Best Ideas 2022.

Thesis summary:

Unit Corporation is an integrated oil and natural gas company operating in three segments: Oil and Natural Gas, Contract Drilling, and Mid-Stream. The Oil and Natural Gas segment, operating as the Unit Petroleum Company, develops and produces oil and natural gas primarily in Oklahoma and Texas. The Contract Drilling segment, operating as Unit Drilling Company, owns and operates 21 drilling rigs. The Mid-Stream segment owns a 50% fully consolidated interest in Superior Pipeline Company, which owns and operates pipeline infrastructure assets used to gather, process, and treat natural gas.

Since declaring bankruptcy in May 2020, Unit shed over $650 million in debt, installed an experienced management team focused on free cash flow, cut costs and capital spending, and divested non-core assets. Through the first three quarters of 2021, Unit generated $124 million in operating cash flow and sold over $70 million in non-core assets. This strong performance has allowed Unit to strengthen the balance sheet. After starting 2021 with $87 million of net debt, the company ended Q3 2021 with a net cash balance of $46 million.

The strengthening energy market should continue to benefit all of the company’s segments, and Mike expects Unit to generate robust profitability and free cash flow for the foreseeable future.

With a recent market capitalization of $350 million (utilizing quarter-end shares) and an enterprise value of under $310 million, Unit trades at under 2.0x EV/EBITDA and has a free cash flow yield in excess of 40%. Additionally, Unit has a shareholder-friendly board of directors that has aggressively looked to repurchase stock, including a $25 million purchase after the end of Q3.

Unit is also exploring strategic alternatives for the Oil and Natural Gas segment, and Mike expects a potential sale of this segment alone could generate proceeds well in excess of the company’s recent market capitalization.

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About the instructor:

Michael Melby is the founder and portfolio manager of Gate City Capital Management, a micro-cap value focused investment firm. Before starting Gate City Capital, Michael worked as a research analyst at Crystal Rock Capital Management where he covered the consumer, restaurant, retail, and gaming sectors. Michael previously worked at Deutsche Bank Securities in their Debt Capital Markets group and at the University of Notre Dame Investment Office where he focused on natural resources, fixed income, and risk management. Michael earned an MBA from the University of Chicago Booth School of Business where he graduated with Honors and a BBA in Finance from the University of Notre Dame where he graduated Summa Cum Laude. Michael is a CFA Charterholder and has earned the Financial Risk Manager designation.

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