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F O R M 1 0 - K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to _________
[Commission File Number 1-9260]
U N I T C O R P O R A T I O N
(Exact Name of Registrant as Specified in its Charter)
Delaware 73-1283193
(State of Incorporation) (I.R.S. Employer Identification No.)
1000 Kensington Tower
7130 South Lewis
Tulsa, Oklahoma 74136
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (918) 493-7700
++++++++++++++++++++++++++++++++
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
Common Stock, par value New York Stock Exchange
$.20 per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Warrants to Purchase Shares of Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or in formation statements incorporated by reference in PART III of this
Form 10-K or any amendment to this Form 10-K.
Aggregate Market Value of the Voting Stock Held By
Non-affiliates on March 13, 1996 - $69,030,808
Number of Shares of Common Stock
Outstanding on March 13, 1996 - 21,009,635
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's Proxy Statement with respect to the Annual Meeting
of Stockholders to be held May 1, 1996 are incorporated by reference in Part
III.
Exhibit Index - See Page 72
FORM 10-K
UNIT CORPORATION
TABLE OF CONTENTS
PART I
Item 1. Business............................................. 1
Item 2. Properties........................................... 1
Item 3. Legal Proceedings.................................... 17
Item 4. Submission of Matters to a Vote of Security Holders.. 17
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters................................ 18
Item 6. Selected Financial Data.............................. 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 20
Item 8. Financial Statements and Supplementary Data.......... 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 61
PART III
Item 10. Directors and Executive Officers of the Registrant... 61
Item 11. Executive Compensation............................... 62
Item 12. Security Ownership of Certain Beneficial Owners
and Management..................................... 63
Item 13. Certain Relationships and Related Transactions....... 63
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................ 64
Signatures ..................................................... 71
UNIT CORPORATION
Annual Report
For The Year Ended December 31, 1995
PART I
Item 1. Business and Item 2. Properties
- -----------------------------------------
GENERAL
The Company, through its wholly owned subsidiaries, is engaged in the
land contract drilling of oil and natural gas wells and the development,
acquisition and production of oil and natural gas properties. The Company
operates primarily in the Anadarko and Arkoma Basins, which cover portions of
Oklahoma, Texas, Kansas and Arkansas and has additional producing properties
located in Canada and other states, including but not limited to, New Mexico,
Louisiana, North Dakota, Colorado, Wyoming, Montana, Alabama and Mississippi.
The Company was originally incorporated in Oklahoma in 1963 as Unit
Drilling Company. In 1979 it became a publicly held Delaware corporation and
changed its name to Unit Drilling and Exploration Company ("UDE") to more
accurately reflect the importance of its oil and natural gas business. In
September 1986, pursuant to a merger and exchange offer, the Company acquired
all of the assets and assumed all of the liabilities of UDE and six oil and gas
limited partnerships for which UDE was the general partner, in exchange for
shares of the Company's common stock (the "Exchange Offer").
The Company's principal executive offices are maintained at 1000
Kensington Tower, 7130 South Lewis, Tulsa, Oklahoma 74136; telephone number
(918) 493-7700. The Company also has a regional office in Houston, Texas. As
used herein, the term " Company" refers to Unit Corporation and at times Unit
Corporation and/or one or more of its subsidiaries with respect to periods from
and after the Exchange Offer and to UDE with respect to periods prior thereto.
OIL AND NATURAL GAS OPERATIONS
In 1979, the Company began to acquire oil and natural gas properties to
diversify its source of revenues which had previously been derived from contract
drilling. The development, production and sale of oil and natural gas together
with the acquisition of producing properties now constitutes the largest part of
the Company's operations as conducted through its wholly owned subsidiary, Unit
Petroleum Company.
As of December 31, 1995, the Company had 5,428 Mbbls and 108,728 MMcf of
estimated proved oil and natural gas reserves, respectively. The Company's
producing oil and natural gas interests, undeveloped leaseholds and related
assets are locate d primarily in Oklahoma, Texas, Louisiana and New Mexico and
to a lesser extent in Arkansas, North Dakota, Colorado, Wyoming, Montana,
Alabama, Mississippi and Canada. As of December 31, 1995, the Company had an
1
interest in a total of 2,570 wells in the United States and served as the
operator of 482 wells. The Company also had an interest in 65 wells located in
Canada. The majority of the Company's development and exploration prospects are
generated by its technical staff. When the Company is the operator of a
property, it generally employs its own drilling rigs and the Company's own
engineering staff supervises the drilling operation.
The Company intends to continue the growth in its oil and natural gas
operations utilizing funds generated from operations and its bank revolving line
of credit.
Well and Leasehold Data. The Company's oil and natural gas exploration
and development drilling activities and the number of wells in which the Company
had an interest, which were producing or capable of producing, were as follows
for the periods indicated:
Year Ended December 31,
Wells drilled: 1995 1994 1993
-------------- Gross Net Gross Net Gross Net
Exploratory: ------ ------ ------ ------ ------ ------
Oil.............. - - - - - -
Natural gas...... - - 1 .98 1 1.00
Dry.............. - - 2 .80 1 0.10
------ ------ ------ ------ ------ ------
Total - - 3 1.78 2 1.10
====== ====== ====== ====== ====== ======
Development:
Oil.............. 15 4.70 5 5.00 12 11.98
Natural gas...... 26 7.02 40 13.46 25 11.12
Dry.............. 6 2.27 12 7.26 8 4.29
------ ------ ------ ------ ------ ------
Total 47 13.99 57 25.72 45 27.39
====== ====== ====== ====== ====== ======
Oil and natural gas wells producing or capable of producing:
------------------------------------------------------------
Oil - USA........ 750 207.80 675 177.68 337 162.09
Oil - Canada..... - - - - - -
Gas -USA........ 1,820 232.03 1,089 179.99 709 141.76
Gas - Canada..... 65 1.63 61 1.53 61 1.53
------ ------ ------ ------ ------ ------
Total 2,635 441.46 1,825 359.20 1,107 305.38
====== ====== ====== ====== ====== ======
2
The following table summarizes the Company's acreage as of the end of each of
the years indicated:
Developed Acreage Undeveloped Acreage
Gross Net Gross Net
------- ------- ------- -------
1995
----
USA 548,674 117,403 24,810 12,866
Canada 31,360 784 - -
------- ------- ------- -------
Total 580,034 118,187 24,810 12,866
======= ======= ======= =======
1994
----
USA 340,241 100,732 21,514 11,540
Canada 31,360 784 - -
------- ------- ------- -------
Total 371,601 101,516 21,514 11,540
======= ======= ======= =======
1993
----
USA 246,115 86,013 28,738 18,021
Canada 31,360 784 - -
------- ------- ------- -------
Total 277,475 86,797 28,738 18,021
======= ======= ======= =======
3
Price and Production Data. The average sales price, oil and natural gas
production volumes and average production cost per equivalent Mcf (1 barrel
(Bbl) of oil = 6 thousand cubic feet (Mcf) of natural gas) of production,
experienced by the Company, for the periods indicated were as follows:
Year Ended December 31,
1995 1994 1993
Average sales price per barrel -------- -------- --------
of oil produced:
USA $ 16.65 $ 15.13 $ 16.73
Canada $ - $ - $ -
Average sales price per Mcf of
natural gas produced:
USA $ 1.61 $ 1.86 $ 2.07
Canada $ 0.98 $ 1.27 $ 0.96
Oil production (Mbbls):
USA 577 406 397
Canada - - -
-------- -------- --------
Total 577 406 397
======== ======== ========
Natural gas production (MMcf):
USA 12,005 9,606 7,435
Canada 54 53 70
-------- -------- --------
Total 12,059 9,659 7,505
======== ======== ========
Average production expense per
equivalent Mcf:
USA $ 0.64 $ 0.58 $ 0.66
Canada $ 0.30 $ 0.37 $ 0.21
Reserves. The following table sets forth the estimated proved developed
and undeveloped oil and natural gas reserves of the Company at the end of each
of the years indicated:
Year Ended December 31,
1995 1994 1993
------- ------- -------
Oil (Mbbls):
USA 5,428 4,308 3,304
Canada - - -
------- ------- -------
Total 5,428 4,308 3,304
======= ======= =======
Natural gas (MMcf):
USA 107,950 92,566 71,379
Canada 778 794 861
------- ------- -------
Total 108,728 93,360 72,240
======= ======= =======
Further information relating to oil and natural gas operations is
presented in Notes 1, 4, 10 and 12 of Notes to Consolidated Financial Statements
set forth in Item 8 hereof.
4
LAND CONTRACT DRILLING OPERATIONS
Unit Drilling Company, a wholly owned subsidiary of the Company, engages
in the land drilling of oil and natural gas wells for a wide range of customers.
A land drilling rig consists, in part, of engines, drawworks or hoists, derrick
or mast , pumps to circulate the drilling fluid, blowout preventers and drill
pipe. An active maintenance and replacement program during the life of a
drilling rig permits upgrading of components on an individual basis. Over the
life of a typical rig, due to the normal wear and tear of operating up to 24
hours a day, several of the major components, such as engines, mud pumps and
drill pipe, are replaced or rebuilt on a periodic basis as required, while other
components, such as the substructure, mast and drawworks, can be utilized for
extended periods of time with proper maintenance. The Company also owns
additional equipment used in the operation of its rigs, including large air
compressors, trucks and other support equipment.
As of December 31, 1995, the Company owns 22 operational drilling rigs
with rated depth capacities ranging from 8,000 to 25,000 feet. A majority of the
Company's rigs are located in the Anadarko and Arkoma Basins of Oklahoma and
Texas. In July 1994, the Company began moving rigs to the South Texas basin
region thereby expanding the Company's market area for its contract drilling
services and in December 1995, the contract drilling operations opened a
regional office in Houston, Texas. In the Anadarko and Arkoma Basins the
Company's primary focus is on the utilization of its medium depth rigs which
have a depth range of 8,000 to 14,000 feet. These medium depth rigs are suited
to the contract drilling currently undertaken by operators in these two basins.
At present, the Company does not have a shortage of rig equipment.
However, certain grades of drill pipe are reaching the end of their useful life
and the Company is increasing its drill pipe acquisitions to maintain current
utilization levels. At December 31, 1995, the Company had orders for 75,000
feet of drill pipe of various grades scheduled for delivery through the first
half of 1996. There is no assurance that sufficient supplies of such equipment
will be readily available in the future and, given the general decline
experienced in the land contract drilling industry over the past decade, the
Company's ability to utilize its full complement of drilling rigs, should
economic conditions improve rapidly, will be restricted due to a lack of
equipment, drill pipe and qualified labor not only within the Company but in the
industry as a whole.
5
The following table sets forth, for each of the periods indicated,
certain data concerning the Company's contract drilling operations:
Year Ended December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Number of operational rigs owned
at end of period 22 25 25 26 26
Average number of rigs utilized(1) 10.9 9.5 8.0 5.5 9.1
Number of wells drilled 111 95 84 56 92
Total footage drilled (feet in 1000's) 1,196 1,027 788 527 736
- -------------------
(1) Utilization rates are based on a 365-day year. A rig is considered
utilized when it is operating or being moved, assembled or
dismantled under contract.
As of March 13, 1996, 14 of the Company's 22 drilling rigs were
operating under contract.
The following table sets forth, as of March 13, 1996, the type and
approximate depth capability of each of the Company's drilling rigs:
Depth
Capability
Type (feet)
---- ----------
U-15 Unit Rig.................................. 11,000
U-15 Unit Rig.................................. 11,000
U-15 Unit Rig.................................. 11,000
U-15 Unit Rig.................................. 11,000
Gardner Denver 800............................. 15,000
Gardner Denver 700............................. 15,000
BDW 800-M1..................................... 15,000
Gardner Denver 700............................. 15,000
Mid-Continent 914-C............................ 20,000
U-15 Unit Rig.................................. 11,000
Brewster N-75.................................. 15,000
Gardner Denver 500............................. 12,000
Gardner Denver 700............................. 15,000
Gardner Denver 700............................. 15,000
Gardner Denver 700............................. 15,000
Brewster N-75.................................. 15,000
BDW 1350-M..................................... 20,000
SU-15 North Texas Machine...................... 12,000
SU-15 North Texas Machine...................... 12,000
National 110-E................................. 20,000
Continental Emsco C-1-E........................ 20,000
Gardner Denver 1500-E.......................... 25,000
6
For the past several years, the Company's contract drilling services
have encountered significant competition due to depressed levels of activity in
contract drilling. While the Company's drilling operations showed improvement
in 1995, this competition will, for the foreseeable future, continue to
adversely affect the Company.
Drilling Contracts. Most of the Company's drilling contracts are
obtained through competitive bidding. Generally, the contracts are for a single
well with the terms and rates varying depending upon the nature and duration of
the work, the equipment and services supplied and other matters. The contracts
obligate the Company to pay certain operating expenses, including wages of
drilling personnel, maintenance expenses and incidental rig supplies and
equipment. Usually, the contracts are subject to termination by the customer on
short notice upon payment of a fee. The Company generally indemnifies its
customers against certain types of claims by the Company's employees and claims
arising from surface pollution caused by spills of fuel, lubricants and other
solvents within the control of the Company. Such customers generally indemnify
the Company against claims arising from other surface and subsurface pollution
other than claims resulting from the Company's gross negligence.
The contracts may provide for compensation to the Company on a day rate,
footage or turnkey basis with additional compensation for special risks and
unusual conditions. Under daywork contracts, the Company provides the drilling
rig with the required personnel to the operator who supervises the drilling of
the contracted well. Compensation to the Company is based on a negotiated rate
per day as the rig is utilized. Footage contracts usually require the Company
to bear some of the drilling costs in addition to providing the rig. The
Company is compensated on a rate per foot drilled basis upon completion of the
well. Under turnkey contracts, the Company contracts to drill a well to a
specified depth and provides most of the equipment and services required. The
Company bears the risk of drilling the well to the contract depth and is
compensated when the contract provisions have been satisfied.
Turnkey drilling operations, in particular, might result in losses if
the Company underestimates the costs of drilling a well or if unforeseen events
occur. Because the proportion of turnkey drilling is currently dictated by
market condition s and the desires of customers using the Company's services,
the Company is unable to predict whether the portion of drilling conducted on a
turnkey basis will increase or decrease in the future. For 1995 turnkey revenue
represented approximately 17 percent of the Company's contract drilling
revenues. To date, the Company has not experienced significant losses in
performing turnkey contracts.
Customers. During the fiscal year ended December 31, 1995, 10 contract
drilling customers accounted for approximately 19 percent of the Company's total
revenues and approximately 1 percent of the Company's total revenues were
generated by drilling on oil and natural gas properties of which the Company was
the operator (including properties owned by limited partnerships for which the
Company acted as general partner). Such drilling was pursuant to contracts
containing terms and conditions comparable to those contained in the Company's
customary drilling contracts with non-affiliated operators.
7
Further information relating to contract drilling operations is
presented in Notes 1 and 10 of Notes to Consolidated Financial Statements set
forth in Item 8 hereof.
NATURAL GAS MARKETING
Prior to April 1995, the Company marketed natural gas from wells located
primarily in Oklahoma and Texas and to a lesser extent in Arkansas, Kansas,
Louisiana, Mississippi and New Mexico. Effective April 1, 1995 the Company
completed a business combination between the Company's natural gas marketing
operations and a third party also involved in natural gas marketing activities
forming a new company called GED Gas Services, L.L.C. ("GED"). The Company owns
a 34 percent interest in GED. Effective November 1, 1995, GED sold its natural
gas marketing operations to a third party. This sale removed the Company from
the third party natural gas marketing business. The creation of GED and the
subsequent sale of the marketing operations did not adversely affect the
Company's drilling and oil and natural gas exploration operations or the
profitability of the Company as a whole. The disposition of the Company's
natural gas marketing segment has been accounted for as a discontinued
operation and accordingly, the 1995 and prior year financial information has
been restated to reflect this treatment.
MARKETING OF OIL AND NATURAL GAS PRODUCTION
The Company's revenue and profitability are substantially dependent upon
prevailing prices for natural gas and crude oil. These prices vary based on
factors beyond the control of the Company, including the extent of domestic
production and importation of crude oil and natural gas, the proximity and
capacity of oil and natural gas pipelines, the marketing of competitive fuels,
general fluctuations in the supply and demand for oil and natural gas, the
effect of federal and state regulation of production, refining, transportation
and sales, the use and allocation of oil and natural gas and their substitute
fuels and general national and worldwide economic conditions. In addition,
natural gas spot prices received by the Company are influenced by weather
conditions impacting the continental United States.
The Company's oil and condensate production is sold at or near the
Company's wells under purchase contracts at prevailing prices in accordance with
arrangements which are customary in the oil industry. The Company's natural gas
production is sold at the wellhead to intrastate and interstate pipelines as
well as to independent marketing firms under contracts with original terms
ranging from one month to 20 years. Most of these contracts contain provisions
for readjustment of price, termination and other terms which are customary in
the industry.
The worldwide supply of oil has been largely dependent upon rates of
production of foreign reserves. Although the demand for oil has increased
slightly in the United States, imports of foreign oil continue to increase.
Future domestic oil prices will depend largely upon the actions of foreign
producers with respect to rates of production and it is virtually impossible to
predict what actions those producers will take in the future. Prices may also
be affected by political, social and other factors relating to the Middle East.
8
In view of the many uncertainties affecting the supply and demand for oil and
natural gas, the Company is unable to predict future oil and natural gas prices
or the overall effect, if any, that a decline in demand or oversupply of such
products would have on the Company.
COMPETITION
All lines of business in which the Company engages are highly
competitive. Competition in land contract drilling traditionally involves such
factors as price, efficiency, condition of equipment, availability of labor and
equipment, reputation and customer relations. Some of the Company's competitors
in the land contract drilling business are substantially larger than the Company
and have appreciably greater financial and other resources. As a result of the
decrease in demand for land contract drilling services over the past decade, a
surplus of certain types of drilling rigs currently exists while inventories of
certain components such as drill pipe have been depleted from continued use.
Accordingly, the competitive environment within which the Company's drilling
operations presently operates is uncertain and extremely price oriented.
The Company's oil and natural gas operations likewise encounter strong
competition from major oil companies, independent operators, and others. Many
of these competitors have appreciably greater financial, technical and other
resources and a re more experienced in the exploration for and production of oil
and natural gas than the Company.
OIL AND NATURAL GAS PROGRAMS
The Company currently serves as a general partner to 4 oil and gas
limited partnerships and 7 employee oil and gas limited partnerships. The
employee partnerships acquire an interest fixed annually ranging from 5% to 15%
of the Company's interest in most oil and natural gas drilling activities and
purchases of producing oil and natural gas properties participated in by the
Company. The limited partners in the employee partnerships are either employees
or directors of the Company or its subsidiaries.
Under the terms of the partnership agreements of each limited
partnership, the general partner, which in each case is Unit Petroleum Company,
has broad discretionary authority to manage the business and operations of the
partnership, including the authority to make decisions on such matters as the
partnership's participation in a drilling location or a property acquisition,
the partnership's expenditure of funds and the distribution of funds to
partners. Because the business activities of the limited partners on the one
hand, and the general partner on the other hand, are not the same, conflicts of
interest will exist and it is not possible to eliminate entirely such conflicts.
Additionally, conflicts of interest may arise where t he Company is the operator
of an oil and natural gas well and also provides contract drilling services.
Although the Company has no formal procedures for resolving such conflicts, the
Company believes it fulfills its responsibility to each contracting party and
complies fully with the terms of the agreements which regulate such conflicts.
9
Depending upon a number of factors, including the performance of the
drilling programs and general economic and capital market conditions, the
Company may form additional drilling and/or producing property acquisition
programs in the future.
EMPLOYEES
As of March 13, 1996, the Company had approximately 225 employees in its
land contract drilling operations, 64 employees in its oil and natural gas
operations and 23 in its general corporate area. None of the Company's
employees are represented by a union or labor organization nor have the
Company's operations ever been interrupted by a strike or work stoppage. The
Company considers relations with its employees to be satisfactory.
OPERATING AND OTHER RISKS
The Company's land contract drilling and oil and natural gas operations
are subject to a variety of oil field hazards such as fire, explosion, blowouts,
cratering and oil spills or certain other types of possible surface and
subsurface pollution, any of which can cause personal injury and loss of life
and severely damage or destroy equipment, suspend drilling operations and cause
substantial damage to surrounding areas or property of others. As protection
against some, but not all, of these operating hazards, the Company maintains
broad insurance coverage, including all-risk physical damage, employer's
liability and comprehensive general liability. In all states in which the
Company operates except Oklahoma, the Company maintains worker's compensation
insurance for losses exceeding $50,000. In Oklahoma, starting in August 1991,
the Company elected to become self insured. In consideration therewith, the
Company purchased an excess liability reinsurance policy. The Company believes
that to the extent reasonably practicable such insurance coverages are adequate.
The Company's insurance policies do not, however, provide protection against
revenue losses incurred by reason of business interruptions caused by the
destruction or damage of major items of equipment nor certain types of hazards
such as specific types of environmental pollution claims. In view of the
difficulties which may be encountered in renewing such insurance at reasonable
rates, no assurance can be given that the Company will be able to maintain the
amount of insurance coverage which it considers adequate at reasonable rates.
Moreover, loss of or serious damage to any of the Company's equipment, although
adequately covered by insurance, could have an adverse effect upon the Company's
earning capacity.
The Company's oil and natural gas operations are also subject to all of
the risks and hazards typically associated with the search for and production of
oil and natural gas. These include the necessity of expending large sums of
money for the location and acquisition of properties and for drilling
exploratory wells. In such exploratory work, many failures and losses may occur
before any accumulation of oil or natural gas is found. If oil or natural gas
is encountered, there is no assurance that it will be capable of being produced
or will be in quantities sufficient to warrant development or that it can be
satisfactorily marketed. The Company's future natural gas and crude oil
revenues and production, and therefore cash flow and income, are highly
10
dependent upon the Company's level of success in acquiring or finding additional
reserves. Without continuing reserve additions through exploration or
acquisitions, the Company's reserves and production will decline over the long
- -term.
GOVERNMENTAL REGULATIONS
The production and sale of oil and natural gas is highly affected by
various state and federal regulations. All states in which the Company conducts
activities impose restrictions on the drilling, production and sale of oil and
natural gas, which often include requirements relating to well spacing, waste
prevention, production limitations, pollution prevention and clean-up, obtaining
drilling permits and similar matters. The following discussion summarizes, in
part, the regulations of the United States oil and natural gas industry and is
not intended to constitute a complete discussion of the many statutes, rules,
regulations and governmental orders to which the Company's operations may be
subject.
The Company's activities are subject to existing federal and state laws
and regulations governing environmental quality and pollution control. Various
states and governmental agencies are considering, and some have adopted, laws
and regulations regarding environmental control which could adversely affect the
business of the Company. Such laws and regulations may substantially increase
the costs of doing business and may prevent or delay the commencement or
continuation of given operations. Compliance with such legislation and
regulations, together with any penalties resulting from noncompliance therewith,
will increase the cost of oil and natural gas drilling, development, production
and processing. In the opinion of the Company 's management, its operations to
date comply in all material respects with applicable environmental legislation
and regulations; however, in view of the many uncertainties with respect to the
current controls, including their duration, interpretation and possible
modification, the Company can not predict the overall effect of such controls on
its operations.
On July 26, 1989, the Natural Gas Wellhead Decontrol Act of 1989 (the
"Wellhead Decontrol Act") became effective. Under the Wellhead Decontrol Act,
all remaining price and non-price controls of first sales under the NGA and NGPA
were removed effective January 1, 1993. Prices for deregulated categories of
natural gas fluctuate in response to market pressures which currently favor
purchasers and disfavor producers. As a result of the deregulation of a greater
proportion of the domestic United States natural gas market and an increase in
the availability of natural gas transportation, a competitive trading market for
natural gas has developed.
During the past several years, the Federal Energy Regulatory Commission
("FERC") has adopted several regulations designed to accomplish a more
competitive, less regulated market for natural gas. These regulations have
materially affected the market for natural gas. The major elements of several
of these initiatives remain subject to appellate review.
11
One of the initiatives FERC adopted was order 636. In brief, the
primary requirements of Order 636 are as follows: pipelines must separate their
sales and transportation services; pipelines must provide open access
transportation services t hat are equal in quality for all natural gas suppliers
and must provide access to storage on an open access contract basis; pipelines
that provide firm sales service on May 18, 1992 must offer a "no-notice" firm
transportation service under which fir m shippers may receive delivery of
natural gas on demand up to their firm entitlement without incurring daily
balancing and scheduling penalties; pipelines must provide all shippers with
equal and timely access to information relevant to the availability of their
open access transportation services; open access pipelines must allow firm
transportation customers to downstream pipelines to acquire capacity on upstream
pipelines held by downstream pipelines; pipelines must implement a capacity
releasing program so that firm shippers can release unwanted capacity to those
desiring capacity (which program replaces previous "capacity brokering" and
"buy-sell" programs); existing bundled firm sales entitlement are converted to
unbundled firm sales entitlement and to unbundled firm transportation rights on
the effective date of a particular pipeline's blanket sales certificate; and
pipeline transportation rights must be developed under the Straight Fixed
Variable (SFV) method of cost classification, allocation and rate design unless
the FERC permits the pipeline to use some other method. The FERC will not
permit a pipeline to change the new resulting rates until the FERC accepts the
pipeline's formal restructuring plans.
In essence, the goal of Order 636 is to make a pipeline's position as
natural gas merchant indistinguishable from that of a non-pipeline supplier.
It, therefore, pushes the point or sale of natural gas by pipelines upstream,
perhaps all the way to the wellhead. Order 636 also requires pipelines to give
firm transportation customers flexibility with respect to receipt and delivery
points (except that a firm shipper's choice of delivery point cannot be
downstream of the existing primary delivery point) and to allow "no-notice"
service (which means that natural gas is available not only simultaneously but
also without prior nomination, with the only limitation being the customer's
daily contract demand) if the pipeline offered no-not ice city-gate sales
service on May 18, 1992. Thus, this separation of pipelines' sales and
transportation allows non-pipeline sellers to acquire firm downstream
transportation rights and thus to offer buyers what is effectively a bundled
city-gate s ales service and it permits each customer to assemble a package of
services that serves its individual requirements. But it also makes more
difficult the coordination of natural gas supply and transportation. A
corollary to these changes is that all pipelines will be permitted to sell
natural gas at market-based rates.
The results of these changes may be the increased availability of firm
transportation and the reduction of interruptible transportation, with a
corresponding reduction in the rates for off-peak and interruptible
transportation. However, due to the still evolutionary nature of Order 636 and
its implementation, it is not possible to project the overall potential impact
on transportation rates for natural gas or market prices of natural gas.
12
The future interpretation and application by FERC of these rules and its
broad authority, or of the state and local regulations by the relevant agencies,
could affect the terms and availability of transportation services for
transportation of natural gas to customers and the prices at which natural gas
can be sold by the Company.
Additional proceedings that might affect the natural gas industry are
pending before the FERC and the courts. The natural gas industry historically
has been very heavily regulated; therefore, there is no assurance that the less
stringent regulatory approach recently pursued by the FERC and Congress will
continue. Sales of petroleum liquids by the Company are not currently regulated
and are made at market prices; however, the FERC is considering a proposal that
could increase transportation rates for petroleum liquids. A number of
legislative proposals have also been introduced in Congress and the state
legislatures of various states, that, if enacted, would significantly affect the
petroleum industry. Such proposals involve, among other things, the imposition
of land and use controls and certain measures designed to prevent petroleum
companies from acquiring assets in other energy areas. In addition, there is
always the possibility that if market conditions change dramatic ally in favor
of oil and natural gas producers that some new form of "windfall profits" or
severance tax may be proposed and imposed upon oil or natural gas. At the
present time it is impossible to predict which proposals, if any, will actually
be enacted by Congress or the various state legislatures. The Company believes
that it is complying with all orders and regulations applicable to its
operations. However, in view of the many uncertainties with respect to the
current controls, including their duration and possible modification together
with any new proposals that may be enacted, the Company cannot predict the
overall effect, if any, of such controls on Company operations.
Certain states in which the Company operates control production from
wells through regulations establishing the spacing of wells, limiting the number
of days in a given month during which a well can produce and otherwise limiting
the rate of allowable production.
As noted above, the Company's operations are subject to numerous federal
and state laws and regulations regarding the control of contamination of the
environment. These laws and regulations may require the acquisition of a permit
before or after drilling commences, prohibit drilling activities on certain
lands lying within wilderness areas or where pollution arises and impose
substantial liabilities for pollution resulting from drilling operations,
particularly operations in offshore waters or on submerged lands.
A past, present, or future release or threatened release of a hazardous
substance into the air, water, or ground by the Company or as a result of
disposal practices may subject the Company to liability under the Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA"),
the Resource Conservation Recovery Act ("RCRA"), the Clean Water Act, and/or
similar state laws, and any regulations promulgated pursuant thereto. Under
CERCLA and similar laws, the Comp any may be fully liable for the cleanup costs
of a release of hazardous substances even though it contributed to only part of
the release. While liability under CERCLA and similar laws may be limited under
13
certain circumstances, the limits are so high that the maximum liability would
likely have a significant adverse effect on the Company. In certain
circumstances, the Company may have liability for releases of hazardous
substances by previous owners of Company properties. CERCLA currently excludes
petroleum from its definition of "hazardous substances." However, Congress may
delete this exclusion for petroleum, in which case the Company would be required
to manage its petroleum production and wastes from its exploration and
production activities as CERCLA hazardous substances. In addition, RCRA
classifies certain oil field wastes as "non-hazardous." Congress may delete
this exemption for oilfield waste, in which case the Company would have to
manage much of its oilfield waste as hazardous. Additionally, the discharge or
substantial threat of a discharge of oil by the Company into United States
waters or onto an adjoining shoreline may subject the Company to liability under
the Oil Pollution Act of 1990 and similar state laws. While liability under the
Oil Pollution Act of 1990 is limited under certain circumstances, the maximum
liability under those limits would still likely have a significant adverse
effect on the Company.
Violation of environmental legislation and regulations may result in the
imposition of fines or civil or criminal penalties and, in certain
circumstances, the entry of an order for the abatement of the conditions, or
suspension of the activities, giving rise to the violation. The Company
believes that the Company has complied with all orders and regulations
applicable to its operations. However, in view of many uncertainties with
respect to the current controls, including their duration and possible
modification, the Company cannot predict the overall effect of such controls on
such operations. Similarly, the Company cannot predict what future
environmental laws may be enacted or regulations may be promulgated and what, if
any, impact they would have on operations.
FACTORS INFLUENCING PROJECTIONS OF FUTURE ACTIVITY
In the normal course of its business, the Company, in an effort to help
keep its shareholders and the public informed about the Company's operations,
may, from time to time, issue certain statements, either in writing or orally,
that contain or may contain forward looking information. Generally, these
statements relate to projections involving the anticipated revenues to be
received from the Company's oil and natural gas production, the utilization rate
of its drilling rigs, growth of its oil and natural gas reserves and well
performance, and the Company's anticipated bank debt.
As with any forward- looking statement, these statements are subject to
a number of factors that may tend to influence the accuracy of the statements
and the projections upon which the statements are based. As noted elsewhere in
this report, all phases of the Company's operations are subject to a number of
influences outside the control of the Company, any one of which, or a
combination of which, could materially affect the results of the Company's
operations.
In order to provide a more thorough understanding of the possible
effects of some of these influences on any projections made by the Company, the
14
following discussion outlines certain factors that in the future could affect
the Company's consolidated results for 1996 and beyond to differ materially from
those that may be set forth in any such forward-looking statement made by or on
behalf of the Company.
COMMODITY PRICES
The prices received by the Company for its oil and natural gas
production have a direct impact on the Company's revenues, profitability and
cash flow as well as its ability to meet its projected financial and operational
goals. The prices for natural gas and crude oil are heavily dependent on a
number of factors beyond the control of the Company, including, but not limited
to, the demand for oil and/or natural gas; current weather conditions in the
continental United States which can greatly influence the demand for natural gas
at any given time as well as the price to be received for such gas; and the
ability of current distribution systems in the United States to effectively meet
the demand for oil and or natural gas at any given time, particularly in times
of peak demand which may result due to adverse weather conditions. Oil prices
are extremely sensitive to foreign influences that may be based on political,
social or economic underpinnings, any one of which could have an immediate and
significant effect on the price and supply of oil. In addition, prices of both
natural gas and oil are becoming more and more influenced by trading on the
commodities markets which, at times, has tended to increase the volatility
associated with these prices. All these factors, especially when coupled with
the fact that much of the Company's product prices are determined on a month to
month basis, can, and at times do, lead to wide fluctuations in the prices
received by the Company.
Based upon the results of operations for the year ended December
31, 1995, the Company estimates that a change of $0.10/Mcf in the average price
of natural gas and a change of $1.00/Bbl in the price of crude oil throughout
such period would have resulted in approximate changes in net income of
$1,100,000 and $535,000, respectively. During 1995, 95% of the natural gas
volume of the Company and substantially all the crude oil volume of the Company
were sold at market responsive prices.
CUSTOMER DEMAND
Demand for the Company's drilling services is dependent almost entirely
on the needs of third parties. Based on past history, such parties'
requirements are subject to a number of factors, independent of any subjective
factors, that directly impact the demand for the Company's drilling rigs. These
include the funds available by such companies to carry out their drilling
operations during any given time period which, in turn, are often subject to
downward revision based on decreases in t he then current prices of oil and
natural gas. Many of the Company's customers are small to mid-size oil and
natural gas companies whose drilling budgets tend to be more susceptible to the
influences of current price fluctuations. Other factors that can affect the
Company's ability to work its drilling rigs are the weather, which can, under
adverse circumstances, delay or even cause a project to be abandoned by an
operator, the competition faced by the Company in securing the award of a
15
drilling contract in a given area, the experience and recognition of the Company
in a new market area, and the availability of labor to run the Company's
drilling rigs.
UNCERTAINTY OF OIL AND NATURAL GAS RESERVES AND WELL PERFORMANCE
There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond the control of the Company.
Estimating quantities of proved reserves is imprecise. Such estimates are based
upon certain assumptions pertaining to future production levels, future natural
gas and crude oil prices, timing and amount of development expenditures and
future operating costs made using currently available geologic, engineering and
economic data, some or all of which may prove to be incorrect over time. As a
result of changes in these assumptions that will occur in the future, and based
upon further production history, results of future exploration and development
activities, future natural gas and crude oil prices and other factors, the
reported quantity of reserves may be subject to upward or downward revision.
In addition to the foregoing, projections regarding the potential
production and reserve capabilities of newly drilled and/ or completed wells are
subject to additional uncertainties that may significantly influence such
projections. Such wells have a very limited production history, if any, on which
to base future forecasts of their capabilities. Since an established rate of
production is a primary factor used by reservoir engineers to forecast oil and
natural gas reserves as well as a well's production rate, the lack of this
information decreases the Company's ability to accurately project such
information. In addition, there are inherent risks in both the drilling and
completion phases of a new well which could cause a well bore to be prematurely
abandoned due either to the loss of the well bore in the physical sense or due
to the costs associated with operational problems which could render further
operations uneconomical.
BANK BORROWING
The amount of the Company's bank debt as well as its projected borrowing
is, to a large extent, a function of the costs associated with the projects
undertaken by the Company at any given time and the cash flow received by the
Company for its oil and natural gas production. Generally, the costs incurred by
the Company in its normal operations are those associated with the drilling of
oil and natural gas wells, the acquisition of producing properties, and the
costs associated with the maintenance of its drilling rig fleet. To some extent,
these costs, particularly the first two items, are discretionary and the
Company maintains a degree of control regarding the timing and/ or the need to
incur the same. However, in some cases, unforeseen circumstances may arise, such
as in the case of an unanticipated opportunity to acquire a large producing
property package or the need to replace a costly rig component due to an
unexpected loss, which could force the Company to incur increased bank debt
above that which it had expected or forecast. Likewise, for many of the reasons
mentioned above, the Company's cash flow may not be sufficient to cover its
current cash requirements which would then require the Company to increase its
bank borrowing.
16
Item 3. Legal Proceeding
- -------------------------
The Company is a party to various legal proceedings arising in the
ordinary course of its business none of which, in the Company's opinion, should
result in judgments which would have a material adverse effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to the security holders during the fourth
quarter of the Company's calendar year ended December 31, 1995.
17
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- --------------------------------------------------------------------------
Matters
- -------
As of February 21, 1996, the Company had 3,225 holders of record of its
common stock. The Company has not paid any cash dividends on shares of its
common stock since its organization and currently intends to continue its policy
of retaining earnings, if any, from the Company's operations. The Company is
prohibited, by certain loan agreement provisions, from declaring and paying
dividends (other than stock dividends) during any fiscal year in excess of 25
percent of its consolidated net income of the preceding fiscal year. The table
below reflects the high and low sales prices per share of the Company's common
stock as reported by the New York Stock Exchange, Inc. for the period indicated:
1995 1994
QUARTER High Low High Low
------- ------ ------ ------ ------
First $3 1/4 $2 1/2 $3 1/2 $2 5/8
Second $3 7/8 $2 7/8 $3 1/4 $2 3/4
Third $4 1/4 $3 1/4 $3 1/2 $2 5/8
Fourth $4 3/4 $3 1/2 $3 7/8 $2 5/8
18
Item 6. Selected Financial Data
- --------------------------------
Year Ended December 31,
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(In thousands except per share amounts)
Revenues $53,074 $43,895 $38,682 $33,744 $40,232
======= ======= ======= ======= =======
Income From Continuing
Operations $ 3,751 $ 4,628 $ 3,937 $ 1,631 $ 4,164
======= ======= ======= ======= =======
Net Income $ 3,999 (1) $ 4,794 (2) $ 3,871 $ 1,087 (3) $ 4,341
======= ======= ======= ======= =======
Net Income Per Common
Share:
Continued $.18 $.22 $.19 $.08 $.20
==== ==== ==== ==== ====
Net Income $.19 (1) $.23 (2) $.19 $.05 (3) $.21
==== ==== ==== ==== ====
Total Assets $110,922 $103,933 $ 88,816 $ 83,960 $ 84,972
======== ======== ======== ======== ========
Long-Term Debt $ 41,100 $ 37,824 $ 25,919 $ 22,298 $ 23,153
======== ======== ======== ======== ========
Long-Term Portion
of Natural Gas
Purchaser Prepayments $ 2,109 $ 2,149 $ 4,417 $ 5,924 $ 7,626
======== ======== ======== ======== ========
Cash Dividends
Per Common Share $ - $ - $ - $ - $ -
======== ======== ======== ======== ========
___________
(1) Includes a $635,000 gain on compressor sale, a $850,000 gain from
settlement of litigation and a net $530,000 deferred tax benefit.
(2) Includes a $742,000 gain on sale of a natural gas gathering system.
(3) Includes a $1.5 million provision for litigation.
19
See Management's Discussion of Financial Condition and Results of
Operations for a review of 1995, 1994 and 1993 activity.
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
- ---------------------
Financial Condition and Liquidity
- ---------------------------------
The Company currently has a loan agreement ("Loan Agreement"), which
provides for a total commitment of $75 million, consisting of a revolving credit
facility through August 31, 1997 and a term loan thereafter, maturing on August
31, 2001. Borrowings under the revolving credit facility are limited to a
borrowing base which is subject to a semi-annual redetermination. The latest
borrowing base determination indicated $50 million of the commitment is
available to the Company. The Loan Agreement contains certain covenants which
require the Company to maintain consolidated net worth of at least $48 million,
a modified current ratio of not less than 1 to 1, a ratio of long-term debt, as
defined in the Loan Agreement, to consolidated tangible net worth not greater
than 1 to 1 and a ratio of total liabilities, as defined in the Loan Agreement,
to consolidated tangible net worth not greater than 1.25 to 1. In addition,
working capital provided by operations, as defined in the Loan Agreement, cannot
be less than $12 million in any year. At December 31, 1995, borrowings under
the Loan Agreement totaled $41.1 million. At February 21, 1996, borrowings under
the Loan Agreement totaled $40.9 million with $7.9 million available for future
borrowings. The average interest rate on the bank debt was 8.2 and 7.6 percent
at December 31, 1995 and February 21, 1996, respectively. At the Company's
election, any portion of the debt outstanding may be fixed at the London
Interbank Offered Rate ("Libor Rate") for 30, 60, 90 or 180 days with the
remainder of the outstanding debt subject to the Chase Manhattan Bank, N. A.
prime rate ("Prime Rate"). During any Libor Rate funding period the Company may
not pay in part or in whole the outstanding principal balance of the note to
which such Libor Rate option applies. At both December 31, 1995 and February
21, 1996, $38.0 million of borrowings were subject to the Libor Rate. A
commitment fee of 1/2 of 1 percent is charged for any unused portion of the
borrowing base.
Shareholders' equity at December 31, 1995 was $56.6 million, making
the Company's ratio of long-term debt-to-equity .73 to 1. The Company's primary
source of liquidity and capital resources in the near- and long-term will
consist of cash flow from operating activities and available
borrowings under the Company's Loan Agreement. Net cash provided by continuing
operating activities in 1995 was $11.2 million as compared to $12.6 million in
1994.
The Company's capital expenditures during 1995 were $22.0 million. The
majority of the capital expenditures, $19.3 million, were made in the
Company's oil and natural gas operations with $8.8 million and $9.2
20
million used for exploration and development drilling and producing
property acquisitions, respectively. Capital expenditures made by the
Company's contract drilling operations were approximately $1.6 million in
1995 and principally consisted of drill pipe and drill collar expenditures
along with improvements to large rig components which benefit
current and future years. The Company's rigs are composed of large components
some of which, on a rotational basis, are required to be overhauled to assure
proper performance. Such capital expenditures will continue in future years.
Additional expenditures of approximately $2 million will be required in 1996 for
drill pipe as certain grades of the Company's drill pipe are reaching the end of
their useful life.
During 1996, the Company's oil and natural gas segment plans to focus on its
developmental drilling program as early 1996 natural gas prices have improved
lessening the availability of economical producing property acquisitions. The
Company's capital expenditures are discretionary and directed toward increasing
reserves and future growth. Current operations should not be adversely affected
by any inability to obtain funds outside of the Company's Loan Agreement. The
decision to acquire or drill on oil and natural gas properties at any given time
depends on market conditions, potential return on investment, future drilling
potential and the availability of opportunities to obtain financing given the
circumstances involved, thus providing the Company with a large degree of
flexibility in incurring such costs. Depending, in part, on commodity pricing,
the Company plans to spend approximately $20 million on its capital expenditure
program in 1996.
The Company has 2.873 million warrants outstanding. The warrants
entitle the holders to purchase one share of common stock at a price of
$4.375 per share. The warrants, subject to certain restrictions, are
callable by the Company, in whole or in part, at $.50 per warrant. A
Second Amendment to the Warrant Agreement between the Company and the
Warrant Agent, dated May 9, 1994, extended the term of the warrants to
August 30, 1996.
The Company continued to receive monthly payments on behalf of itself
and other parties (collectively the "Committed Interest") from a natural
gas purchaser pursuant to a settlement agreement (the "Settlement
Agreement"). As a result of the Settlement Agreement, the December 31,
1995 prepayment balance of $2.1 million paid by the purchaser for natural
gas not taken (the "Prepayment Balance") is subject to recoupment in
volumes of natural gas through a period ending on the earlier of recoupment
or December 31, 1997 (the "Recoupment Period"). Additionally, the purchaser
is obligated to make monthly payments on behalf of the Committed Interest
based on their share of the natural gas deliverability of the wells subject
to the Settlement Agreement, up to a maximum of $180,000 or a minimum of
$90,000 per month for the year 1996. Both the maximum and minimum monthly
payments decline annually through the Recoupment Period. If natural gas is
taken during a month, the value of such natural gas is credited toward the
monthly amount the purchaser is required to pay. In the event the
purchaser takes volumes of natural gas valued in excess of its monthly
payment obligations, the value taken in excess is applied to reduce any
21
then outstanding Prepayment Balance. The Company currently believes that
sufficient natural gas deliverability is available to enable the Committed
Interest to receive substantially all of the maximum monthly payments
during 1996. At the end of the Recoupment Period, the Settlement Agreement
and the natural gas purchase contracts which are subject to the Settlement
Agreement will terminate. If the Prepayment Balance is not fully recouped
in natural gas by December 31, 1997, then the unrecouped portion is subject
to cash repayment, limited to a maximum of $3 million, payable in equal
annual payments over a five year period with the first payment due June 1, 1998.
The Company anticipates the maximum balance of $3 million will be unrecouped at
December 31, 1997. Under the Settlement Agreement, the purchaser is entitled to
make a monthly determination of the volumes to be purchased from the wells
subject to the Settlement Agreement. During 1994 and the first nine months of
1995 natural gas delivered was approximately 75 percent of the deliverability of
the wells subject to the Settlement Agreement. Pursuant to the terms of the
Settlement Agreement, the purchaser notified the Company that effective October
1, 1995, the purchaser plans to make seasonal takes of natural gas by requesting
the maximum deliverability subject to the Settlement Agreement in certain months
and no deliverability in other months. For the majority of the fourth quarter
of 1995 and continuing into the first quarter of 1996 the purchaser has
requested the maximum deliverability subject to the Settlement Agreement.
Because these month-to-month determinations, up to certain maximum levels, are
made by the purchaser, the Company is unable to predict with certainty future
natural gas sales from these wells. In addition, future revenues to be received
by the Company would be impacted by the failure of the purchaser to meet its
obligations, financially or otherwise, under the terms of the Settlement
Agreement or by the ability of the wells to maintain certain projected
deliverability requirements. In the event the wells are unable to maintain such
deliverability, the monthly payments to be received by the Company under the
Settlement Agreement would be decreased. The price per Mcf under the Settlement
Agreement is substantially higher than current spot market prices. The impact
of the higher price received under the Settlement Agreement increased pre-tax
income approximately $1.6, $1.8 and $1.9 million in 1995, 1994 and 1993,
respectively.
Oil prices received by the Company in 1995 ranged from an average of
$15.33 in July to $18.14 in December. The Company's average price for oil
received in 1995 was $16.65. Natural gas prices received by the Company in 1995
ranged from an average of $1.35 in March to $2.01 in December. Average natural
gas prices received by the Company remained volatile throughout 1995 and
averaged $1.61 f or the year as a whole. Oil prices within the industry
remain largely dependent upon world market developments for crude oil. Prices
for natural gas are influenced by weather conditions and supply imbalances,
particularly in the domestic market, an d by world wide oil price levels. Any
large drop in spot market natural gas prices will have a significant adverse
effect on the value of the Company's reserves and could cause the Company to
reduce the carrying value of its oil and natural gas properties. Likewise,
declines in natural gas or oil prices could adversely effect the semi-annual
borrowing base determination under the Company's Loan Agreement since this
determination is calculated on the value of the Company's oil and natural gas
reserves.
22
The Company's ability to utilize its full complement of drilling rigs,
should economic conditions improve in the future, will be limited due to
the lack of qualified labor and certain supporting equipment not only
within the Company but in the industry as a whole. The Company's ability
to utilize its drilling rigs at any given time is dependent on a number of
factors, including but not limited to, the price of both oil and natural
gas, the availability of labor and the Company's ability to supply the type
of equipment required. The Company's management expects that these factors
will continue to influence the Company's rig utilization during 1996.
In the third quarter of 1994, the Company's Board of Directors
authorized the Company to purchase up to 1,000,000 shares of the Company's
outstanding common stock on the open market. Since that time, 115,100 shares
have been repurchased at prices ranging from $2 1/2 to $3 3/8 per share. During
the first quarter of 1995, 46,659 of the purchased shares were reissued as the
Company's matching contribution to its 401(k) Employee Thrift Plan. At December
31, 1995, 68,441 treasury shares were held by the Company.
The Company's wholly owned natural gas marketing subsidiary, Mountain
Front Pipeline Company, achieved substantial growth in revenues during
previous years, but did not achieve the size necessary to reach desired levels
of profitability. Consequently, on April 1, 1995 the Company completed a
business combination between the Company's natural gas marketing operations and
a third party also involved in natural gas marketing activities forming a new
company called GED Gas Services, L.L.C. ("GED"). The Company owns a 34 percent
interest in GED. Effective November 1, 1995 GED sold its natural gas marketing
operations to a third party. T his sale removed the Company from the third party
natural gas marketing business. The creation of GED and its subsequent sale of
its marketing operations did not adversely affect the Company's drilling and oil
and natural gas exploration operations or the profitability of the Company as a
whole. The discontinuation of the Company's natural gas marketing segment has
been accounted for as a discontinued operation and accordingly, the 1995 and
prior year financial information has been restated to reflect this treatment.
Effects of Inflation
- ---------------------
The effects of inflation on the Company's current operations have been
minimal due to low inflation rates. However, the impact of inflation on
the Company in the future will depend on the relative increase, if any, the
Company may realize in its rig rates and the selling price of its oil and
natural gas. If industry activity increases substantially, shortages in
support equipment such as drill pipe, third party services and qualified
labor would occur resulting in corresponding increases in material and
labor costs. These market conditions may limit the Company's ability to
realize improvements in operating profits.
23
Results of Operations
1995 versus 1994
- ----------------
Net income for 1995 was $3,999,000, compared with $4,794,000 in 1994.
While the Company continued to increase natural gas production through producing
property acquisitions and developmental drilling, lower 1995 natural gas prices
limited corresponding increases in net income. Net income in the fourth quarter
of 1995 w as also further reduced by a $254,000 write down of certain rig
components as the Company elected to take 3 of its drilling rigs out of service
since current economic conditions do not warrant the capital investment
necessary to keep them in service. The impact of lower natural gas prices on
net income was partially offset by a $635,000 gain from the sale of 44 natural
gas compressors and certain related support equipment which were sold for $2.7
million in the first quarter and by the receipt of $850,000 in the third quarter
from a settlement reached by two of the Company's subsidiaries in certain
litigation brought against the Federal Deposit Insurance Corporation and other
parties. In the fourth quarter, the Company also recognized a $360,000 net gain
from the Company's interest in the sale of GED's gas marketing operations and a
$530,000 net income tax benefit. The disposition of the Company's involvement
in third party natural gas marketing does not adversely affect the operation of
the Company's drilling and oil and natural gas exploration operations or the
profitability of the Company as a whole. Total revenues from continuing
operations increased to $53,074,000 in 1995 as compared to $43,895,000 in 1994.
The Company's 1994 net income included a net gain of $742,000 recognized in
conjunction with the sale of one of the Company's natural gas gathering systems.
Oil and natural gas revenues increased 20 percent due to a 25 percent
increase in natural gas production and a 42 percent increase in oil
production between 1995 and 1994. Average oil prices received by the Company
increased 10 percent while average natural gas prices received by the Company
decreased 13 percent. The average natural gas price declined due to a 11
percent reduction in average spot market prices received by the Company coupled
with a 18 percent reduction in volumes produced from certain wells included
under the Settlement Agreement which contains provisions for prices which are
higher than current spot market prices. The impact of higher prices received
under the Settlement Agreement increased pre-tax income by approximately $1.6
and $1.8 million in 1995 and 1994, respectively.
In 1995, revenues from contract drilling operations increased by 19
percent as average rig utilization increased from 9.5 rigs operating in 1994 to
10.9 rigs operating in 1995. Daywork revenues represented 57 percent of total
drilling revenues in 1995 and 58 percent in 1994. Turnkey and footage contracts
typically provide for higher revenues since a greater portion of the expense of
drilling the well is born by the drilling contractor.
In 1994, the Company moved two of its rigs under multi-well contracts to the
South Texas Basin creating a new operating region for the Company's drilling
24
services and helping to further improve its rig utilization. In the fourth
quarter of 1995, the contract drilling operations opened an office in Houston,
Texas with plans to further develop this new market area. At December 31, 19
95, four of the Company's 22 rigs were located in the South Texas Basin.
Operating margins (revenues less operating costs) for the Company's oil and
natural gas operations were 62 percent in 1995 compared to 66 percent in 1994.
The reduction was primarily due to the decrease in prices received for the
Company's natural gas production which offset increases in production between
the two years. Margins were also reduced by the shutting in of production on
certain natural gas properties in the months of February and March due to low
spot market natural gas prices. Total operating costs increased 36 percent due
to the additional costs associated with oil and natural gas production from new
wells acquired and drilled in 1995 and 1994.
Operating margins for contract drilling decreased from 12 percent in
1994 to 11 percent in 1995. Margins in 1995 were limited by initial start up
costs incurred in the first quarter of 1995 to establish rigs in the South Texas
Basin and by unusually wet weather conditions during the second quarter of 1995
which delay ed rig moves and depressed rig utilization. Total operating costs
for contract drilling were up 21 percent in 1995 versus 1994 due to increased
rig utilization and start up costs.
Contract drilling depreciation increased 28 percent in response to
increased rig utilization. Depreciation, depletion and amortization
("DD&A") of oil and natural gas properties increased 23 percent as the
Company increased its equivalent barrels of production by 28 percent. The
Company's average DD&A rate per equivalent barrel declined from $4.08 in
1994 to $3.93 in 1995.
General and administrative expense increased 9 percent as certain
employee costs, contract services and rental costs increased between the
comparative years due to the continued growth of the Company's operations. This
increase is expected to continue in 1996 as the Company expands its operations.
Interest expense increased 96 percent as the average interest rate on the
Company's outstanding bank debt increased from 7.15 percent in 1994 to 8.52
percent in 1995. Average bank debt outstanding in 1995 was $20.3 million higher
than average bank debt outstanding in 1994 primarily due to the financing of
producing property acquisition and developmental drilling as previously
discussed.
The Company's effective income tax rate in recent years has been
significantly impacted by its net operating loss carryforwards. As of December
31, 1995, the Company's net operating loss and statutory depletion carryforwards
have been fully recognized for financial reporting purposes, resulting in a net
deferred tax asset of $530,000. Realization is dependent on generating
sufficient taxable income prior to expiration of net operating loss
carryforwards. Although realization is not assured, management believes it is
more likely than not that all of the deferred tax asset will be realized. The
amount of the deferred tax asset considered realizable, however, could be
reduced in the near-term if estimates of future taxable income during the
carryforward period are reduced.
25
1994 versus 1993
- ----------------
Net income for 1994 was $4,794,000, compared with $3,871,000 in 1993.
The increase in net income was achieved through improved operating results
in the Company's contract drilling segment and also from a net gain of $742,000
recognized in conjunction with the sale of one of the Company's gas gathering
systems. Total revenues from continuing operations were
$43,895,000 in 1994 and $38,682,000 in 1993.
Oil and natural gas revenues increased 8 percent due to a 29 percent
increase in natural gas production and a 2 percent increase in oil
production between 1994 and 1993. Average natural gas and oil prices
received by the Company both decreased 10 percent partially offsetting the
increases in production. Average natural gas prices received by the
Company declined due to a 14 percent reduction in average spot market
prices coupled with a 14 percent reduction in volumes produced from certain
wells included under the Settlement Agreement which contains provisions for
prices which are higher than current spot market prices. The impact of the
higher price received under the Settlement Agreement increased pre-tax income by
approximately $1.8 and $1.9 million in 1994 and 1993, respectively.
In 1994, revenues from contract drilling operations increased by 16
percent as average rig utilization increased from 8 rigs in 1993 to 9.5
rigs in 1994. Daywork revenues represented 58 percent of total drilling
revenues in 1994 as opposed to 47 percent in 1993. Turnkey and footage
contracts typically provide for higher revenues since a greater portion of
the expense of drilling the well is born by the drilling contractor.
Operating margins (revenues less operating costs) were either slightly
improved or unchanged for all segments on the Company's operations when
comparing 1994 with 1993. Operating margins for the Company's oil and
natural gas operations were unchanged due primarily to increased production
offset by the decrease in average prices received for oil and natural gas.
Total operating costs from oil and natural gas operations increased 9 percent as
the Company increased production from reserves added primarily through
development drilling i n 1993 and 1994.
Operating margins for contract drilling improved from 10 percent in
1993 to 12 percent in 1994. Increased rig utilization helped provide
greater revenue in relation to fixed costs. Total operating costs for
contract drilling were up 12 percent in 1994 versus 1993 due to the
increased utilization.
Contract drilling depreciation increased 19 percent in response to
increased rig utilization. Depreciation, depletion and amortization
("DD&A") of oil and natural gas properties increased 18 percent as the
Company increased its equivalent barrels of production by 22 percent. The
Company's average DD&A rate per equivalent barrel declined from $4.13 in
1993 to $4.08 in 1994.
26
General and administrative expense increased 8 percent as certain
employee and reporting costs increased between the comparative years. Interest
expense increased 25 percent as the average interest rate on the Company's
outstanding bank debt increased from 6 percent in 1993 to 7.15 percent in 1994.
Outstanding bank debt was $12.4 million higher at December 31, 1994 when
compared with December 31, 1993 due to the financing of the December 15, 1994
Patrick acquisition.
IMPACT OF FINANCIAL ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------------
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of" was issued. The statement establishes accounting standards for
the impairment of long-lived assets, such as the Company's drilling,
transportation and other equipment and will be effective for the Company
beginning with the year ending December 31, 1996. The Company does not believe
the new standard will have a material effect on the Company's financial
position or results of operations.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" was issued. The statement requires
the computation of compensation for grants of stock, stock options and other
equity instrument s issued to employees based on fair value. The compensation
calculated is to be either recorded as an expense in the financial statements
or, alternatively, disclosed. The Company anticipates it will elect the
disclosure method of complying with the new standard. Under existing accounting
rules, the Company's stock option grants have not resulted in compensation
expense. Accordingly, under the provisions of the new statement, pro forma net
income to be disclosed will be lower than net income reported in the financial
statements.
27
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
UNIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
ASSETS 1995 1994
---------- ----------
(In thousands)
Current Assets:
Cash and cash equivalents $ 534 $ 2,641
Accounts receivable (less allowance for
doubtful accounts of $116 and $289) 10,398 8,173
Materials and supplies 2,048 1,498
Prepaid expenses and other 1,046 952
--------- ---------
Total current assets 14,026 13,264
--------- ---------
Net Assets of Discontinued Operations - 124
--------- ---------
Property and Equipment:
Drilling equipment 75,751 75,746
Oil and natural gas properties, on the full
cost method 175,225 157,393
Transportation equipment 3,695 3,341
Other 6,100 7,858
--------- ---------
260,771 244,338
Less accumulated depreciation, depletion,
amortization and impairment 164,752 153,833
--------- ---------
Net property and equipment 96,019 90,505
--------- ---------
Other Assets 877 40
--------- ---------
Total Assets $110,922 $103,933
========= =========
The accompanying notes are an integral part of the
consolidated financial statements
28
UNIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
As of December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
---------- ----------
(In thousands)
Current Liabilities:
Current portion of long-term debt $ 20 $ 496
Current portion of natural gas
purchaser prepayments (Note 4) - 1,580
Accounts payable 6,701 6,068
Accrued liabilities 3,976 3,051
Contract advances 410 158
---------- ----------
Total current liabilities 11,107 11,353
---------- ----------
Natural Gas Purchaser Prepayments (Note 4) 2,109 2,149
---------- ----------
Long-Term Debt 41,100 37,824
---------- ----------
Commitments and Contingencies (Note 9)
Shareholders' Equity:
Preferred stock, $1.00 par value, 5,000,000
shares authorized, none issued - -
Common stock, $.20 par value, 40,000,000
shares authorized, 20,976,090 and
20,910,190 shares issued, respectively 4,195 4,182
Capital in excess of par value 50,181 50,086
Retained earnings (deficit) 2,418 (1,581)
Treasury stock, at cost (68,441 and
25,100 shares, respectively) (188) (80)
---------- ----------
Total shareholders' equity 56,606 52,607
---------- ----------
Total Liabilities and Shareholders' Equity $ 110,922 $ 103,933
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements
29
UNIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
1995 1994 1993
-------- -------- --------
Revenues: (In thousands except per share amounts)
Contract drilling $20,211 $16,952 $14,676
Oil and natural gas 31,187 26,001 24,073
Other 1,676 942 (67)
-------- -------- --------
Total revenues 53,074 43,895 38,682
Expenses: -------- -------- --------
Contract drilling:
Operating costs 18,041 14,909 13,269
Depreciation and impairment 2,596 2,030 1,713
Oil and natural gas:
Operating costs 12,003 8,799 8,098
Depreciation, depletion
and amortization 10,223 8,281 7,018
General and administrative 3,893 3,574 3,302
Interest 3,235 1,654 1,324
-------- -------- --------
Total expenses 49,991 39,247 34,724
-------- -------- --------
Income From Continuing Operations
Before Income Taxes 3,083 4,648 3,958
Income Tax Expense (Benefit) (668) 20 21
-------- -------- --------
Income From Continuing Operations 3,751 4,628 3,937
-------- -------- --------
Discontinued Operations:
Income (loss) from operations of
discontinued operations (net of
income taxes of $69 in 1995) (112) 166 (66)
Gain from sale of discontinued
operations (net of income taxes
of $221 in 1995) 360 - -
-------- -------- --------
Income(loss) from
discontinued operations 248 166 (66)
-------- -------- --------
Net Income $ 3,999 $ 4,794 $ 3,871
======== ======== ========
Net Earnings Per Common Share:
Continuing operations $ .18 $ .22 $ .19
======== ======== ========
Net income $ .19 $ .23 $ .19
======== ======== ========
Weighted Average Shares Outstanding 21,210 20,900 20,860
(Both Primary and Fully Diluted) ======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements
30
UNIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Year Ended December 31, 1993, 1994 and 1995
Capital
In Excess Retained
Common Of Par Earnings Treasury
Stock Value (Deficit) Stock Total
-------- -------- --------- -------- --------
(In thousands)
Balances,
January 1, 1993 $ 4,157 $49,841 $(10,246) $ - $43,752
Net income - - 3,871 - 3,871
Activity in employee
compensation plans
(78,706 shares) 15 136 - - 151
-------- -------- --------- -------- --------
Balances,
December 31, 1993 4,172 49,977 (6,375) - 47,774
Net income - - 4,794 - 4,794
Activity in employee
compensation plans
(48,685 shares) 10 109 - - 119
Purchase of treasury
stock (25,100
shares) - - - (80) (80)
-------- -------- --------- -------- --------
Balances,
December 31, 1994 4,182 50,086 (1,581) (80) 52,607
Net income - - 3,999 - 3,999
Activity in employee
compensation plans
(112,559 shares) 13 95 - 122 230
Purchase of treasury
stock (90,000
shares) - - - (230) (230)
-------- -------- --------- -------- --------
Balances,
December 31, 1995 $ 4,195 $50,181 $ 2,418 $ (188) $56,606
======== ======== ========= ======== ========
The accompanying notes are an integral part of the
consolidated financial statements
31
UNIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1995 1994 1993
-------- -------- --------
(In thousands)
Cash Flows From Operating Activities:
Income from continuing operations $ 3,751 $ 4,628 $ 3,937
Adjustments to reconcile income
from continuing operations
to net cash provided (used) by
continuing operating activities:
Depreciation, depletion,
amortization and impairment 13,120 10,760 9,243
Gain on disposition of assets (723) (813) (49)
Employee stock compensation plans 231 119 151
Bad debt expense 55 - -
Deferred tax benefit (682) - -
Changes in operating assets and
liabilities increasing
(decreasing) cash:
Accounts receivable (2,280) 94 428
Materials and supplies (550) (74) (99)
Prepaid expenses and other (94) (396) 318
Accounts payable (1,151) (871) (1,632)
Accrued liabilities 925 824 (877)
Contract advances 252 148 8
Natural gas purchaser prepayments (1,620) (1,858) (1,743)
-------- -------- --------
Net cash provided
by continuing operating
activities 11,234 12,561 9,685
-------- -------- --------
Net cash flows provided by
discontinued operations
including changes in
working capital (259) 532 182
-------- -------- --------
Net cash provided by
operating activities 10,975 13,093 9,867
-------- -------- --------
The accompanying notes are an integral part of the
consolidated financial statements
32
UNIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31,
1995 1994 1993
--------- --------- ---------
(In thousands)
Cash Flows From Investing Activities:
Capital expenditures (including
producing property acquisitions) $(20,634) $(28,227) $(11,946)
Proceeds from disposition of assets 4,613 2,038 709
Decrease in short-term investments - 41 664
(Acquisition) disposition
of other assets - 141 (45)
Proceeds of sale of
discontinued operations 369 - -
--------- --------- ---------
Net cash used in
investing activities (15,652) (26,007) (10,618)
--------- --------- ---------
Cash Flows From Financing Activities:
Borrowings under line of credit 39,700 63,700 43,400
Payments under line of credit (35,900) (51,300) (40,600)
Proceeds from notes payable
and other long-term debt - - 911
Payments on notes payable and
other long-term debt (1,000) (480) (367)
Acquisition of treasury stock (230) (80) -
--------- --------- ---------
Net cash provided by
financing activities 2,570 11,840 3,344
--------- --------- ---------
Net Increase (Decrease) in Cash
and Cash Equivalents (2,107) (1,074) 2,593
Cash and Cash Equivalents,
Beginning of Year 2,641 3,715 1,122
--------- --------- ---------
Cash and Cash Equivalents, End of Year $ 534 $ 2,641 $ 3,715
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 3,214 $ 1,548 $ 1,326
Income taxes $ - $ 2 $ 2
The accompanying notes are an integral part of the
consolidated financial statements
33
UNIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Principles of Consolidation
The consolidated financial statements include the accounts of Unit
Corporation and its directly and indirectly wholly owned subsidiaries (the
"Company"). The Company's investment in limited partnerships is accounted for
on the proportionate consolidation method, whereby its share of the
partnerships' assets, liabilities, revenues and expenses is included in the
appropriate classification in the accompanying consolidated financial
statements.
Nature of Business
The Company is engaged in the development, acquisition and production of
oil and natural gas properties and the land contract drilling of oil and natural
gas wells primarily in the Anadarko, Arkoma and South Texas Basins. These
basins are located in Oklahoma, Texas, Kansas and Arkansas. Additional
producing properties are located in Canada and other states, including New
Mexico, Louisiana, North Dakota, Colorado, Wyoming, Montana, Alabama and
Mississippi. The Company has an interest in 2,635 wells and serves as operator
of 482 of those wells. Land contract drilling of oil and natural gas wells is
performed for a wide range of customers with the 22 drilling rigs owned and
operated by the Company.
Drilling Contracts
The Company accounts for "footage" and "turnkey" drilling contracts, in
which the Company assumes the risks associated with drilling the well, under the
completed-contract method and for "daywork" drilling contracts under the
percentage-of-completion method. The entire amount of the loss, if any, is
recorded when the loss is determinable.
The costs of uncompleted drilling contracts include expenses incurred to
date on "footage" or "turnkey" drilling contracts which are still in process.
Cash Equivalents and Short-Term Investments
The Company includes as cash equivalents, certificates of deposits and
all investments with maturities at date of purchase of three months or less
which are readily convertible into known amounts of cash.
Property and Equipment
Drilling equipment, transportation equipment and other property and
equipment are carried at cost. The Company provides for depreciation of
drilling equipment on the units-of-production method based on estimated useful
34
lives, including a minimum provision of 20 percent of the active rate when the
equipment is idle. At December 31, 1995, the Company elected to take three rigs
out of service, which rigs and certain other components of the rig fleet were
written down by $254,000 to their estimated market value. The Company uses the
composite method of depreciation for drill pipe and collars and calculates the
depreciation by footage actually drilled compared to total estimated remaining
footage. Depreciation of other property and equipment is computed using the
straight-line method over the estimated useful lives of the assets ranging from
3 to 15 years.
Realization of the carrying value of the Company's drilling rigs is
evaluated utilizing estimated future net cash flows from utilization of the
Company rigs. Changes in these estimates could cause the Company to reduce the
carrying value of its rigs.
When property and equipment components are disposed of, the cost and the
related accumulated depreciation are removed from the accounts and any resulting
gain or loss is generally reflected in operations. For dispositions of drill
pipe and d rill collars, an average cost for the appropriate feet of drill pipe
and drill collars is removed from the asset account and charged to accumulated
depreciation and proceeds, if any, are credited to accumulated depreciation.
Oil and Natural Gas Operations
The Company accounts for its oil and natural gas exploration and
development activities on the full cost method of accounting prescribed by the
Securities and Exchange Commission ("SEC"). Accordingly, all productive and
non-productive costs incurred in connection with the acquisition, exploration
and development of oil and natural gas reserves are capitalized and amortized on
a composite units-of-production method based on proved oil and natural gas
reserves. The Company's determination of its oil and natural gas reserves are
reviewed annually by independent petroleum engineers. The average composite
rates used for depreciation, depletion and amortization ("DD&A") were $3.93,
$4.08 and $4.13 per equivalent barrel in 1995, 1994 and 1993, respectively. The
Company's calculation of DD&A includes estimated future expenditures to be
incurred in developing proved reserves and estimated dismantlement and
abandonment costs, net of estimated salvage values. In the event the
unamortized cost of oil and natural gas properties being amortized exceeds the
full cost ceiling, as defined by the SEC, the excess is charged to expense in
the period during which such excess occurs. The full cost ceiling is based
principally on the estimated future discounted net cash flows from the Company's
oil and natural gas properties. As discussed in Note 12, such estimates are
imprecise. Changes in these estimates or declines in oil and natural gas prices
could cause the Company in the near-term to reduce the carrying value of its oil
and natural gas properties.
No gains or losses are recognized upon the sale, conveyance or other
disposition of oil and natural gas properties unless a significant reserve
amount is involved.
The SEC's full cost accounting rules prohibit recognition of income in
35
current operations for services performed on oil and natural gas properties in
which the Company has an interest or on properties in which a partnership, of
which the Comp any is a general partner, has an interest. Accordingly, in 1994
the Company recorded $14,000 of contract drilling profits as a reduction of the
carrying value of its oil and natural gas properties rather than including these
profits in current operations. No contract drilling profits were realized on
such interests in 1995 and 1993.
Limited Partnerships
The Company, through its wholly owned subsidiary, Unit Petroleum
Company, is a general partner in eleven oil and natural gas limited partnerships
sold privately and publicly. Certain of the Company's officers and directors
own interests in some of these partnerships. Their interests were acquired
generally on the same basis as other outside investors.
The Company shares in partnership revenues and costs in accordance with
formulas prescribed in each limited partnership agreement. The partnerships
also reimburse the Company for certain administrative costs incurred on behalf
of the partner ships.
Income Taxes
Measurement of current and deferred income tax liabilities and assets
is based on provisions of enacted tax law; the effects of future changes in tax
laws or rates are not included in the measurement. Valuation allowances are
established where necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable for the year and the
change during that year in deferred tax assets and liabilities.
Natural Gas Balancing
The Company uses the sales method for recording natural gas sales. This
method allows for recognition of revenue which may be more or less than the
Company's share of pro-rata production from certain wells. Based upon the
Company's 1995 average spot market natural gas price of $1.47 per Mcf, the
Company estimates its balancing position to be approximately $4.5 million on
under-produced properties and approximately $2.7 million on over-produced
properties.
The Company's policy is to expense its pro-rata share of lease operating
costs from all wells as incurred. Such expenses relating to the Company's
balancing position on wells on which the Company has imbalances are not
material.
Financial Instruments and Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables with a
variety of national and international oil and natural gas companies. The
Company does not generally require collateral related to receivables. Such
36
credit risk is considered by management to be limited due to the large number of
customers comprising the Company's customer base. In addition, at December 31,
1995 and 1994, the Company had a concentration of cash of $1.2 and $2.3 million,
respectively, with one bank.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Impact of Financial Accounting Pronouncements
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of" was issued. The statement establishes accounting standards for the
impairment of long-lived assets, such as the Company's drilling, transportation
and other equipment and will be effective for the Company beginning with the
year ending December 31, 1996. The Company does not believe the new standard
will have a material effect on the Company's financial position or results of
operations.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" was issued. The statement requires
the computation of compensation for grants of stock, stock options and other
equity instrument s issued to employees based on fair value. The compensation
calculated is to be either recorded as an expense in the financial statements
or, alternatively, disclosed. The Company anticipates it will elect the
disclosure method of complying with the new standard. Under existing accounting
rules, the Company's stock option grants have not resulted in compensation
expense. Accordingly, under the provisions of the new statement, pro forma net
income to be disclosed will be lower than net income reported in the financial
statements.
Reclassifications
Certain reclassifications have been made in the 1993 and 1994
consolidated financial statements to conform them to classifications used in
1995.
NOTE 2 - DISCONTINUED OPERATIONS
- --------------------------------
On April 1, 1995, the Company's natural gas marketing operations were
combined with a third party also involved in natural gas marketing activities
into a business combination forming GED Gas Services L.L.C. ("GED"). The
combination was made to attain the increased volumes deemed necessary to
37
profitably market third party natural gas. The Company owns a 34 percent
interest in GED. On November 1, 1995 GED sold its natural gas marketing
operation. This sale removed the Company from the third party natural gas
marketing business. The gain on the sale was $360,000 net of income tax of
$221,000. Prior years have been restated to present the Company's former
natural gas marketing activity as a discontinued operation.
Summary results of operations and financial position data of the
discontinued operations were as follows:
For the Year Ended December 31,
1995 1994 1993
------- ------- -------
(In Thousands)
Results of Operations:
Revenues attributable to
discontinued operations $13,548 $43,725 $31,636
Expenses attributable to
discontinued operations 13,729 43,559 31,702
------- ------- -------
Income (loss) attributable
to discontinued operations
before income taxes (181) 166 (66)
Income tax benefit 69 - -
------- ------- -------
Income (loss) attributable
to discontinued
operations $ (112) $ 166 $ (66)
======= ======= =======
December 31,
1995 1994
------- -------
(In Thousands)
Financial Position:
Current assets $ - $ 8,574
Net property plant and
equipment - 38
Current liabilities - (8,488)
------- -------
Net assets of discontinued
operations $ - $ 124
======= =======
NOTE 3 - WARRANTS
- -----------------
In 1987, the Company issued 2.873 million Units, consisting of three
shares of the Company's common stock and one warrant, at a price of $10.375 per
Unit. Each warrant entitles the holder to purchase one share of the Company's
38
common stock a t a price of $4.375 anytime prior to the warrant's expiration on
August 30, 1996. The warrants, subject to certain restrictions, are callable by
the Company, in whole or in part, at $.50 per warrant. As of December 31, 1995
no warrants have been exercised.
NOTE 4 - NATURAL GAS PURCHASER PREPAYMENTS
- -------------------------------------------
In March 1988, the Company entered into a settlement agreement with a
natural gas purchaser. During early 1991, the Company and the natural gas
purchaser superseded the original agreement with a new settlement agreement
effective retroactively to January 1, 1991. Under these settlement agreements
("Settlement Agreement"), the Company has a prepayment balance of $2.1 million
at December 31, 1995 representing proceeds received from the purchaser as
prepayment for natural gas. This amount is net of natural gas recouped and net
of certain amounts disbursed to other owners (such owners, collectively with the
Company are referred to as the "Committed Interest") for their proportionate
share of the prepayments. The December 31, 1995 p repayment balance is subject
to recoupment in volumes of natural gas for a period ending the earlier of
recoupment or December 31, 1997 (the "Recoupment Period"). Additionally, the
purchaser is obligated to make monthly payments on behalf of the Committed
Interest in an amount calculated as a percentage of the Committed Interest's
share of the deliverability of the wells subject to the Settlement Agreement, up
to a maximum of $180,000 or a minimum of $90,000 per month for the year 1996.
Both t he maximum and minimum monthly payments decline annually through the
Recoupment Period. At December 31, 1997, the Committed Interest's prepayment
balance, if any, that has not been fully recouped in natural gas is subject to a
cash repayment limited to a maximum of $3 million to be made in equal annual
payments over a five year period with the first payment due June 1, 1998. The
prepayment amounts subject to recoupment from future production by the purchaser
are being recorded as liabilities a nd are reflected in revenues as recoupment
occurs. The portion of the prepayments that are estimated to be recouped in the
next twelve months has been included in current liabilities. The Company
anticipates the maximum balance of $3 million will b e unrecouped at December
31, 1997. At the end of the Recoupment Period, the terms of the Settlement
Agreement and the natural gas purchase contracts which are subject to the
Settlement Agreement will terminate.
39
NOTE 5 - LONG-TERM DEBT
- ------------------------
Long-term debt consisted of the following as of December 31, 1995 and
1994:
1995 1994
--------- ---------
Revolving credit and term loan, (In thousands)
with interest at December 31,
1995 and 1994 of 8.2 percent
and 8.5 percent, respectively $ 41,100 $ 37,300
Other 20 1,020
--------- ---------
41,120 38,320
Less current portion 20 496
--------- ---------
Total long-term debt $ 41,100 $ 37,824
========= =========
At December 31, 1995, the Company's loan agreement ("Loan Agreement")
provided for a total loan commitment of $75 million consisting of a revolving
credit facility through August 31, 1997 and a term loan thereafter, maturing on
August 31, 200 1. Borrowings under the Loan Agreement are limited to a semi-
annual borrowing base computation which as of December 31, 1995 is $50 million.
Borrowings under the revolving credit facility bear interest at the
Chase Manhattan Bank, N.A. prime rate ("Prime Rate") or the London Interbank
Offered Rates ("Libor Rate") plus 1.75 to 2.25 percent depending on the level of
debt as a percentage of the total borrowing base. Subsequent to August 1, 1997,
borrowings under the Loan Agreement bear interest at the Prime Rate plus .25
percent or the Libor rate plus 2.00 to 2.50 percent depending on the level of
debt as a percentage of the total borrowing base.
At the Company's election, any portion of the debt outstanding may be
fixed at the Libor Rate for 30, 60, 90 or 180 days. During any Libor Rate
funding period the Company may not pay in part or in whole the outstanding
principal balance of t he note to which such Libor Rate option applies.
Borrowings under the Prime Rate option may be paid anytime in part or in whole
without premium or penalty.
A 1/2 of 1 percent facility fee is charged for any unused portion of the
borrowing base. Virtually all of the Company's drilling rigs are collateral for
such indebtedness and the balance of the Company's assets are subject to a
negative pledge.
The Loan Agreement includes prohibitions against (i) the payment of
dividends (other than stock dividends) during any fiscal year in excess of 25
percent of the consolidated net income of the Company during the preceding
fiscal year and only if working capital provided from operations during said
year is equal to or greater than 175 percent of current maturities of long-term
40
debt at the end of such year, (ii) the incurrence by the Company or any of its
subsidiaries of additional debt with certain very limited exceptions and (iii)
the creation or existence of mortgages or liens, other than those in the
ordinary course of business, on any property of the Company or any of its
subsidiaries, except in favor of its banks. The Loan Agreement also requires
that the Company maintain consolidated net worth of at least $48 million, a
modified current ratio of not less than 1 to 1, a ratio of long-term debt, as
defined in the Loan Agreement, to consolidated tangible net worth not greater
than 1 to 1 and a ratio of total liabilities, as defined in the Loan Agreement,
to consolidated tangible net worth not greater than 1.25 to 1. In addition,
working capital provided by operations, as defined in the Loan Agreement, cannot
be less than $12 million in any year.
Estimated annual principal payments under the terms of all long-term
debt from 1996 through 2000 are $20,000, $3,425,000, $10,275,000, $10,275,000
and $10,275,000. Based on the borrowing rates currently available to the
Company for debt with similar terms and maturities, long-term debt at December
31, 1995 approximates its fair value.
NOTE 6 - INCOME TAXES
- ---------------------
A reconciliation of the income tax expense, computed by applying the
federal statutory rate to pre-tax income from continuing operations, to the
Company's effective income tax expense is as follows:
1995 1994 1993
-------- -------- --------
(In thousands)
Income tax expense computed by
applying the statutory rate $ 1,048 $ 1,580 $ 1,346
Tax benefit of net operating
loss carryforward (1,730) (1,595) (1,331)
State income tax - 6 1
Other 14 29 5
-------- -------- --------
Income tax expense (benefit) $ (668) $ 20 $ 21
======== ======== ========
41
Deferred tax assets and liabilities are comprised of the following at
December 31, 1995 and 1994:
1995 1994
--------- ---------
Deferred tax assets: (In thousands)
Allowance for losses $ 670 $ 521
Net operating loss carryforwards 17,058 18,190
Statutory depletion carryforward 2,260 2,500
Investment tax credit carryforward 3,530 3,530
--------- ---------
Gross deferred tax assets 23,518 24,741
Valuation allowance (3,530) (6,423)
Deferred tax liability-
Depreciation, depletion and amortization (19,458) (18,318)
--------- ---------
Net deferred tax asset $ 530 $ -
========= =========
The deferred tax asset valuation allowance reflects that the investment
tax credit carryforwards above may not be utilized before the expiration dates
as itemized below due in part to the effects of anticipated future exploratory
and development drilling costs.
Realization of the deferred tax asset is dependent on generating
sufficient taxable income prior to expiration of loss carryforwards. Although
realization is not assured, management believes it is more likely than not that
the deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near-term if estimates
of future taxable income during the carryforward period are reduced. Due to the
full utilization of such carryforwards, the Company's effective tax rate in
future years will approximate the statutory tax rate (both federal and state).
At December 31, 1995, the Company has net operating loss carryforwards
for regular tax purposes of approximately $44,891,000 and net operating loss
carryforwards for alternative minimum tax purposes of approximately $37,109,000
which expire i n various amounts from 1999 to 2007. The Company has investment
tax credit carryforwards of approximately $3,530,000 which expire from 1996 to
2000. In addition, a statutory depletion carryforward of approximately
$5,948,000, which may be carried forward indefinitely, is available to reduce
future taxable income, subject to statutory limitations. Based on revised
calculations, the estimated statutory depletion carryforward was reduced and the
estimated deferred tax liability relating to DD&A was increased in the current
year.
42
NOTE 7 - BENEFIT AND COMPENSATION PLANS
- ---------------------------------------
In December 1984, the Board of Directors approved the adoption of an
Employee Stock Bonus Plan ("the Plan") whereby 330,950 shares of common stock
were authorized for issuance under the Plan. On May 3, 1995, the Company's
shareholders amended the Plan to increase by 250,000 shares the aggregate number
of shares of common stock that could be issued under the Plan. Under the terms
of the Plan, bonuses may be granted to employees in either cash or stock or a
combination thereof, and are payable in a lump sum or in annual installments
subject to certain restrictions. The Company issued 38,354 shares under the
Plan in 1993. No shares were issued under the Plan in 1995 or 1994.
At December 31, 1995, the Company also has a Stock Option Plan which
provides for the granting of options for up to 1,500,000 shares of common stock
to officers and employees. The plan permits the issuance of qualified or
nonqualified stock options. Options granted become exercisable at the rate of
20 percent per year one year after being granted and expire after ten years from
the original grant. The exercise price for options granted is based on market
value on the date of the grant .
Activity pertaining to the Stock Option Plan is as follows:
NUMBER
OF OPTION PRICE
SHARES ------------------------------
--------- PER SHARE AGGREGATE
--------------- -----------
Outstanding at
January 1, 1993 752,000 $ 1.50 to 3.375 1,469,520
Granted 89,000 2.75 244,750
Exercised (12,000) 1.50 to 2.37 (19,740)
--------- ---------------- -----------
Outstanding at
December 31, 1993 829,000 1.50 to 3.375 1,694,530
Granted 102,500 3.00 307,500
Exercised (16,000) 1.50 to 2.37 (24,870)
--------- ---------------- -----------
Outstanding at
December 31, 1994 915,500 1.50 to 3.375 1,977,160
Granted 26,000 2.75 to 4.00 83,750
Exercised (65,900) 1.50 to 2.75 (108,900)
Canceled (10,000) 1.875 (18,750)
--------- ---------------- -----------
Outstanding at
December 31, 1995 865,600 $ 1.50 to 4.00 $1,933,260
========= ================ ===========
Options for 675,000, 676,400 and 610,500 shares were exercisable at
prices ranging from $1.50 to $3.375 at December 31, 1995, 1994 and 1993,
respectively.
43
In February and May 1992, the Board of Directors and shareholders,
respectively, approved the Unit Corporation Non-Employee Directors' Stock Option
Plan (the "Directors' Plan"). An aggregate of 100,000 shares of the Company's
common stock ma y be issued upon exercise of the stock options. On the first
business day following each annual meeting of stockholders of the Company, each
person who is then a member of the Board of Directors of the Company and who is
not then an employee of the Company or any of its subsidiaries will be granted
an option to purchase 2,500 shares of common stock. The option price for each
stock option is the fair market value of the common stock on the date the stock
options are granted. No stock options m ay be exercised during the first six
months of its term except in case of death and no stock options are exercisable
after ten years from the date of grant.
Activity pertaining to the Directors' Plan is as follows:
NUMBER
OF OPTION PRICE
SHARES ------------------------------
--------- PER SHARE AGGREGATE
-------------- -----------
Outstanding at
January 1, 1993 10,000 $ 1.75 $ 17,500
Granted 10,000 3.75 37,500
--------- -------------- -----------
Outstanding at
December 31, 1993 20,000 1.75 to 3.75 55,000
Granted 10,000 2.875 28,750
--------- -------------- -----------
Outstanding at
December 31, 1994 30,000 1.75 to 3.75 83,750
Granted 12,500 3.375 42,188
--------- -------------- -----------
Outstanding at
December 31, 1995 42,500(1) $1.75 to 3.75 $ 125,938
========= ============== ===========
- -------------
(1) All 42,500 options were exercisable at December 31, 1995.
Under the Company's 401(k) Employee Thrift Plan, employees who meet
specified service requirements may contribute a percentage of their total
compensation, up to a specified maximum, to the plan. Each employee's
contribution, up to a specified maximum, may be matched by the Company in full
or on a partial basis. The Company made discretionary contributions under the
plan of 46,659, 32,685 and 28,352 shares of common stock and recognized expense
of $174,000, $130,000 and $162,000 in 199 5, 1994 and 1993, respectively.
Effective March 1, 1993, the Company adopted a salary deferral plan
("Deferral Plan"). The Deferral Plan allows participants to defer the
recognition of salary for income tax purposes until actual distribution of
benefits which occurs at either termination of employment, death or certain
44
defined unforeseeable emergency hardships. Funds set aside in a trust to
satisfy the Company's obligation under the Deferral Plan at December 31, 1995,
1994 and 1993 totaled $271,000, $108,000 and $41, 000, respectively. The
Company recognizes payroll expense and records a liability at the time of
deferral.
NOTE 8 - TRANSACTIONS WITH RELATED PARTIES
- ------------------------------------------
The Company formed private limited partnerships (the "Partnerships")
with certain qualified employees, officers and directors from 1984 through 1995,
with a subsidiary of the Company serving as General Partner. The Partnerships
were formed f or the purpose of conducting oil and natural gas acquisition,
drilling and development operations and serving as co-general partner with the
Company in any additional limited partnerships formed during that year. The
Partnerships participated on a proportionate basis with the Company in most
drilling operations and most producing property acquisitions commenced by the
Company for its own account during the period from the formation of the
Partnership through December 31 of each year. Pursuant to the terms of an
agreement and plan of merger, seven limited partnerships, in which the Company
was general partner, were consolidated into one new employee limited partnership
effective December 31, 1993.
Amounts received in the following years ended December 31 from both
public and private Partnerships for which the Company is a general partner are
as follows:
1995 1994 1993
-------- -------- --------
(In thousands)
Contract drilling $ 34 $ 53 $ 60
Well supervision and other fees $ 119 $ 226 $ 278
General and administrative
expense reimbursement $ 235 $ 209 $ 231
A subsidiary of the Company paid the Partnerships, for which the Company
or a subsidiary is the general partner, $18,000, $38,000 and $65,000 during the
years ended December 31, 1995, 1994 and 1993, respectively, for purchases of
natural gas production.
During 1995 and 1994, a bank owned by one of the Company's Directors was
a participant in the Company's Loan Agreement. The bank's total pro rata share
of the Company's line of credit is currently limited to not exceed $1.5
million.
45
NOTE 9 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
The Company leases office space under the terms of operating leases
expiring through January 31, 2000. Future minimum rental payments under the
terms of the leases are approximately $264,000, $244,000, $246,000, $246,000 and
$21,000 in 1996, 1997, 1998, 1999 and 2000, respectively. Total rent expense
incurred by the Company was $307,000, $210,000 and $208,000 in 1995, 1994 and
1993, respectively.
The Company had letters of credit supported by its Loan Agreement
totaling $935,000 at December 31, 1995.
The Unit 1984 Oil and Gas Limited Partnership and the 1986 Energy Income
Limited Partnership agreements along with the employee oil and gas limited
partnerships require, upon the election of a limited partner, that the Company
repurchase the limited partner's interest at amounts to be determined by
appraisal in the future. Such repurchases in any one year are limited to 20
percent of the units outstanding. The Company made repurchases of $34,000,
$38,000 and $56,000 in 1995, 1994 and 1 993, respectively, for such limited
partners' interests.
The Company is a party to various legal proceedings arising in the
ordinary course of its business none of which, in the Company's opinion, will
result in judgements which would have a material adverse effect on the Company.
46
NOTE 10 - INDUSTRY SEGMENT INFORMATION
- --------------------------------------
The Company operates in the United States in two industry segments which
are contract drilling and oil and natural gas exploration. The Company also has
natural gas production in Canada which is not significant. Selected financial
information by industry segment is as follows:
Depreciation,
Depletion,
Operating Amortization
Operating Profit Total Capital and Impairment
Revenues (Loss)(1) Assets(2) Expenditures Expense
---------- -------- -------- --------- ----------
(In thousands)
Year ended December 31, 1995:
Drilling $ 20,211 $ (426) $ 15,449 $ 1,556 $ 2,596
Oil and natural gas 31,187 8,961 92,033 19,308 10,223
---------- -------- -------- --------- ----------
51,398 $ 8,535 107,482 20,864 12,819
========
Other 1,676 3,440 1,089 301
---------- -------- --------- ----------
Total $ 53,074 $110,922 $ 21,953 $ 13,120
========== ======== ========= ==========
Year ended December 31, 1994:
Drilling $ 16,952 $ 13 $ 14,771 $ 1,115 $ 2,030
Oil and natural gas 26,001 8,921 83,082 25,110 8,281
---------- -------- -------- --------- ----------
42,953 $ 8,934 97,853 26,225 10,311
========
Other 942 5,956 764 449
Discontinued
operations - 124 - -
---------- -------- --------- ----------
Total $ 43,895 $103,933 $ 26,989 $ 10,760
========== ======== ========= ==========
Year ended December 31, 1993:
Drilling $ 14,676 $ (306) $ 15,738 $ 936 $ 1,713
Oil and natural gas 24,073 8,957 64,845 11,422 7,018
---------- -------- -------- --------- ----------
$ 38,749 $ 8,651 80,583 12,358 8,731
========
Other (67) 7,743 1,372 512
Discontinued
operations - 490 - -
---------- -------- --------- ----------
Total $ 38,682 $ 88,816 $ 13,730 $ 9,243
========== ======== ========= ==========
(1) Operating profit is total operating revenues less operating expenses,
depreciation, depletion, amortization and impairment and does not include non-
47
operating revenues, general corporate expenses, interest expense, income taxes,
provision for litigation or gain from litigation settlement.
(2) Identifiable assets are those used in the Company's operations in each
industry segment. Corporate assets are principally cash and cash equivalents,
short-term investments, corporate leasehold improvements, furniture and
equipment.
NOTE 11 - SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- --------------------------------------------------------------
Summarized quarterly financial information for 1995 and 1994 is as
follows:
Three Months Ended
-------------------------------------------------
March 31 June 30 September 30 December 31
--------- --------- --------- ----------
(In thousands except per share amounts)
Year ended December 31, 1995:
Revenues $ 12,388 $ 11,505 $ 14,117 $ 15,064
========= ========= ========= =========
Gross profit(1) $ 1,875 $ 1,819 $ 1,721 $ 3,120
========= ========= ========= =========
Income from continuing
operations $ 857 $ 102 $ 916 $ 1,876
Income (loss) from
discontinued
operations 99 (81) (35) (95)
Gain from sale of
discontinued
operations - - - 360
--------- --------- --------- ---------
Net Income $ 956 (2) $ 21 $ 881 (3) $ 2,141 (4)
========= ========= ========= =========
Earnings Per Common Share:
Continuing
operations $ .05 $ - $ .04 $ .09
Discontinued
operations - - - (.01)
Gain on sale of
discontinued
operations - - - .02
--------- --------- --------- ---------
Net income $ .05 (2) $ - $ .04 (3) $ .10 (4)
========= ========= ========= =========
48
Three Months Ended
------------------------------------------------
March 31 June 30 September 30 December 31
--------- --------- --------- ---------
(In thousands except per share amounts)
Year ended December 31, 1994:
Revenues $ 10,587 $ 11,064 $ 11,939 $ 10,305
========= ========= ========= =========
Gross profit(1) $ 2,361 $ 2,754 $ 1,895 $ 1,924
========= ========= ========= =========
Income from continuing
operations $ 1,135 $ 1,407 $ 1,542 $ 544
Income from
discontinued
operations 76 18 48 24
--------- --------- --------- ---------
Net income $ 1,211 $ 1,425 $ 1,590 (5) $ 568
========= ========= ========= =========
Earnings Per Common Share:
Continuing
operations $ .06 $ .07 $ .07 $ .03
Discontinued
operations - - - -
--------- --------- --------- ---------
Net income $ .06 $ .07 $ .07 (5) $ .03
========= ========= ========= =========
(1) Gross Profit excludes other revenues, general and administrative
expense and interest expense.
(2) Includes $635,000 gain on sale of natural gas compressors.
(3) Includes $850,000 gain from the settlement of litigation.
(4) Includes a net income tax benefit of $530,000.
(5) Includes $742,000 net gain on sale of natural gas gathering system.
49
NOTE 12 - OIL AND NATURAL GAS INFORMATION (UNAUDITED)
- -----------------------------------------------------
The capitalized costs at year end and costs incurred during the year
were as follows:
USA Canada Total
--------- -------- ---------
(In thousands)
1995:
Capitalized costs:
Proved properties $ 171,259 $ 465 $ 171,724
Unproved properties 3,501 - 3,501
--------- -------- ---------
174,760 465 175,225
Less accumulated depreciation,
depletion, amortization
and impairment 91,739 379 92,118
--------- -------- ---------
Net capitalized costs $ 83,021 $ 86 $ 83,107
========= ======== =========
Cost incurred:
Unproved properties $ 1,338 $ - $ 1,338
Producing properties 9,183 - 9,183
Exploration 1,291 - 1,291
Development 7,486 10 7,496
--------- -------- ---------
Total costs incurred $ 19,298 $ 10 $ 19,308
========= ======== =========
1994:
Capitalized costs:
Proved properties $ 154,688 $ 455 $ 155,143
Unproved properties 2,250 - 2,250
--------- -------- ---------
156,938 455 157,393
Less accumulated depreciation,
depletion, amortization
and impairment 81,583 368 81,951
--------- -------- ---------
Net capitalized costs $ 75,355 $ 87 $ 75,442
========= ======== =========
Cost incurred:
Unproved properties $ 460 $ - $ 460
Producing properties 13,108 - 13,108
Exploration 1,825 - 1,825
Development 9,716 1 9,717
--------- -------- ---------
Total costs incurred $ 25,109 $ 1 $ 25,110
========= ======== =========
50
USA Canada Total
--------- -------- ---------
(In thousands)
1993:
Capitalized costs:
Proved properties $ 129,612 $ 454 $ 130,066
Unproved properties 2,638 - 2,638
--------- -------- ---------
132,250 454 132,704
Less accumulated depreciation,
depletion, amortization
and impairment 73,419 314 73,733
--------- -------- ---------
Net capitalized costs $ 58,831 $ 140 $ 58,971
========= ======== =========
Cost incurred:
Unproved properties $ 732 $ - $ 732
Producing properties 1,241 - 1,241
Exploration 1,359 - 1,359
Development 8,084 6 8,090
--------- -------- ---------
Total costs incurred $ 11,416 $ 6 $ 11,422
========= ======== =========
51
The results of operations before income taxes for producing activities
are provided below. Due to the Company's utilization of net operating loss
carryforwards, income taxes are not significant and have not been included.
USA Canada Total
-------- -------- --------
(In thousands)
1995:
Revenues $ 28,928 $ 53 $ 28,981
Production costs 9,914 16 9,930
Depreciation, depletion
and amortization 10,156 11 10,167
-------- -------- --------
Results of operations for
producing activities
before income taxes
(excluding corporate
overhead and financing
costs) $ 8,858 $ 26 $ 8,884
======== ======== ========
1994:
Revenues $ 23,964 $ 67 $ 24,031
Production costs 7,011 19 7,030
Depreciation, depletion
and amortization 8,165 53 8,218
-------- -------- --------
Results of operations for
producing activities
before income taxes
(excluding corporate
overhead and financing
costs) $ 8,788 $ (5) $ 8,783
======== ======== ========
1993:
Revenues $ 22,040 $ 67 $ 22,107
Production costs 6,439 15 6,454
Depreciation, depletion
and amortization 6,875 81 6,956
-------- -------- --------
Results of operations for
producing activities
before income taxes
(excluding corporate
overhead and financing
costs) $ 8,726 $ (29) $ 8,697
======== ======== ========
52
Estimated quantities of proved developed oil and natural gas reserves
and changes in net quantities of proved developed and undeveloped oil and
natural gas reserves were as follows:
USA Canada Total
---------------- ----------- ----------------
Natural Natural Natural
Oil Gas Oil Gas Oil Gas
Bbls Mcf Bbls Mcf Bbls Mcf
------- -------- ----- ----- ------- --------
(In thousands)
1995:
Proved developed and
undeveloped reserves:
Beginning of year 4,308 92,566 - 794 4,308 93,360
Revision of previous
estimates 910 9,525 - (10) 910 9,515
Extensions, discoveries
and other additions 305 7,910 - 48 305 7,958
Purchases of minerals
in place 500 10,892 - - 500 10,892
Sales of minerals in place (18) (938) - - (18) (938)
Production (577) (12,005) - (54) (577) (12,059)
------- -------- ----- ----- ------- --------
End of Year 5,428 107,950 - 778 5,428 108,728
======= ======== ===== ===== ======= ========
Proved developed reserves:
Beginning of year 3,521 80,110 - 359 3,521 80,469
End of year 4,697 94,975 - 350 4,697 95,325
1994:
Proved developed and
undeveloped reserves:
Beginning of year 3,304 71,379 - 861 3,304 72,240
Revision of previous
estimates (97) (571) - (14) (97) (585)
Extensions, discoveries
and other additions 601 17,426 - - 601 17,426
Purchases of minerals
in place 910 14,075 - - 910 14,075
Sales of minerals in place (4) (137) - - (4) (137)
Production (406) (9,606) - (53) (406) (9,659)
------- -------- ----- ----- ------- --------
End of Year 4,308 92,566 - 794 4,308 93,360
======= ======== ===== ===== ======= ========
Proved developed reserves:
Beginning of year 3,187 65,395 - 426 3,187 65,821
End of year 3,521 80,110 - 359 3,521 80,469
53
USA Canada Total
---------------- ----------- ----------------
Natural Natural Natural
Oil Gas Oil Gas Oil Gas
Bbls Mcf Bbls Mcf Bbls Mcf
------- -------- ----- ----- ------- --------
(In thousands)
1993:
Proved developed and
undeveloped reserves:
Beginning of year 3,308 63,761 - 931 3,308 64,692
Revision of previous
estimates (132) 4,662 - - (132) 4,662
Extensions, discoveries
and other additions 549 9,169 - - 549 9,169
Purchases of minerals
in place 18 1,369 - - 18 1,369
Sales of minerals in place (42) (147) - - (42) (147)
Production (397) (7,435) - (70) (397) (7,505)
------- -------- ----- ----- ------- --------
End of Year 3,304 71,379 - 861 3,304 72,240
======= ======== ===== ===== ======= ========
Proved developed reserves:
Beginning of year 3,245 58,809 - 468 3,245 59,277
End of year 3,187 65,395 - 426 3,187 65,821
Oil and natural gas reserves cannot be measured exactly. Estimates of
oil and natural gas reserves require extensive judgments of reservoir
engineering data and are generally less precise than other estimates made in
connection with financial disclosures. The Company utilizes Ryder Scott
Company, independent petroleum consultants, to review the Company's reserves as
prepared by the Company's reservoir engineers.
Proved reserves are those quantities which, upon analysis of geological
and engineering data, appear with reasonable certainty to be recoverable in the
future from known oil and natural gas reservoirs under existing economic and
operating conditions. Proved developed reserves are those reserves which can be
expected to be recovered through existing wells with existing equipment and
operating methods. Proved undeveloped reserves are those reserves which are
expected to be recovered from new wells on undrilled acreage or from existing
wells where a relatively major expenditure is required.
Estimates of oil and natural gas reserves require extensive judgments of
reservoir engineering data as explained above. Assigning monetary values to
such estimates does not reduce the subjectivity and changing nature of such
reserve estimate s. Indeed the uncertainties inherent in the disclosure are
compounded by applying additional estimates of the rates and timing of
production and the costs that will be incurred in developing and producing the
reserves. The information set forth herein is therefore subjective and, since
judgments are involved, may not be comparable to estimates submitted by other
54
oil and natural gas producers. In addition, since prices and costs do not
remain static and no price or cost escalations or de-escalations have been
considered, the results are not necessarily indicative of the estimated fair
market value of estimated proved reserves nor of estimated future cash flows.
55
The standardized measure of discounted future net cash flows ("SMOG")
was calculated using year-end prices and costs, and year-end statutory tax
rates, adjusted for permanent differences, that relate to existing proved oil
and natural gas reserves. SMOG as of December 31 is as follows:
USA Canada Total
--------- -------- ---------
(In thousands)
1995:
Future cash flows $320,916 $ 1,462 $322,378
Future production and
development costs 107,830 304 108,134
Future income tax expenses 49,437 660 50,097
--------- -------- ---------
Future net cash flows 163,649 498 164,147
10% annual discount for estimated
timing of cash flows 60,826 183 61,009
--------- -------- ---------
Standardized measure of
discounted future net cash
flows relating to proved oil
and natural gas reserves $102,823 $ 315 $103,138
========= ======== =========
1994:
Future cash flows $234,171 $ 1,255 $235,426
Future production and
development costs 105,876 311 106,187
Future income tax expenses 20,161 524 20,685
--------- -------- ---------
Future net cash flows 108,134 420 108,554
10% annual discount for estimated
timing of cash flows 30,116 170 30,286
--------- -------- ---------
Standardized measure of
discounted future net cash
flows relating to proved oil
and natural gas reserves $ 78,018 $ 250 $ 78,268
========= ======== =========
1993:
Future cash flows $214,800 $ 861 $215,661
Future production and
development costs 90,177 229 90,406
Future income tax expenses 17,097 244 17,341
--------- -------- ---------
Future net cash flows 107,526 388 107,914
10% annual discount for estimated
timing of cash flows 34,374 157 34,531
--------- -------- ---------
Standardized measure of
discounted future net cash
flows relating to proved oil
and natural gas reserves $ 73,152 $ 231 $ 73,383
========= ======== =========
56
The principal sources of changes in the standardized measure of
discounted future net cash flows were as follows:
USA Canada Total
--------- -------- ---------
(In thousands)
1995:
Sales and transfers of oil and
natural gas produced,
net of production costs $(19,015) $ (36) $(19,051)
Net changes in prices and
production costs 28,857 112 28,969
Revisions in quantity estimates
and changes in production timing (6,620) (10) (6,630)
Extensions, discoveries and improved
recovery, less related costs 11,320 49 11,369
Purchases of minerals in place 11,897 - 11,897
Sales of minerals in place (968) - (968)
Accretion of discount 8,447 54 8,501
Net change in income taxes (11,727) (105) (11,832)
Other - net 2,614 1 2,615
--------- -------- ---------
Net change 24,805 65 24,870
Beginning of year 78,018 250 78,268
--------- -------- ---------
End of year $102,823 $ 315 $103,138
========= ======== =========
1994:
Sales and transfers of oil and
natural gas produced,
net of production costs $(16,953) $ (48) $(17,001)
Net changes in prices and
production costs (14,941) 206 (14,735)
Revisions in quantity estimates
and changes in production timing (482) (5) (487)
Extensions, discoveries and improved
recovery, less related costs 17,050 - 17,050
Purchases of minerals in place 13,426 - 13,426
Sales of minerals in place (138) - (138)
Accretion of discount 7,915 35 7,950
Net change in income taxes (457) (177) (634)
Other - net (554) 8 (546)
--------- -------- ---------
Net change 4,866 19 4,885
Beginning of year 73,152 231 73,383
--------- -------- ---------
End of year $ 78,018 $ 250 $ 78,268
========= ======== =========
57
USA Canada Total
--------- -------- ---------
1993:
Sales and transfers of oil and
natural gas produced,
net of production costs $(15,359) $ (52) $(15,411)
Net changes in prices and
production costs (4,997) 73 (4,924)
Revisions in quantity estimates
and changes in production timing 483 (70) 413
Extensions, discoveries and improved
recovery, less related costs 12,886 - 12,886
Purchases of minerals in place 1,440 - 1,440
Sales of minerals in place (284) - (284)
Accretion of discount 7,619 36 7,655
Net change in income taxes (74) (8) (82)
Other - net 1,178 (4) 1,174
--------- -------- ---------
Net change 2,892 (25) 2,867
Beginning of year 70,260 256 70,516
--------- -------- ---------
End of year $ 73,152 $ 231 $ 73,383
========= ======== =========
The Company's SMOG and changes therein were determined in accordance
with Statement of Financial Accounting Standards No. 69. Certain information
concerning the assumptions used in computing SMOG and their inherent limitations
are discussed below. Management believes such information is essential for a
proper understanding and assessment of the data presented.
The assumptions used to compute SMOG do not necessarily reflect
management's expectations of actual revenues to be derived from those reserves
nor their present worth. Assigning monetary values to the reserve quantity
estimation process does not reduce the subjective and ever-changing nature of
such reserve estimates. Additional subjectivity occurs when determining present
values because the rate of producing the reserves must be estimated. In
addition to errors inherent in predicting the future, variations from the
expected production rate could result from factors outside of management's
control, such as unintentional delays in development, environmental concerns or
changes in prices or regulatory controls. Also, the reserve valuation assumes
that all reserves will be disposed of by production. However, other factors
such as the sale of reserves in place could affect the amount of cash eventually
realized.
Future cash flows are computed by applying year-end prices of oil and
natural gas relating to proved reserves to the year-end quantities of those
reserves. Future price changes are considered only to the extent provided by
contractual arrangements in existence at year-end.
58
Future production and development costs are computed by estimating the
expenditures to be incurred in developing and producing the proved oil and
natural gas reserves at the end of the year, based on continuation of existing
economic conditions.
Future income tax expenses are computed by applying the appropriate
year-end statutory tax rates to the future pretax net cash flows relating to
proved oil and natural gas reserves less the tax basis of the Company's
properties. The future income tax expenses also give effect to permanent
differences and tax credits and allowances relating to the Company's proved oil
and natural gas reserves.
Care should be exercised in the use and interpretation of the above
data. As production occurs over the next several years, the results shown may
be significantly different as changes in production performance, petroleum
prices and costs are likely to occur.
As disclosed in Note 4, the Company is receiving payments from a natural
gas purchaser which are subject to recoupment from future natural gas
production. The amounts received will be reflected in revenues and the reserves
and future net cash flows will be reduced as recoupment occurs.
59
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders and Board of Directors
Unit Corporation
We have audited the accompanying consolidated balance sheets of Unit Corporation
and subsidiaries as of December 31, 1995 and 1994 and the related consolidated
statements of operations, changes in shareholders' equity and cash flows and the
related financial statement schedule for each of the three years in the period
ended December 31, 1995. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Unit Corporation
and subsidiaries as of December 31, 1995 and 1994, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when consider ed in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Tulsa, Oklahoma
February 20, 1996
60
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure.
- --------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The table below and accompanying footnotes set forth certain information
concerning each executive officer of the Company. Unless otherwise indicated,
each has served in the positions set forth for more than five years. Executive
officers a re elected for a term of one year. There are no family relationships
between any of the persons named.
NAME AGE POSITION
- ---------------- --- ----------------------------------------
King P. Kirchner 68 Chairman of the Board, Chief Executive Officer
and Director
John G. Nikkel 61 President, Chief Operating Officer and Director
Earle Lamborn 61 Senior Vice President, Drilling and Director
Philip M. Keeley 54 Senior Vice President, Exploration and
Production
Larry D. Pinkston 41 Vice President, Treasurer and Chief Financial
Officer
Mark E. Schell 38 General Counsel and Secretary
________
Mr. Kirchner, a co-founder of the Company, has been the Chairman of the
Board and a director since 1963 and was President until November 1983. Mr.
Kirchner is a Registered Professional Engineer within the State of Oklahoma,
having received degrees in Mechanical Engineering from Oklahoma State University
and in Petroleum Engineering from the University of Oklahoma.
Mr. Nikkel joined the Company in 1983 as its President and a director.
From 1976 until January 1982 when he co-founded Nike Exploration Company, Mr.
Nikkel was an officer and director of Cotton Petroleum Corporation, serving as
the President of that Company from 1979 until his departure. Prior to joining
Cotton, Mr. Nikkel was employed by Amoco Production Company for 18 years, last
serving as Division Geologist for Amoco's Denver Division. Mr. Nikkel
presently serves as President and a director of Nike Exploration Company. Mr.
Nikkel received a Bachelor of Science degree in Geology and Mathematics from
Texas Christian University.
61
Mr. Lamborn has been actively involved in the oil field for over 40
years, joining the Company's predecessor in 1952 prior to it becoming a
publicly-held corporation. He was elected Vice President, Drilling in 1973 and
to his current position as Senior Vice President and Director in 1979.
Mr. Keeley joined the Company in November 1983 as a Senior Vice
President, Exploration and Production. Prior to that time, Mr. Keeley co-
founded (with Mr. Nikkel) Nike Exploration Company in January 1982 and serves as
Executive Vice President and a director of that company. From 1977 until 1982,
Mr. Keeley was employed by Cotton Petroleum Corporation, serving first as
Manager of Land and from 1979 as Vice President and a director. Before joining
Cotton, Mr. Keeley was employed for four years by Apexco, Inc. as Manager of
Land and prior thereto he was employed by Texaco, Inc. for nine years. He
received a Bachelor of Arts degree in Petroleum Land Management from the
University of Oklahoma.
Mr. Pinkston joined the Company in December 1981. He had served as
Corporate Budget Director and Assistant Controller prior to being appointed as
Controller in February 1985. He has been Treasurer since December 1986 and was
elected to the position of Vice President and Chief Financial Officer in May
1989. He holds a Bachelor of Science Degree in Accounting from East Central
University of Oklahoma and is a Certified Public Accountant.
Mr. Schell joined the Company in January of 1987, as its Secretary and
General Counsel. From 1979 until joining the Company, Mr. Schell was Counsel,
Vice President and a member of the Board of Directors of C & S Exploration, Inc.
He receive d a Bachelor of Science degree in Political Science from Arizona
State University and his Juris Doctorate degree from the University of Tulsa Law
School.
The balance of the information required in this Item 10 is incorporated
by reference from the Company's Proxy Statement to be filed with the Securities
and Exchange Commission in connection with the Company's 1996 annual meeting of
stockholders.
Item 11. Executive Compensation
- ---------------------------------
Information required by this item is incorporated by reference from the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Company's 1996 annual meeting of stockholders.
62
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Information required by this item is incorporated by reference from the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Company's 1996 annual meeting of stockholders.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Information required by this item is incorporated by reference from the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Company's 1996 annual meeting of stockholders.
PART IV
63
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) Financial Statements, Schedules and Exhibits:
1. Financial Statements:
---------------------
Included in Part II of this report:
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. Financial Statement Schedules:
------------------------------
Included in Part IV of this report for the years ended
December 31, 1995, 1994 and 1993:
Schedule II - Valuation and Qualifying Accounts and Reserves
Other schedules are omitted because of the absence of conditions under which
they are required or because the required information is included in the
consolidated financial statements or notes thereto.
The exhibit numbers in the following list correspond to the numbers assigned
such exhibits in the Exhibit Table of Item 601 of Regulation S-K.
3. Exhibits:
--------
2 Certificate of Ownership and Merger of the Company and Unit
Drilling Co., dated February 22, 1979 (filed as an Exhibit to the
Company's Registration Statement No. 2-63702, which is incorporated
herein by reference).
3.1.1 Certificate of Incorporation (filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-4 as S.E.C. File No. 33-7848, which
is incorporated herein by reference).
3.1.2 Certificate of Amendment of Certificate of Incorporation dated July
21, 1988 (filed as an Exhibit to the Company's Annual Report under
cover of Form 10-K for the year ended December 31, 1989, which is
incorporated herein by reference).
64
3.1.3 Restated Certificate of Incorporation of Unit Corporation dated
February 2, 1994 (filed as an Exhibit to the Company's Annual Report
under cover of Form 10-K for the year ended December 31, 1993, which
is incorporated herein by reference).
3.2.1 By-Laws (filed as Exhibit 3.5 to the Company's Registration Statement
of Form S-4 as S.E.C. File No. 33-7848, which is incorporated herein
by reference).
3.2.2 Amended and Restated By-Laws, dated June 29, 1988 (filed as an
Exhibit to the Company's Annual Report under cover of Form 10-K for
the year ended December 31, 1989, which is incorporated herein by
reference).
4.2.1 Form of Warrant Agreement between the Company and the Warrant Agent
(filed as Exhibit 4.1 to the Company's Registration statement on Form
S-2 as S.E.C. File No. 33-16116, which is incorporated herein by
reference).
4.2.2 Form of Warrant (filed as Exhibit 4.3 to the Company's Registration
Statement of Form S-2 as S.E.C. File No. 33-16116, which is
incorporated herein by reference).
4.2.3 Form of Common Stock Certificate (filed as Exhibit 4.2 on Form S-2 as
S.E.C. File No. 33-16116, which is incorporated herein by reference).
4.2.4 First Amendment to Warrant Agreement (filed as an Exhibit to the
Company's Quarterly Report under cover of Form 10-Q for the quarter
ended March 31, 1992, which is incorporated herein by reference).
4.2.5 Second Amendment to Warrant Agreement (filed as an Exhibit to the
Company's Quarterly Report under cover of Form 10-Q for the quarter
ended March 31, 1994, which is incorporated herein by reference).
4.2.6 Rights Agreement dated as of May 19, 1995 between the Company
and Chemical Bank, as Rights Agent (filed as Exhibit 1 to the
Company's Form 8-A filed May 23, 1995, File No. 1-92601 and
incorporated herein by reference).
10.1.14 Amended and Restated Credit Agreement dated as of January 17, 1992 by
and between Unit Corporation and Bank of Oklahoma N.A., F&M Bank and
Trust Company, Fourth National Bank of Tulsa and Western National
Bank of Tulsa (filed as an Exhibit to the Company's Annual Report
under cover of Form 10-K for the year ended December 31, 1991, which
is incorporated herein by reference).
65
10.1.16 First Amendment to Amended and Restated Credit Agreement dated as of
May 1, 1992, by and between Unit Corporation and Bank of Oklahoma,
N.A., F&M Bank and Trust Company, Fourth National Bank of Tulsa, and
Western National Bank of Tulsa (filed as an Exhibit to the Company's
Quarterly Report under cover of Form 10-Q for the quarter ended June
30, 1992, which is incorporated herein by reference).
10.1.17 Second Amendment to Amended and Restated Credit Agreement, dated
March 3, 1993 and effective as of March 1, 1993, by and between Unit
Corporation and Bank of Oklahoma, N.A., F&M Bank and Trust Company,
Fourth National Bank of Tulsa, and Western National Bank of Tulsa
(filed as an Exhibit to the Company's Quarterly Report under cover
of Form 10-Q for the quarter ended March 31, 1993, which is
incorporated herein by reference).
10.1.18 Third Amendment to Amended and Restated Credit Agreement effective
as of March 31, 1994, by and between Unit Corporation and Bank of
Oklahoma, N.A., F&M Bank and Trust Company, Bank IV, Oklahoma, N.A.
and American National Bank and Trust Comp any of Shawnee (filed as
an Exhibit to the Company's Quarterly Report under cover of Form 10-
Q for the quarter ended March 31, 1994, which is incorporated herein
by reference).
10.1.19 Fourth Amendment to Amended and Restated Credit Agreement dated as
of December 12, 1994, by and between Unit Corporation and Bank of
Oklahoma, N.A., F&M Bank and Trust Company, Bank IV, Oklahoma, N.A.
and American National Bank and Trust Comp any of Shawnee (filed as
an Exhibit in Form 8-K dated December 15, 1994, which is
incorporated herein by reference).
10.1.20 Loan Agreement dated August 3, 1995 (filed as an Exhibit to the
Company's Quarterly Report under cover of Form 10-Q for the quarter
ended June 30, 1995, which is incorporated herein by reference).
10.2.2 Unit 1979 Oil and Gas Program Agreement of Limited Partnership
(filed as Exhibit I to Unit Drilling and Exploration Company's
Registration Statement on Form S-1 as S.E.C. File No. 2-66347, which
is incorporated herein by reference).
10.2.10 Unit 1984 Oil and Gas Program Agreement of Limited Partnership
(filed as an Exhibit 3.1 to Unit 1984 Oil and Gas Program's
Registration Statement Form S-1 as S.E.C. File No. 2-92582, which is
incorporated herein by reference).
10.2.11 Unit 1984 Employee Oil and Gas Program Agreement of Limited
Partnership (filed as an Exhibit 3.1 to Unit 1984 Employee Oil and
Gas Program's Registration Statement of Form S-1 as S.E.C. File No.
2-89678, which is incorporated herein by reference).
66
10.2.12 Unit 1985 Employee Oil and Gas Limited Partnership Agreement of
Limited Partnership (filed as an Exhibit 3.1 to Unit 1985 Employee
Oil and Gas Limited Partnership's Registration Statement on Form S-1
as S.E.C. File No. 2-95068, which is incorporated herein by
reference).
10.2.13 Unit 1986 Employee Oil and Gas Limited Partnership Agreement of
Limited Partnership (filed as an Exhibit 10.11 to the Company's
Registration Statement on Form S-4 as S.E.C. File No. 33-7848, which
is incorporated herein by reference).
10.2.14 Unit 1987 Employee Oil and Gas Limited Partnership Agreement of
Limited Partnership (filed as an Exhibit to the Company's Annual
Report under cover of Form 10-K for the year ended December 31,
1989, which is incorporated herein by reference).
10.2.15 Unit 1988 Employee Oil and Gas Limited Partnership Agreement of
Limited Partnership (filed as an Exhibit to the Company's Annual
Report under cover of Form 10-K for the year ended December 31,
1989, which is incorporated herein by reference).
10.2.16 Unit 1989 Employee Oil and Gas Limited Partnership Agreement of
Limited Partnership (filed as an Exhibit to the Company's Annual
Report under cover of Form 10-K for the year ended December 31,
1989, which is incorporated herein by reference).
10.2.17 Unit 1990 Employee Oil and Gas Limited Partnership Agreement of
Limited Partnership (filed as an Exhibit to the Company's Annual
Report under cover of Form 10-K for the year ended December 31,
1990, which is incorporated herein by reference).
10.2.18 Unit 1991 Employee Oil and Gas Limited Partnership Agreement of
Limited Partnership (filed as an Exhibit to the Company's Annual
Report under cover of Form 10-K for the year ended December 31,
1991, which is incorporated herein by reference).
10.2.19 Unit 1992 Employee Oil and Gas Limited Partnership Agreement of
Limited Partnership (filed as an Exhibit to the Company's Annual
Report under cover of Form 10-K for the year ended December 31,
1992, which is incorporated herein by reference).
10.2.20 Unit 1993 Employee Oil and Gas Limited Partnership Agreement of
Limited Partnership (filed as an Exhibit to the Company's Annual
Report under cover of Form 10-K for the year ended December 31,
1992, which is incorporated herein by reference).
10.2.21* Unit Drilling and Exploration Employee Bonus Plan (filed as
Exhibit 10.16 to the Company's Registration Statement on Form S-4 as
S.E.C. File No. 33-7848, which is incorporated herein by
reference).
67
10.2.22* The Company's Stock Option Plan (filed on the Company's Registration
Statement of Form S-8 as S.E.C. File No. 33-44103, which is
incorporated herein by reference)
10.2.23* Unit Corporation Non-Employee Directors' Stock Option Plan (filed on
Form S-8 as S.E.C. File No. 33-49724, which is incorporated herein
by reference).
10.2.24* Unit Corporation Employees' Thrift Plan (filed on Form S-8 as S.E.C.
File No. 33-53542, which is incorporated herein by reference).
10.2.25 Unit Consolidated Employee Oil and Gas Limited Partnership
Agreement. (filed as an Exhibit to the Company's Annual Report
under cover of Form 10-K for the year ended December 31, 1993, which
is incorporated herein by reference).
10.2.26 Unit 1994 Employee Oil and Gas Limited Partnership Agreement of
Limited Partnership (filed as an Exhibit to the Company's Annual
Report under cover of Form 10-K for the year ended December 31,
1993, which is incorporated herein by reference).
10.2.27* Unit Corporation Salary Deferral Plan (filed as an Exhibit to the
Company's Annual Report under cover of Form 10-K for the year ended
December 31, 1993, which is incorporated herein by reference).
10.2.28 Unit 1995 Employee Oil and Gas Limited Partnership Agreement of
Limited Partnership (filed as an Exhibit to the Company's Annual
Report, under cover of Form 10-K for the year ended December 31,
1994, which is incorporated herein by reference) .
10.2.29 Unit 1996 Employee Oil and Gas Limited Partnership Agreement of
Limited Partnership (filed herewith).
10.5 Acquisition and Development Agreement, dated September 26, 1991,
between Registrant and Municipal Energy Agency of Nebraska (filed on
Form 8-K dated September 30, 1991, which is incorporated herein by
reference).
10.6 Purchase and Sale Agreement, dated May 22, 1992, between Esco
Exploration, Inc. and Aleco Production Company (as "Seller") and
Unit Petroleum Company (a "Buyer") and Helmerich & Payne, Inc. (a
"Buyer") (filed on Form 8-K dated May 21, 1992, which is
incorporated herein by reference).
10.7 Asset Purchase Agreement, dated as of November 28, 1994, between the
Registrant and Patrick Petroleum Corp of Michigan and American
National Petroleum Company (filed as an Exhibit in Form 8-K dated
December 15, 1994, which is incorporated herein by reference).
22.1 Subsidiaries of the Registrant (filed herewith).
68
24.1 Consent of Independent Accountants (filed herewith).
27 Financial Data Schedules (filed herewith).
* Indicates a management contract or compensatory plan identified pursuant to
the requirements of Item 14 of Form 10-K.
(b) Reports on Form 8-K:
No reports under Form 8-K were filed during the quarter ended
December 31, 1995.
69
Schedule II
UNIT CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Allowance for Doubtful Accounts:
Additions Balance
Balance at charged to Deductions at
beginning costs & & net end of
Description of period expenses write-offs period
----------- -------- -------- --------- --------
(In thousands)
Year ended
December 31, 1995 $ 289 $ 55 $ 228 $ 116
======== ======== ======== ========
Year ended
December 31, 1994 $ 411 $ - $ 122 $ 289
======== ======== ======== ========
Year ended
December 31, 1993 $ 376 $ - $ (35 ) $ 411
======== ======== ======== ========
Deferred Tax Asset Valuation Allowance:
Balance at Balance at
beginning end of
Description of period Additions Deductions period
----------- -------- -------- -------- --------
(In thousands)
Year ended
December 31, 1995 $ 6,423 $ - $ 2,893 $ 3,530
======== ======== ======== ========
Year ended
December 31, 1994 $ 8,218 $ - $ 1,795 $ 6,423
======== ======== ======== ========
Year ended
December 31, 1993 $ 12,245 $ - $ 4,027 $ 8,218
======== ======== ======== ========
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNIT CORPORATION
DATE: March 19, 1996 By: /s/ John G. Nikkel
-------------- ---------------------------
JOHN G. NIKKEL
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on the 19th day of March, 1996.
Name Title
/s/ King P. Kirchner
- ------------------------------- Chairman of the Board and Chief
KING P. KIRCHNER Executive Officer, Director
/s/ John G. Nikkel
- ------------------------------- President and Chief Operating
JOHN G. NIKKEL Officer, Director
/s/ Earle Lamborn
- ------------------------------- Senior Vice President, Drilling,
EARLE LAMBORN Director
/s/ Larry D. Pinkston
- ------------------------------- Vice President, Chief Financial
LARRY D. PINKSTON Officer and Treasurer
/s/ Stanley W. Belitz
- ------------------------------- Controller
STANLEY W. BELITZ
/s/ Don Bodard
- ------------------------------- Director
DON BODARD
/s/ Don Cook
- ------------------------------- Director
DON COOK
/s/ William B. Morgan
- ------------------------------- Director
WILLIAM B. MORGAN
/s/ John S. Zink
- ------------------------------- Director
JOHN S. ZINK
/s/ John H. Williams
- ------------------------------- Director
JOHN H. WILLIAMS
71
EXHIBIT INDEX
-----------------
Exhibit
No. Description Page
- ------- --------------------------------------------- ----
10.2.29 Unit 1996 Employee Oil and Gas Limited
Partnership Agreement of
Limited Partnership.
22.1 Subsidiaries of the Registrant.
24.1 Consent of Independent Accountants.
27 Financial Data Schedule.
72